I am pleased to have the opportunity to appear before the Select Committee today and look forward to a constructive discussion covering the 2013 technical allocations for my Department’s group of Votes. I welcome this earlier interaction on the 2013 expenditure allocations and on the budgetary challenges facing the Finance Group of votes.
If I may, I will begin by making some general comments in relation to the economy, our progress under the terms of the EU/IMF programme of support and other strategic objectives set out in our Strategy Statement earlier this year.
Recent developments in the economy
The economy is expanding once again and that is to be welcomed.
Last April my Department projected GDP growth of 0.7 per cent for this year; six months later and the indications are that a growth rate somewhere in this region will be achieved. However, the external outlook – that is the outlook for growth in many of our trading partners – has deteriorated over the summer. As a small and very open economy, this is not good news for us. My Department is currently working on its latest forecast which will be published in the coming weeks taking account of this and other recent data.
Public Finances
Turning briefly to the public finances, it is clear that we are moving in the right direction after a number of very difficult years. The most recent estimate of the 2011 underlying General Government deficit – that is the deficit excluding the direct impact of State support to the banking system – is 9.0 per cent of GDP. This compares to an equivalent 2010 deficit of 10.8 per cent of GDP. Importantly, the 2011 deficit was well within the limit set as part of the EU/IMF Programme. All of the quantitative fiscal targets set so far, as part of that Programme, have been achieved, most recently for the end-September Exchequer primary balance.
The end-September Exchequer Returns were generally positive showing robust tax revenue growth. Indeed tax revenues in the first nine months of the year were 1½ per cent ahead of our expectations with three of our “big four” sources of tax revenue – income tax, corporation tax and VAT – performing better than expected. While there are spending pressures in the health and social protections areas, I remain confident that we can meet this year’s 8.6 per cent of GDP deficit target.
What is clear also however is that we continue to spend far more than we collect in revenue. Closing this gap further in the years ahead presents a very real challenge to policymakers but we must remain steadfast in our commitment to reduce the deficit to below 3 per cent of GDP by 2015.
EU/IMF Programme of support
As you will be aware, the 8th Review Mission on the EU/IMF Programme began yesterday. We are again in the position of having met our commitments under the programme for Q3 (end September 2012), both in terms of policy reforms as well as quantitative targets. A substantial number of actions – over 160 (by our count) - have now been completed.
The purpose of the quarterly review mission is to evaluate performance against the targets set for the fourth quarter of the programme of financial support for Ireland including fiscal developments, the macroeconomic outlook, progress on commitments in the restructuring of the financial sector and structural reform.
Ireland has successfully completed seven reviews of our programme to date and I am sure that the Troika will once again find us to be meeting all of our targets, making real progress in restoring order to the economy and public finance, re-structuring the banking system getting back into the markets and getting people back to work.
Ireland’s strong programme implementation has been recognised by our European Partners, by the IMF and by the Markets
Banking Sector
Turning to our objectives within the banking and financial services sector, work is continuing across many areas. Significant progress has been made in the Irish banking sector since the start of the EU/IMF Programme, at the beginning of 2011, to our current position at October 2012.
Recapitalisation, restructuring and deleveraging
Recapitalisation of the PCAR banks, (AIB, Bank of Ireland, and PTSB) and IBRC has been completed with a total cost to the State of €64.1bn. Approximately €15.5bn was also generated through burden sharing with bond holders. In addition a significant sale of the State’s stake in Bank of Ireland to private investors was successfully concluded. Recapitalisation for PCAR banks was completed on time and below expected costs. In December 2011, the European Banking Authority published a survey on European banks levels of Core Tier 1 capital using certain stress assumptions. In the results of the survey, the Irish banks ranked amongst the best capitalised banks in Europe.
Restructuring of the Irish banking system underwent considerable transformation. Restructuring realised the new blueprint for the banking system, with two pillar banks, AIB and Bank of Ireland, and mergers between AIB and EBS, and INBS and Anglo. Directors on boards of the banks have been renewed so that only one board member is in situ since 2008
All 2011 deleveraging targets for the banks have been met. Since the start of the programme, total covered bank deleveraging (to end of June 2012) of €56.7bn has been achieved, comprising €44.6bn at AIB, Bank of Ireland and PTSB together with €12.1bn in IBRC. Significant disposals are targeted for the second half of 2012 as part of the pillar banks’ planned run down of non-core balances.
The banks’ funding positions have improved significantly. Deposits in AIB, Bank of Ireland and PTSB have stabilised with net inflows achieved since last year whilst reliance on ECB funding is down on previous levels. The banks have also achieved €6.9bn of wholesale repo funding, which together with the levels at which their senior bank bonds are trading in the market suggests that significant progress has been made to restoring investor confidence and with it market access.
Bank guarantee support in the form of the ELG has reduced from €375bn in September2008 to €90bn at end of June 2012.
Given that other EU member states have encountered difficulties with their banking systems Europe is now seeking new ways of breaking the link between sovereigns and their banks.
A key objective for 2013 is to find the best option for a long-term financing solution for the Irish banking system and to replace promissory notes with an instrument that is more favourable to the State’s finances.
In addition, it is in the interests of the State that the Irish banks continue to build on their viability, to ensure the return of a vital and healthy banking system in Ireland.
Mortgage Arrears
Much work has been undertaken in the area of mortgage arrears. The Personal Insolvency Bill has passed Committee stage in the Dail and will move to Report stage in November. The Director designate of the Insolvency Service has been appointed and will oversee the creation of the vital infrastructure to underpin the legislation The enactment of this Bill is a key legislative priority for the Government. The banks have been piloting resolution options through the course of Quarter 3 of this year with Central Bank oversight in advance of broader rollout and a comprehensive advisory service has been established of the banks’ own strategies to deal with those in arrears.
SME Credit
In terms of SME credit, access to credit for viable businesses and individuals remains a key Government priority in supporting economic recovery. The pillar banks have been set ambitious targets for sanctioning of lending into the economy. The target for 2012 is €3.5 billion 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 facilitate the implementation of a temporary loan guarantee scheme and a microfinance fund. The Credit Review Office is an important instrument in providing a valuable appeal mechanism for businesses that have had their credit applications rejected by the pillar banks. The Office has overturned some 55% of the cases referred to it and, in doing so, has secured over €9.6 million in credit for small businesses in Ireland, safeguarding some 850 jobs. We continue to assess SME demand on a six-monthly basis through our regular surveys which help inform and guide policy in this important area.
Credit Unions
The Government has made significant progress with regard to credit unions. The Commission on Credit Unions finalised an agreed Final Report on schedule in March, which sets out recommendations across a broad range of areas and which will provide the basis for a viable sector into the future. The Credit Union Bill 2012 was published at the end of September in accordance with the EU-IMF structural benchmark and implements over 60 of the Commission’s recommendations. Two further programme targets have also been delivered in the commencement of fitness and probity for credit unions and the commencement of contributions under the Deposit Guarantee Scheme. The Credit Union Restructuring Board – or ReBo – has been established with Mr Bobby McVeigh as Chair – an individual with many years experience in the credit union
movement internationally. The ReBo has already begun meeting and is focused on progressing the restructuring programme in accordance with the timetable set out in the Commission report.
Much work has also taken place in the legislative area, the negotiation of EU Directives, a public sector migration plan for SEPA compliance and rolling out of the standard bank account project. We will continue to manage an ambitious agenda of policies to support effective regulatory supervision of the financial sector, continuing development of Ireland as a centre for international financial services and representation of Irish national interests at EU level in relation to financial services dossiers while respecting the goal of effective supervision consistent with EU financial services initiatives.
2013 Estimates
Turning to the business of the committee today, my Department has provided you with technical calculations 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, setting out our funding requirements on a “no-policy” change basis and the associated savings that would be required in order to comply with the expenditure ceilings under the multi-annual financial framework.
As I indicated in my covering letter at the time, this “no-policy” change approach does not reflect the reality on the ground. In fact, both my own Department and Revenue are facing significant additional challenges in the coming twelve months and there are associated expenditure pressures which we will discuss in due course. Furthermore, my own Department is undergoing extensive restructuring in order to better align resources against the objectives of our Statement of Strategy. When we come to reviewing my Vote I would ask therefore that we focus on the total vote rather than on the individual programmes, which will not reflect the structure of the Vote in 2013.
Vote 7 provides for the administrative and non-administrative costs of the Department of Finance. Much discussion has taken place at this committee, and other committees, regarding the capacity of the Department, skills gaps, etc. My Department sought, and was granted, an increase in funding in 2012 to enable the Department to address these issues. Recruitment is progressing and we are restructuring the Department to enable us to realign our resources in line with our revised and more forward looking strategic plan.
As part of this restructuring we will 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 relevant 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.
EU Presidency
A further key deliverable for my Department in 2013 will be the successful hosting of the EU Presidency function. Ireland will take over the Presidency of the European Union next January for six months. As the Committee is aware, the Government allocated additional resources for the preparation and operation of the Irish Presidency. The effective and efficient operation of the Presidency will involve increased expenditure for my Department in 2013 and it would not be possible to operate the Presidency without appropriate resources. Significant work has already gone into the preparation of the Presidency at all levels of government at this stage. When considering the financial cost of the Presidency we should be aware that it presents us with many opportunities.
Having the Presidency allows us to manage and steer the Union agenda which is of significant importance to this country and the future of the European Union. Having an effective and efficient Presidency is important in terms of improving the international perception and profile of this country. It demonstrates our commitment to the EU and that we remain at the heart of the European decision making process. There will also of course be tangible benefits in terms of the number of visits by officials and the media during the first six months of 2013. It is up to all of us as how we exploit the potential opportunities presented by the Presidency.
The Presidency will face a significant agenda on financial regulation in 2013 with a large range of EU proposals. The dossiers to be prioritised during our Presidency will be determined in the first instance by the achievements of the Cypriot Presidency and discussions at political and institutional levels. However, we are watching closely progress made in relation to banking union and to the continuing reform of financial service markets and these will be two important areas that will require our energy and commitment.
Other dossiers which are part of an integrated package of financial services regulatory reforms are also likely to be part of the Presidency work programme. However our decision on what particular dossiers to prioritise will be driven in part by the need to seek solutions to the current financial crises – specifically on an integrated financial framework at EU level and the possible components of that. Progress made by Ireland in this area will also be relevant to the stability of the financial sector and hence to the role of that sector in restoring the overall health of the Irish economy.
Turning to the Office of the Revenue Commissioners, Revenue’s goal is to create a more tax and customs compliant society and a Revenue administration that assists economic growth and development. Its road map to achieve this, in a challenging and difficult environment, is set out in its “Statement of Strategy 2011 – 2014”.
Under the Statement of Strategy, Revenue has prioritised 4 strategies: -
· to make it easier and less costly for taxpayers to comply with their tax obligations by delivering quality services to them;
· to increase timely compliance and reduce outstanding tax debt;
· to target and confront those who do not comply;
· to contribute to Irelands economic recovery by providing high quality policy advice and legislation, extending a tax treaty network that is favourable to inward investment and trade and, for 2013, contribute to a successful EU Presidency.
As regards resources, Revenue accepts that it must play its part in meeting Government policy on public service staffing numbers and I am satisfied that Revenue to date has carried, at least, its share of the burden of staffing and other reductions. An effective tax collection system is an essential element of our fiscal consolidation requirements and is critical to the successful achievement of the Government’s objectives in the context of the EU/IMF Programme of Financial Support for Ireland.
However, while there is undoubtedly a connection between resources and the ability to collect, determining the appropriate level of resources for an organisation like Revenue is a complex task. Revenue will continue to engage with the Department of Public Expenditure and Reform in order to establish the best allocation of resources in the interest of an optimal result for the taxpayer.
The budget of the Office of the Comptroller and Auditor General is applied towards a single programme with the following outputs:
· Auditing the financial statements of public bodies and issuing audit opinions – the Certification Audit Programme
· Examining financial management arrangements in public bodies and the value for money of public services – the Reporting Programme
The Comptroller and Auditor General assists the PAC in it scrutiny of the public finances. The number of whole time equivalents is currently 136, which is 14 below the approved Employment Control Framework number of 150. Measures have been taken to address the resource deficit including the temporary engagement of qualified accountants.
Thank you.