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Introductory Statement by Mr Michael Noonan TD, Minister for Finance, at the meeting of the Select Committee on Finance and the Public Service on 25th April, 2012 on the Finance Group of Estimates

I am pleased to have the opportunity to appear before the Select Committee today and look forward to a constructive discussion covering the 2012 Estimates for my Department’s group of Votes. If I may, I will begin by making some general comments in relation to the economy, the public finances and our progress under the terms of the EU/IMF programme of support.

Recent developments in the economy

Last year, GDP grew by 0.7 per cent. This is the first increase in economic growth since 2007. Activity is being driven by exports (up 4.1 per cent). This owes much to the competitiveness improvements that have taken place in recent years, which, in turn, is testament to the flexibility of the Irish economy. Importantly, many “indigenous sectors” are performing relatively well, i.e. tourism and agri-food.

In terms of the domestic side of the economy, consumption declined 2.7 per cent in 2011 on foot of falling disposable incomes and uncertainty. As would be expected given a period of fiscal austerity, spending by the government sector also contracted and is expected to remain in negative territory for some time to come. The pace of decline in investment moderated.

In quarterly terms, Q4 2011 data showed that GDP fell 0.2 per cent relative to Q3 2011, a slightly disappointing but not surprising performance given developments in the external environment, particularly the intensification of the euro crisis.

We are starting to see improvements in sectors of the economy that are externally oriented, such as tourism, manufacturing and ICT. This is in line with the plan for economic recovery which we have set out. The exporting-sector is leading the way and this will feed into investment and in time, the domestic economy.

Budget 2012 Economic Forecasts

This year’s Budget is based on real GDP growth of 1.3 per cent in 2012 – a forecast in line with the consensus at the time. Since then, however, the indications are that growth will be a bit weaker, and most analysts have been revising downwards their forecasts over the past few months. My Department will publish revised forecasts at the end of this month, as all Member States will do as part of the European Semester.

The external environment is expected to strengthen from 2013 onwards and this should feed through to the domestic economy with lower levels of savings and higher levels of consumption.

Having recorded a small surplus in 2010, which was the first in a decade, and again in 2011, the current account of the balance of payments is expected to improve further over the forecast horizon. This is encouraging and means that the nation as a whole is paying its way.

Risk

There is, of course, a lot of uncertainty and considerable risk. Obviously, weakness of the euro area is of concern, especially over the past two weeks. The ongoing elections across the EU and the continued pressure within the eurozone make it very difficult to forecast economic growth with certainty.

The Department of Finance will continue to monitor the economic situation over the coming weeks.

Public Finances

I would like to turn to the public finances as this is central to our return to economic well-being and, indeed, to exiting the EU/IMF Programme.

Since the sharp downturn in economic growth that started in 2007, Ireland has been running very large public finance deficits, which have driven up significantly the country’s debt. That is the backdrop that frames our economic and budgetary policy at present. We cannot consistently spend more than we take-in in revenue each year. It is unsustainable. Through the Government’s determination to correct the public finances, enhance economic growth prospects and create jobs, we are beginning to see positive results.

The end-March 2012 Exchequer Returns data was generally positive showing. Taxes ahead of profile in the first quarter.

Jobs

As I already mentioned, the latest economic data shows that domestic activity, especially household spending, remains weak. The jobs initiative contained a number of measures to support the domestic economy focussing on employment intensive areas such as the tourism sector. The VAT reduction included in the jobs initiative was targeted towards the tourism sector through the introduction of a 9 per cent VAT rate for its goods and services. The positive effects of the initiative can be seen in the 10,000 increase in the numbers working in the tourism sector since the Government took office.

The Government has built on the Jobs Initiative with the Action Plan for Jobs and Pathways to Work. These initiatives include targeted measures to reduce the numbers going into long term unemployment. The Government knows that we must prevent long term unemployment becoming the severe structural problem that it became in the 1980s and early 1990s. Initiatives such as these show how structural economic problems can be resolved without recourse to increased taxation or reduced expenditure.

Budget 2012 and beyond

Very significant adjustments have already been implemented and they have not been easy. As you know, Budget 2012 implemented a budgetary adjustment package designed to reduce further the deficit in our public finances in line with our commitments. One of the key objectives of the Government is to get people back to work, the focus of Budget 2012 revenue raising measures was on indirect taxes, such as VAT, rather than on income tax. Indirect taxes have a less adverse impact on economic activity and employment.

We are meeting our targets

The key point is that the public finances are moving in the right direction. An underlying General Government deficit of just under 11 per cent of GDP was recorded in 2010 whereas the equivalent figure for 2011 is 9.4 per cent of GDP. This is evidence of the progress that is being made. Crucially also, the underlying deficit in 2011 was well within the limits set as part of the EU/IMF Programme and we saw some favourable comment from market participants when this information was published by Eurostat earlier this week.

All six of the end-quarter Exchequer primary balance targets set so far as part of the EU/IMF Programme have also been met, as have the Central Government net debt targets, including most recently for end-Q1 2012.

We have achieved these targets despite weaker international economic conditions than had been previously forecast.

Stability Treaty

The Treaty on Stability, Coordination and Governance and the Fiscal Compact is key to supporting Ireland's recovery.

Ahead of the referendum on the Treaty next month, I want to make clear that this is a Treaty on Stability which is about ensuring a stable euro, recovery, growth and jobs.

It is about confidence abroad, and maintaining and enhancing the influence we’ve been rebuilding with investors, job creators and our European Partners. For job-creating investors, from whom so many announcements have come in recent months, their decisions have been thanks to our renewed political and economic stability and above all the determination of the Irish people - despite great sacrifices - to restore Ireland’s economic health.

The Treaty is also about good housekeeping - managing our debt in such a way that over time, taxpayers’ money goes not into servicing debts but more and more into public services and targeted growth initiatives to create jobs.

Finally, it’s about having an insurance policy - making sure we have access to the money that allows us to fund those public services and all government spending. We are on target with our Programme and sentiment is good...yet, we can’t control world events and the world economy; markets need to know there’s a backup there in the form of the European Stability Mechanism. Just having this backup will improve our ability to re access financial markets at the end of our Programme and ratification will allow us access.

The Government is taking every step to support economic recovery and will continue to focus on creating the right conditions to get our people back to work.

Banking Sector

Returning the banking sector to health is an area that has been a particular priority for the Government over the last year – we must have a financial system that supports a return to sustainable growth in the economy.

The Government set out its vision for a new core banking system that is aligned for lending to the economy, businesses and households last year. In order to help achieve this goal a new division was established in the Department to focus on the banking sector. A number of developments driven by my Department over the last year have help move us towards this goal:

· Following the PCAR exercise the banks have been recapitalised. The State’s investment was limited to €16.5 billion due in large part to the sale of part of our stake in Bank of Ireland and as well as liability management exercises across the covered banks. This is a significantly smaller investment than the initial estimates of €35bn when we entered the IMF/EU Programme of Support. I suspect Deputies will raise the consultancy costs that are provided for in the Department’s Vote but I want to make the point at the outset that although these consultancy costs are in the millions, they have assisted in generated a capital gain of €7 billion in 2011 alone. This has meant a very significant saving to the taxpayer.

· Following a number of mergers Ireland now has two universal government supported pillar banks – Bank of Ireland and Allied Irish Bank/EBS as well as Permanent TSB and other non-domestic banks. Anglo Irish Bank and INBS have been merged to create the IBRC which is being wound down over time.

· The banks have embarked on an ambitious deleveraging programme. They exceeded the target of approximately €37 billion 2011 with deleveraging of approximately €46 billion across the covered banks, despite the challenging economic environment.

· We are beginning to see some stability return to the banking sector as a result of these actions. The deposit outflows seen in the period prior to the PCAR and subsequent recapitalisation have been reversed and there has been significant stabilisation and indeed growth in deposit numbers.

· The level of Central Bank funding for the covered banks has fallen from a high of €157 billion in February to €109 billion at the end of the 2011, and these banks’ share of total ECB funding has fallen below September 2010 levels. Government guarantees have also fallen to below €100bn from a high of almost €375bn.

We aim to establish sustainable banks that can survive and prosper, without the need for on-going State support. Weaning the banks off State support will take time of course and will require improved profitability and market access. We are continuing to focus on maximising the value of the State’s investment in the banks. We are engaging with our external partners to develop a proposal which facilitates further restructuring in the banking sector including the promissory note. Discussions on this proposal have been underway at a technical level.

Looking to the future we are focussed on developing and implementing solutions to the mortgage arrears problems in the economy – my Department is working to ensure a comprehensive solution is implemented to address this difficult area. Work is on-going to prepare the Personal Insolvency Bill for formal publication and the enactment of this Bill is a key legislative priority for the Government. Work is also underway on other initiatives such as mortgage to rent, as well as the Central Banks’ oversight of the banks’ own strategies to deal with those in arrears.

In addition, access to credit for viable businesses and individuals is a vital part of the banking system’s role in supporting economic growth. The pillar banks have been set ambitious targets for sanctioning of lending into the economy. The 2011 target of €3bn for each bank was achieved. The target for 2012 is €3.5bn and the banks are being closely monitored to ensure that they meet these targets. The Department is also working closely with the Department of Jobs, Enterprise and Innovation to assist in the implementation of a Loan Guarantee Fund (bill published two weeks ago) and a Microfinance fund (Heads of Bill agreed and the Bill will be published this quarter).

The overall focus of all of these policy streams is to ensure that the banking sector is fit for purpose for the economy. The actions taken in 2011 and so far in 2012 have made significant progress towards this goal but I, and my Department remain committed to completing this task.

Presentation of the 2012 Estimates

Turning to the business of the committee today, I am presenting estimates for my own Department, for the Office of the Revenue Commissioners, the Office of the Appeals Commissioner and the Office of the Comptroller and Auditor General.

Vote 7 provides for the administrative and non-administrative costs of the Department of Finance. The format of the Estimate follows the performance budgeting model which was introduced in 2011, albeit that the functions of my Department have been realigned under four programmes in 2012, which gives an increased focus to Banking Sector Policy.

· The Gross Estimate for Vote 7 amounts to some €33 million which represents an increase of some €9 million on the 2011 outturn.

· The net estimate is €32 million, which is an increase of €9.5 million on the 2011 outturn.

The Gross increase is accounted for by:

· An increase in the paybill (€3 million) arising from the requirement to up-skill the Department in the Economic and Banking areas;

· A projected increase in banking related consultancy costs (€4 million); and

· A provision of €2 million in respect of costs associated with the our hosting of the EU Presidency.

The provision for EU Presidency costs is obviously a temporary increase for the duration of the presidency and these costs will cease from mid-2013. The remainder of the increase is a regrettable but necessary outcome of the ongoing position we face in terms of managing our country’s finances and restoring our banking system. A number of external reviews of my Department have commented on the need to upskill staff and supplement skillsets where necessary. The increase in the Estimate for my Department will enable us to do address these challenges.

My Department will, however, continue to pursue economies of scale and improved productivity through the expansion of the Shared Service function to other Departments, Agencies and Bodies and through the sharing of consultancy expertise with the National Treasury Management Agency. Consultancy costs will be monitored closely and will be recouped from the releavant financial institutions where possible. However, I am sure that the committee will appreciate that we must utilise expertise where necessary in order to secure a robust banking system and to promote an environment of stable sustainable economic growth.

As for the Office of the Revenue Commissioners, the net Estimate of €311.978 million is down - €5.581m or 2% on the 2011 net outturn, of which 74% is related to pay for an Employment Control Framework ceiling of 5,774 staff. Continued investment in information and communications technology, as well as providing better service for the taxpaying public, has been a major driver of productivity growth in Revenue. It continues assisting the organisation to deliver in these more difficult economic times with fewer resources.

In 2011 the net tax and duty receipts increased by 7.3% to €34.2 billion, reversing three years of falling returns to the Exchequer. The level of outstanding debt stabilised. High level of timely compliance with payment and filing deadlines were achieved despite difficult economic circumstances. Revenue continued to provide quality services to support and assist all customers meet their obligations. Throughout 2011, Revenue increased organisational flexibility, efficiency and innovation. Revenue continues to extend the range of electronic services available to their customers and see potential for further development in online operations. In addition, Revenue continues to collect taxes as they fall due, managing the risks inherent in the shadow economy and improving the skills and tools used in tackling tax and duty evasion. These are all important in maintaining the highest possible level of trust and confidence of the community in the operations of Revenue.

The primary priority for Revenue in 2012 is to maximise compliance with Tax and Customs legislation. In an environment of difficulty and challenge for businesses and individuals Revenue continues in its efforts to advance the achievement of its mission, through

· Making it easier and less costly for its customers to comply by delivering quality services to their customers so that they are informed, understand their obligations and pay the right amount of tax and duty;

· Increasing timely compliance or filing returns and making payments as well as reducing debt;

· Targeting and confronting those who do not comply;

· Contributing to Ireland’s economic recovery by ensuring a strong and effective legislative base for its activities and the implementation of international / national customs and taxation policy and a network of tax treaties / agreements.

These are seen as Revenue’s most important contribution to the Programme for Government, the EU/ECB/IMF Programme and the national objective of economic recovery. A key challenge for 2012 is containing shadow economy activity in a recession and with reducing resources. The shadow economy has the potential to undermine the legitimate economy, reduce tax and duty receipts, and impact negatively on competitiveness and jobs. Revenue’s strategy of matching resources to priorities, further developing their risk analysis tools, combined with a strong focus on cash business, will continue. Revenue will also continue to address smuggling and associated criminal activity, particularly in the areas of oil and tobacco fraud.

I thank members for their attention and I commend the Estimates for the Finance group of Votes to the committee. I will be glad to supply any further information or clarification that members may request.