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Opening statement by Minister for Finance and Public Expenditure and Reform, Paschal Donohoe, T.D., to the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach

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Chairman,

I wish to thank the Committee for the invitation to come here today to discuss Brexit preparations and the recent European Commission Communication “Towards a more efficient and democratic decision making in EU tax policy”.

I look forward to a positive exchange.

Brexit Preparations

In relation to Brexit, the Government remains firmly of the view that the only way to ensure an orderly withdrawal of the United Kingdom is to ratify the Withdrawal Agreement, as endorsed by the European Council and agreed with the British Government.

The European Council has made clear that it stands by the Withdrawal Agreement and that it is not for renegotiation.

The Agreement, with its backstop provisions, is the only agreement on the table that provides the essential legal guarantee to avoid a hard border in any circumstances and protects the Good Friday Agreement in all its parts.

As a Government our focus remains on securing ratification of the Withdrawal Agreement but we must also continue to implement our preparations for a no deal scenario.

On 19 December last, the Government published its Brexit Contingency Action Plan, setting out its approach to dealing with a no deal Brexit. Intensive work related to the Action Plan continues right across Government on a daily basis.

As Minister for Finance, my objective is to protect the economic and financial interests of the State and to support the work of the Revenue Commissioners so as to minimise the Brexit disruption to trade, to the greatest extent possible.

My Department is working within the whole-of-Government approach and coordinating closely with its agencies who are developing and implementing plans and measures to protect our economy.

I recently met with the Chief Executive of the NTMA, the Chairman of the Revenue Commissioners and the Deputy Governor of the Central Bank.

All are engaging closely in the overall whole- of- Government preparations, and are confident that they have put appropriate contingency measures in place to do everything possible to limit the inevitable disruption to consumers and trade, in the event of a no deal Brexit.

However, it is not possible to eliminate all risk in a no deal situation.  Any Brexit will be negative, and a no deal most of all. Not all issues are within Ireland’s direct control.

This is not to avoid responsibility, but to be frank and open.

This is about damage limitation.

The Government is working actively at EU level and the EU will be taking a number of unilateral, limited and temporary measures in areas such as air transport, for example.

However, it is important not to pretend that there can be, what some in the UK are calling, a ‘managed no deal’. 

No such thing exists and, from the EU perspective, we need to be very careful not to put at risk the benefits of the Withdrawal Agreement and, in particular, the transitional arrangements and the backstop.

Economy and Budget

Last week, following discussion with Government, I issued an initial assessment of the economic and fiscal impact of a ‘no deal’ Brexit prepared by my Department.

The new analysis is based on an initial application of the latest UK estimates from the National Institute of Economic and Social Research, the UK equivalent of our ESRI.

Brexit, in whatever form, is a historic challenge for Ireland and the implications for our economy will be disproportionate relative to the rest of the EU.

While my Department’s central economic and fiscal planning scenario remains an orderly exit, based on the UK leaving with a transition arrangement in place, the risk of a disorderly exit has increased in recent weeks.

In a disorderly exit, while in aggregate terms, the economy is likely to continue expanding, the pace of growth would be lower than is currently expected.

The initial assessment by my Department suggests that the level of economic activity will be around 4¼ percentage points lower than our existing trajectory over the medium-term and will be around 6 percentage points lower compared to a ‘no Brexit’ scenario.

The reduction in the pace of growth would have negative spill-overs to the public finances and to the labour market.

The headline deficit could deteriorate by nearly a percentage point of GDP in the short-term.

In terms of the labour market, the unemployment rate would increase by an estimated 2 percentage points, relative to Budget 2019 projections.

As earlier research from the Department of Finance has shown, the most adverse impacts are likely to be felt in agri-food and indigenous manufacturing sectors.

The more comprehensive assessment by the Department of Finance and the ESRI, will be published later this quarter.

This output will be incorporated in the Stability Programme Update, due to be published in April this year.

It is important to recognise that such estimates may not capture the full impact, and the figures may be conservative.

Indeed, the impact in certain exposed sectors and regions will be worse than the average.

Nevertheless, quantifying the impact is important to help Government understand the possible macroeconomic implications and to design the appropriate policy response.

Of course, it is important to point out that Ireland is facing the challenge of Brexit in a robust economic position, with the highest GDP growth in Europe and record employment levels.

In addition, exports, job creation, inflation and public debt indicators are all strong.

This strong performance will provide a stable platform for the external challenges that lie ahead.

The Government has already taken significant action to get Ireland Brexit ready. Since the UK referendum, all of our national Budgets have been framed to prepare for the challenge of Brexit with dedicated measures announced in Budgets 2017, 2018 and 2019.

This is supported by long-term planning through the National Development Plan and the National Planning Framework which will provide significant investment in Ireland’s public capital infrastructure.

Financial Services

My Department has been working closely with the Central Bank on planning for Brexit.

The Central Bank has statutory responsibility for financial stability.

It is working closely with financial services firms to ensure that they have contingency plans in place for end March 2019, and that they are adequately prepared to cope with the possible effects of Brexit, with as little disruption for consumers as possible.

In terms of Financial Services, the Department and the Central Bank have stressed that responsibility for contingency planning remains with individual firms.

On the basis of its ongoing work and its intensive engagement across the sector, the Central Bank has been able to provide assurance that, while some level of market disruption is inevitable, the financial system as a whole should be resilient enough to withstand a hard Brexit and that the most material ‘cliff edge’ financial stability risks arising from Brexit have been largely mitigated.

In this context, the contingency preparations announced by the European Commission last November mitigate the immediate risks arising from potential loss of access to UK based market infrastructure -  the Central Clearing Counterparties, used to clear derivatives -  and for Ireland specifically, access to a Central Securities Depositary (CSD) which allows for the settlement of Irish equities/Exchange Traded Funds (ETFs). 

In relation to the CSD, I am proposing legislation in the Government General Scheme which will support the Commission decision.

As far as consumers are concerned, the most important issue for consumers arises where UK or Gibraltar based insurance firms have not put adequate contingency plans in place.

While most insurance firms and intermediaries providing services from the UK and Gibraltar have taken appropriate action, contract continuity still remains a risk where firms have not taken adequate action.

The legislation, which I am proposing as part of the Government Omnibus Bill, will allow for the run-off of policies in place at the time of Brexit over a three year period, eliminating the most material risk for customers of insurance firms. 

Customs and Taxation

The Department of Finance has been working closely with the Revenue Commissioners on Brexit since before the UK Referendum.

While the Department is responsible for overall policy, Revenue is an independent body responsible for implementing that policy in a fair and efficient manner.

Revenue is on the frontline in terms of our preparations for Brexit and facilitating efficient movement of legitimate trade post Brexit to the greatest extent possible.

I know that the Chairman of the Revenue Commissioners attended this Committee on 24 January and outlined the very significant work currently being undertaken by Revenue, and how this work has intensified in recent months. 

He outlined the scale of the challenge in terms of the very significant, increase that can be expected in traders who will have to deal with customs formalities for the first time, leading to an estimated 10 fold increase in customs declarations, the complexity of issues relating to the landbridge and the challenge for Government agencies, including Revenue, in putting the necessary arrangements In place in a context where many issues are outside our control.

The Chairman outlined to the Committee the very significant programme of work that has been ongoing in Revenue in terms of ICT, staffing and engagement across the country with the business community:

  • Regarding ICT, an additional €2 million has been invested in scaling up Customs ICT framework to deal efficiently with the anticipated increase in customs declarations, post Brexit.
  • Regarding staffing, Revenue has accelerated and expanded their recruitment and training schedules to be ready for March 2019 and are on track to have over 400 additional staff in place by the end of March 2019.
  • Regarding outreach to business, the Chairman outlined how Revenue is working hard to support trade and businesses to be prepared as possible and to deal with the outcome of unfolding developments.

 This is being done through engagement with trade representative bodies, participation in and organization of events and seminars around the country and targeted correspondence to reach some 85,000 large and small traders who do business with the UK.

 A ‘no deal’ Brexit will be a serious challenge for our traders.

 However,  I am satisfied that the Revenue Commissioners have been working very hard and will continue to work hard to ensure that they are prepared to facilitate the efficient movement of legitimate trade to the maximum extent possible in a no deal scenario.

Legislation

The general scheme for the draft Omnibus Bill, known officially as the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill, was published on 24 January.

This focuses on those areas that need to be addressed urgently and immediately, through primary legislation, to protect our citizens and to support the economy, enterprise and jobs, particularly in key economic sectors. 

I would like to take this opportunity to outline, in more detail, the elements of the general scheme, for which I, as Minister for Finance, am responsible.  These are parts 6, 7 and 8: 

In Part 6, legislative amendments are proposed for Income Tax, Capital Tax, Corporation Tax and Stamp Duty legislation in order to ensure continuity for business and citizens in relation to current access to certain taxation reliefs and allowances, and the retention of a number of anti-avoidance provisions when the UK is no longer a member of the EU/EEA. I can confirm that I received Cabinet approval, this morning to introduce postponed accounting. Accordingly, provision will be made in the Brexit Omnibus Bill.

In Part 7, legislative measures are proposed for the Settlement Finality Directive to support the implementation of the European Commission’s equivalence decision under the Central Securities Depositories (CSD) Regulation, and to extend the protections contained in the Settlement Finality Directive to Irish participants in relevant third country domiciled settlement systems.

Part 8, includes legislative measures for a temporary run-off regime, which, subject to a number of conditions, will enable insurance undertakings and intermediaries to continue to fulfil contractual obligations to Irish customers for three years after the date of the withdrawal of the UK from the EU. 

As the timelines for ratification are tight, the Government will work very closely with all Opposition parties in the Oireachtas and all members of the Dáil and Seanad to ensure that the necessary no deal Brexit related legislation will be in place before the 29 March.

EU Taxation Proposals

Let me now turn to the second topic on the agenda- the launch, earlier this month, by Commissioner Moscovici of a Commission Communication entitled ‘Towards a more efficient and democratic decision making in EU tax policy’. 

This communication sets out a roadmap, which aims to start a debate around changing the system of voting for tax files from unanimity to ‘Qualified Majority Voting’ (QMV). 

At this point, I believe it is important to reflect on just how much has been achieved on tax issues at EU level by Member States and the Commission in recent years. 

Since 2015, unanimity has not prevented the agreement of an unprecedented 21 different tax initiatives by all Member States.  

This is an average of more than one initiative being agreed by Finance Ministers every 3 months, and includes important Directives on VAT, administrative co-operation, Anti-Tax-Avoidance and, also, the EU list of non-cooperative tax jurisdictions.

This is evidence of real, tangible progress made through all Member states working together for the benefit of the whole Union.

The Commission Roadmap identifies the ‘passerelle clause’ as being the most feasible option for moving away from the unanimity voting procedure. 

The passerelle clause provides that the European Council could unanimously decide to move an entire policy area or part of a policy area from unanimity voting to QMV. 

The support of the European Parliament as well as national parliaments, including Dáil Éireann, would also be required. 

This is a highly sensitive suggestion for many Member States, including Ireland, as any move to change the voting method, used for tax files, would reduce Member States’ sovereignty. 

Given the large volume of important agreements reached at EU level on tax issues, I do not see the need for, or merits of, any proposals to move away from the requirement for unanimity. 

Conclusion

To conclude, regrettably the UK is leaving the EU and that means that some things are going to change.

Planning for this change has been taking place on a whole-of-Government basis for some time, and we have been taking the necessary measures to implement actions to mitigate the risks, as far as is possible.

No future relationship between the EU and UK will be as good as the status quo.

Membership of the Single Market and Customs Union is a core element of our economic strategy – including in attracting business, both over the decades and more recently.

That will not change.

Ireland will remain an active and enthusiastic member of the EU.

The Government is committed to working with the European Commission, and with our EU partners, to ensure the closest possible relationship between the EU and UK, and to minimise any disruption for our businesses and citizens as much as possible.

In terms of taxation the same principles apply. It is our view that all Member states, working together for the benefit of the whole Union, is the way to achieve the best results and real tangible progress.

Chairman and members of the Committee, I trust that the above gives you an outline of the issues you asked me to address. 

I would like to thank you for your attention and, at this point, I will be happy to respond to any questions that Members may have.