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Introduction

Chairman and Committee Members,

I am very pleased to have the opportunity to appear before the Select Committee today. I look forward to a constructive discussion covering the 2011 estimates for my Department’s group of Votes and the recent Stability Programme Update.

I’d like to start by setting out the backdrop against which the Stability Programme Update and estimates were prepared. Over the past three years or so, Ireland has been grappling with the consequences of the most severe economic downturn in the history of the State, principally the crises in the public finances and in the banking system. These problems, which resulted in our entry into the Joint EU/IMF Programme of Financial Support in December 2010, have radically changed the environment in which we operate. Under the EU/IMF Programme, we can borrow up to €67.5 billion from our external partners provided we satisfy the conditions set out in the Programme. The Government has repeatedly stated its commitment to meeting the Programme targets, and we are on track in this regard.

Encouragingly, economic activity has started to pick-up again, while the public finances are showing welcome signs of stabilisation. The reform of the banking system is well underway, with progress also being made on the structural reform front. That said, the challenges we face in returning to a position of economic sovereignty remain considerable. There have been four successive austerity Budgets, but we will need to implement a further series of tough Budgets in the years to come. In the real world in which we live, it is neither credible nor viable to do otherwise. Delivering the conditions required under the EU/IMF Programme, on time and on target, is essential if we are to emerge successfully from the situation we find ourselves in and return to financial markets for funding. This Government has the necessary conviction to take the decisions needed to secure the future of our country.

Let me now turn to the details of the Stability Programme Update (SPU), which was laid before the Dáil on April 29. I will begin by setting out the aim of the document and the background to it.

The purpose of the SPU is to provide an update of the economic and fiscal outlook for this year and next, along with medium-term macroeconomic and budgetary projections. All EU Member States are required to prepare such a document and submit it to the European Commission. In the past, the Irish SPU has been presented as part of the Budget Day package. However, with the move to a new European Semester, Member States are now required to submit their Stability or Convergence Programme Updates in April of each year. The rationale for this early submission is to facilitate greater ex-ante coordination of Member States’ economic and fiscal policies. The idea is to consider the emerging economic and fiscal outlook, together with governments’ policy intentions, at national and EU level before the annual budget process begins in earnest.

On foot of these discussions, the ECOFIN Council will adopt an Opinion for each Member State, including policy recommendations. Member States are expected to take this guidance, along with the EU perspective, into account when preparing their budgets and making policy decisions for the next year.

The move to a European Semester is one of the many steps being taken to help improve economic governance within the euro area and EU. Other initiatives include the so-called ‘six-pack’ of legislative reforms which is close to being agreed, and the Euro Plus Pact. In early May, the Government set out a series of commitments under each of the four Pact headings (fostering competitiveness, fostering employment, enhancing the sustainability of public finances and reinforcing financial stability). These complement the measures presented in our Stability Programme Update and the National Reform Programme.

On the whole, I believe that what has emerged, and is still emerging, from the current overhaul of the EU governance process is for the good. A more transparent, more robust and more co-ordinated system of economic governance is essential if we are to avoid repeating the damaging experience of the recent global economic and financial crisis. The Government’s support for this process has been wholehearted, but not unconditional, and we will continue to work for an outcome that is in both Ireland’s and Europe’s best interests.

The ECOFIN Council adopted Opinions on all Member States’ Stability and Convergence Programmes yesterday, bringing to an end the first year of the European Semester at EU level. The Council’s Opinion on our SPU is broadly positive, with only one policy recommendation given to Ireland. This relates to the implementation of the EU / IMF Programme, and we are on track in this regard.

I think it is also worth touching on some of the more specific comments contained in the Opinion. Notably, the Council consider the macroeconomic projections which underpin the SPU to be plausible and acknowledge that important progress has been made in reforming the banking system. This is a welcome acknowledgment of the work the Government is doing to ensure that the recapitalisation and restructuring of the banking sector takes place in a timely manner, so that it is fit for the purpose of supporting an economy that is emerging from a period of significant contraction. The Council also recognises that we are taking steps to achieve the structural reforms agreed with the EU and IMF. Such reforms will help improve our competitiveness position, thus benefitting exports and the economy as a whole.

While the EU leg of the European semester has come to an end for this year, today’s meeting provides a valuable opportunity to continue the discussion on the economic and fiscal outlook at national level. Economic outlook

In terms of the economy, the forecasts published in the Stability Programme Update foresee a return to growth this year. GDP is forecast to grow by 0.8 per cent in 2011 and by 2.5 per cent in 2012 (the corresponding GNP figures are 0.3 and 2 per cent). While exports are set to continuing performing strongly, domestic demand is projected to remain weak. No significant improvement on this front is expected in the short-term as imbalances, such as excessive indebtedness and over-reliance on construction, have to be worked off. Looking to the medium term, a gradual firming of economic activity is projected as the recovery broadens out and spills over to the labour market. For the period 2013-15, the economy is forecast to grow by 3 per cent per annum on average (2.5 per cent on a GNP basis).

Recently published economic data show that GDP is indeed growing once again. It increased by 1.3 per cent in the first quarter of 2011 relative to the previous quarter, a relatively good performance. After a difficult couple of years, this development is encouraging and very welcome. On the assumption of continued export momentum, the latest figures are broadly consistent with the SPU forecasts for this year.

Overall exports grew by 7 per cent year-on-year in the first quarter of 2011, providing clear evidence that the competitiveness improvements of recent years are having the desired effect. A particularly welcome feature of the export figures is that they show a broadening out of performance, with strong growth recorded across a number of sectors. A less positive feature of the exporting sector as a whole is that it is less labour intensive and as such, will not have a major up-front impact in terms of jobs.

Employment continued to decline in the first quarter of the year. However it did so at its slowest pace for three years, while the seasonally-adjusted unemployment rate fell to 14 per cent in the first quarter, from 14.8 per cent in the last quarter of 2010. Developments in the labour market typically lag those in the economy, as firms initially increase output by boosting productivity and increasing hours. Given this, the SPU foresees a further, but much lower, fall in employment this year, in the order of 1.6% per cent. Labour-market conditions should gradually improve next year and beyond. Still, the unemployment rate is expected to remain well above its pre-crisis level, averaging 10% in 2015.

Such a high rate of unemployment is of considerable concern. The increasing numbers of long-term unemployed – which now represent more than half of the total unemployed – is particularly problematic and raises the risk of unemployment becoming structural. Indeed, construction accounts for almost 50% of the total employment drop. The first steps in addressing this issue have been taken within the framework of the Jobs Initiative. The Government will provide an additional 6,000 specific skills training courses targeted at those who have lost jobs in areas where there are now significant structural employment issues – such as the construction sector. In addition, we will provide an additional 3,000 Back to Education Initiative places which will be targeted at adults with less than the Leaving Certificate.

The Jobs Initiative also contains a number of measures to support the ‘domestic’ economy. As I already mentioned, the latest economic data shows that domestic activity, especially household spending, remains weak. To help bolster such activity, the Jobs Initiative focuses on employment intensive areas such as the tourism sector and includes a reduction of the VAT rate from 13.5 to 9%, an elimination of the Air Travel Tax and a visa waiver programme.

While the macroeconomic forecasts underpinning the Stability Programme Update are still valid, my Department will continue to monitor the economic situation over the coming months and will give a further update on the macroeconomic outlook next October in the Pre-Budget Outlook.

As for the budgetary outlook, the projections contained in the Stability Programme Update show that although a large deficit remains, we are making important progress in closing the gap between the revenues and spending of the State. We have factored in a deficit of 10 per cent of GDP this year, down from around 12 per cent of GDP last year. Notwithstanding this, our General Government debt to GDP ratio is expected to end this year at 111 per cent of GDP, a very high level indeed.

These deficit and debt numbers serve to highlight the importance of continuing to implement budgetary and economic policies to return sustainability to our public finances. This is vital if we want to be in a position to return to sourcing funding from international financial markets at appropriate rates of interest as soon as we possibly can, and before the EU/IMF Programme of Financial Support comes to an end.

Through the implementation of further budgetary consolidation next year, we aim to reduce the deficit to 8.6 per cent of GDP. The forecasts contained in the Stability Programme Update are based on an adjustment package of €3.6 billion in 2012 being required to deliver this target deficit. While it will require further analysis before we can reach a conclusion on the precise level of adjustment that will ultimately be required next year, an adjustment package above €3.6 billion is something that will have to be considered by Government as we work through the budgetary numbers. One way or another, the task of restoring sustainability to the public finances will be a long one and further difficult choices will have to be made in this regard in Budget 2012.

The precise make-up of the measures to be introduced will be decided upon later this year and will take account of the Comprehensive Reviews of current and capital expenditure - both of which are currently underway - and more up-to-date economic and budgetary data. We will make these decisions in a manner that best seeks to protect the economic growth which is beginning to return, and we will do so in an equitable and fair manner.

This also seems like an opportune moment to reiterate this Government’s commitment to restoring sustainability to the public finances and to emphasise our resolve in pursuing a deficit reduction strategy. Sustainable public finances are a key condition for growth and we will implement the necessary consolidation to achieve the 3 per cent of GDP deficit target by 2015.

As I have mentioned, we have already have made some progress towards this objective, with the public finances showing welcome signs of stabilisation after a number of very difficult years. We just recently met the mid-year fiscal target set as part of the EU/IMF Programme. Underlying this, tax revenues are increasing and public expenditure is being managed within the limits set out for the year. The Exchequer position at end June was also broadly in line with my own Department’s estimates.

The aim of the Programme of Financial Support is to provide a secure source of financing for essential public services, while the process of restoring order to the public finances, implementing the policies to return our economy to growth and the restructuring of the banking system continues. All of these are vital to our future economic well being. We need to continue the process of budgetary adjustment if we are to restore confidence in our ability to deal with our difficulties.

Institutional features of the public finances

Let me also say a few words on the issue of budgetary reform, and the actions we are taking to move Ireland’s system of budgeting and fiscal policy formulation into line with best international practice. April’s Stability Programme Update set out the background to, and the key elements, of our fiscal reform agenda, including the establishment of an independent Fiscal Advisory Council and the introduction of a Fiscal Responsibility Act.

The Committee will be aware that, last week - following on from a Government decision in June - I formally announced the establishment of the Irish Fiscal Advisory Council. The Council will provide an independent assessment of the Government’s budgetary stance and projections and, in doing so, will help to inform public discussion surrounding economic and fiscal matters. A number of other countries have taken the step of establishing such a council and have found it to be beneficial not only in helping to ensure that appropriate budgetary policies are pursued, but also in sending a positive signal to markets regarding future fiscal discipline.

The establishment of the Council by mid-year was a structural benchmark to be met under the EU/IMF Programme and its achievement is further evidence that Ireland remains on track in meeting its obligations under the Programme and is committed to overcoming its financial difficulties. The introduction of the Fiscal Responsibility Act by end-year is another structural benchmark under the Programme and one that the Government fully intends to meet. These important reforms will place our future budgetary framework on a more sustainable and credible footing.

Before I turn to the estimates for the Finance group of Votes, I will take this opportunity to update the Committee on the state of play vis-à-vis the EU/IMF Programme. The Government’s compliance with the Programme was confirmed by the combined 1^st and 2^nd Review. This started with the Troika mission in April and was completed with the approval of EU Finance Ministers and the IMF Executive Board on 16^th/17^th May. We have met the fiscal targets. We have met the banking targets. We have met the structural reform targets. The Troika team concluded that we have made a strong start.

The third quarterly Review is now underway. The Troika mission to Dublin, which commenced on the 6^th of July, will finish this week. In the coming weeks, the staff of the European Commission and the IMF will prepare staff reports for the Eurogroup, ECOFIN and the IMF Executive Board respectively. As we have complied with the end-June deadlines and the mission is going well, I do not anticipate any difficulties with the completion of this review and securing access to the drawdown of the next tranche of funds under the Programme.

When it comes to the terms of our funding programme, as I have said on numerous occasions, we take every appropriate opportunity to raise the issue. Since coming into office, the Government has consistently argued for a reduction in the interest rate and put forward proposals for more flexible policy instruments. The statement by my Eurogroup colleagues on Monday that they are now willing to consider a wider suite of measures than before is an important step forward in this respect.

Monday’s statement also set out a commitment to a reduced interest rate. This is recognition that the interest rates from the EFSF fund are too high, and that there is a need for a general reduction applying to all programme countries. There appears to be no quid pro quo, which will make it difficult for other countries to re-enter with a quid pro quo. We will continue to argue strongly for an interest rate reduction, as the details still have to be agreed and we cannot afford to take this change for granted. Nevertheless, Monday’s statement was significant as it stated that all Ministers stand ready to adopt these measures at the EU level, as opposed to the measures being agreed at a country by country level. The details and level need to be worked out though and must be agreed by all euro area Member States. It is not clear at this stage if, when the details become available, they will be acceptable to all Member States.

Organisational Issues

The Report of the Independent Review Group on "Strengthening the Capacity of the Department of Finance" provides my Department with the opportunity to strengthen its core functions, to address organisational structures, to upgrade its budgetary and other processes and to increase staff with technical economic and other disciplines, especially banking and financial markets. Work needs to continue on this to build a modern high performing Finance Department. Contrary to popular opinion, the Department has been very open to atypical recruitment and secondment arrangements to bring in highly skilled staff, and further recruitment of staff with the required skills is planned. Some measures have also been put in place to ensure that serving staff are given development opportunities to enhance their professional competence. Further changes in organisational structure, HR management and in the management of performance are also needed. Proposals are being developed in this regard, taking account of the need to strengthen the Departments core functions to meet the challenges of the future and the recommendations of the Independent Review. On a final note in this area, I am happy to report that the co-ordination of functions with the Department of Public Expenditure and Reform is working very well. Vote 6 - Office of the Minister for Finance

Today I am also presenting an estimate for Vote 6, which provides for the administrative and non-administrative costs of the Department of Finance. The format of the Estimate follows the new ‘performance budgeting’ model which was introduced to the Committee yesterday by the Minister for Public Expenditure and Reform. The format presents Departmental Estimates on a Strategic Programme basis and, therefore, follows an approach similar to that followed by the Departmental Statements of Strategy. Information on the outputs and impacts of Programme expenditure is also provided and this ensures that value-for-money will be a central consideration in all discussion of financial allocations. I am happy to welcome this initiative which should improve the standard of consideration of the Estimates.

The new Department of Public Expenditure and Reform assumes certain functions previously performed by the Department of Finance, primarily in the areas of Public Expenditure and Sectoral Policy and Public Service Management Policy. The Department of Finance retains functions in relation to Budget, Taxation and Economic Policy and Financial Services Policy together with certain Shared Service Functions including the Paymaster General’s Office. As part of the latter Shared Service Function, certain HR, Facilities Management, Accounting and related services are also provided to the new Department of Public Expenditure and Reform.

The gross estimate for Vote 6 amounts to some €27 million which represents an increase of some €1.5 million on the 2010 outturn. I am satisfied that the increased provision is required to provide for the very important ongoing work in restructuring the banking sector and putting the economy back on track. Year-on-year, the 2011 Estimate is down marginally compared to the portion of the 2010 Estimate that would have been attributable to the functions remaining in my Department.

The net estimate is €25.9 million, which is an increase of some €3.8 million on the 2010 outturn.

As for the Office of the Revenue Commissioners, the net estimate of €325.7 million is down slightly (€4.1 million or 1 per cent) on the 2010 outturn. 75% of the estimate is related to the pay of around 6,000 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 Revenue to deliver in these more difficult economic times with fewer resources. The decreased provision in 2011 is mainly reflected in decreased spending on External I.T. Systems Development and Maintenance reflecting the completion of critical IT projects.

In 2010, the Revenue Commissioners focused its Key Corporate Priorities for the year on collecting taxes as they fell due, managing the risks inherent in the shadow economy, improving the skills and tools used in tackling tax and duty evasion, and continuing a policy of organisational reform and innovative use of information and communications technology. These activities were undertaken in an environment of difficulty and challenge both for the businesses and individuals Revenue serves, as well as the organisation itself. Fully aware of the difficulties faced by taxpayers in the prevailing economic circumstances, Revenue endeavoured to balance concerns for taxpayers in genuine difficulties while safeguarding the integrity and efficacy of the tax system.

In 2011 their primary focus has been on:

· Targeting and confronting those who do not comply, in particular prioritising the deployment of resources to identify and confront the shadow economy, with more on-the-ground presence and visibility in the main risk sectors, such as cash businesses;

· Increasing timely compliance and reducing tax debts;

Making it easier and less costly to comply by reducing the complexity and cost of compliance to the taxpayer through increased use of electronic channels and providing better communication and information where it is most needed;

· Contributing to Ireland’s economic development through the provision of high quality legislation and advice as well as advancing Ireland’s agenda in international fora. Conclusion

To conclude, I thank the Committee for its attention and I commend the estimates for the Finance group of Votes to the Committee. I will of course be glad to supply any further information or clarification that Members may request.