Oireachtas Joint and Select Committees
Wednesday, 23 October 2024
Committee on Budgetary Oversight
Ireland's Medium-Term Fiscal and Structural Plan: Irish Fiscal Advisory Council
5:30 pm
Aindrias Moynihan (Cork North West, Fianna Fail)
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This evening's engagement is with representatives of the Irish Fiscal Advisory Council. On behalf of the committee, I welcome Mr. Seamus Coffey, chairman of the council, and Dr. Eddie Casey, chief economist. It is always great to have them here. We are looking forward to a discussion on the EU's fiscal rules and the State's medium-term fiscal and structural plan, which was published last week. It has raised a number of issues directly relating to our committee's work on budgetary scrutiny. We look forward to hearing what the witnesses have to say.
Before we launch into that, I want to explain the limitations on parliamentary privilege and the practice of the House regarding the references witnesses can make in their evidence. Witnesses are protected by absolute privilege in respect of the presentations they make to the committee. This means they have an absolute defence against any defamation action for anything they say at the meeting. However, they are expected not to abuse the privilege and it is my duty as Chair to ensure that this privilege is not abused. Therefore, if their statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him, her or it identifiable.
I invite Mr. Coffey to make his opening statement.
Mr. Seamus Coffey:
I thank the Chair and committee members for inviting us to appear before them today. We welcome the transition to revised EU fiscal rules. We value these engagements can see them as integral to our work. The fiscal council is responsible for providing honest and independent assessment of how the Government is managing the public finances and the economy. We shared a briefing with the committee in advance of the meeting. I will briefly summarise the points made there and touch on our thinking about where things should be headed.
The new EU the fiscal rules focus primarily on putting a speed limit on spending. However, these rules are unlikely to safeguard Ireland's public finances. First, they focus heavily on GDP, which makes debt and deficit ratios look overly benign for Ireland. Using GDP would give Ireland a debt ratio of closer to 40% as opposed to the 60% limit. The debt ratio would be more like 70% if more appropriate measures of economic activity such as modified GNI* were used. Why do we think GNI* is a more appropriate measure? It has a closer link to things that matter, including the more reliable tax revenues that Ireland raises - basically everything outside corporation tax - and things like jobs created in the economy.
Second, the EU rules do not account for Ireland's increasing reliance on corporation tax. This dependency on a small number of multinational companies is risky. The council estimates that just three multinationals made up 43% of corporation tax receipts in 2022. This means they are prone to sudden upswings and could be exposed to sharp reversals. Receipts might continue to increase but the risk remains that receipts could fall suddenly. We do not know what will happen. It depends on developments related to a handful of multinationals in just a couple of sectors. The tax receipts could reverse if there was a sudden shift in company fortunes, restructurings or a change in international or US tax policies. It is unclear what action, if any, the European Commission might take if Ireland goes beyond the net spending ceilings set out in its medium-term plan. So long as Ireland's debt ratio remains below 60% of GDP and the deficit below 3% of GDP, enforcement seems unlikely.
However, the Commission will continue to monitor Ireland's net spending and will report on how this fares compared with its initial plans. This means little formal scrutiny for Ireland under the EU's new fiscal rules. Like a motorway with unenforced speed limits, Ireland will for the most part be left to its own devices. The situation poses significant risks. With Ireland facing little external scrutiny under the new rules, the onus falls on the Irish Government to manage its finances responsibly. With each passing budget, Irish Governments may well decide to revise up the speed limit they stick to on net spending. The Commission will report on this but it is unclear to us whether any enforcement will be enacted for some time.
One of the only ways we might expect some restraint is if the next Government sticks to a domestic or national rule. Something like the net tax and spending rule introduced in 2021 would fit the bill but the Government would have to stick to it. Future governments can show they are serious about managing the public finances sustainably by reinforcing such an approach. This could be by bringing the rule into legislation or at the very least it could entail seeking cross-party agreement on how the rule should work. This would follow the successful examples of other countries such as the Netherlands, Finland and Sweden.
As elected representatives, the committee members will have a good understanding of the tension between meeting their constituents' immediate needs and ensuring public finances are kept safe over the long term. We understand there will always be a desire to address demands today. However, it is crucial to recognise that giving in to that desire often means building up risks for the future. This is usually in the form of large underlying deficits. If more spending is desired today, there is always the scope to do this sustainably. It can be by raising taxes or exploring ways to reduce existing spending. History, including Ireland's own, teaches us that there are significant economic, social and political costs to running unsustainable public or fiscal policies.
After the profligacy of the 2000s, Ireland's period of austerity lasted seven years. It added to the pain of rising job losses and changed the political landscape dramatically. Fiscal rules, such as the net tax and spending rule, provide a valuable framework for navigating these tensions. By clarifying and promoting the need for responsible policy in good times, such rules can help safeguard growth. They can preserve the Government's ability to respond to recessions and they avoid adding too much pressure to the economy in good times. By embracing these rules, Ireland's elected representatives could strengthen the foundation for sustainable growth in income and future prosperity.
Aindrias Moynihan (Cork North West, Fianna Fail)
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As a vote has been called in the Dáil, I propose that we suspend until it has concluded.
Aindrias Moynihan (Cork North West, Fianna Fail)
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2 o’clock
I thank Mr. Coffey for his opening statement. I open the floor, following the normal rota, and call Deputy Conway-Walsh.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Apologies for the vote. My first question refers to an endorsement IFAC provided for the economic projections which were released alongside budget 2025. In the letter of endorsement on the macroeconomic projections, IFAC stated that one of the three elements of the basis for its approach is a review of the Department's past forecasts to look for errors and systematic bias. Is it fair to say that the Department systematically produces conservative macroeconomic forecasts? Excluding 2020, how many times has the Department overestimated GNI* or tax revenue in the past five or six years? I only saw one example when reviewing that. Could the witnesses speak to those two things, the conservatism and overestimation?
Dr. Eddie Casey:
I can speak to the first point on the conservatism of the forecasting. We recently looked at this in more detail. To be honest, we cannot see any overarching systematic conservatism bias. We know that was the expectation and many people seem to think this is the case, but statistically speaking it was not that obvious when we looked at it. We want to do more work on that and look at specific parts of the forecast such as consumer spending, where maybe that is different, and investment. In the headline aggregates, it does not look like it is the case. We are not getting a clear signal on that. With regard to the tax revenue and GNI*, I do not have those numbers to hand but it is something we can look into.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Maybe IFAC could let us have that. How many times has it overestimated? It should be fairly easy to see in GNI*. It is important for us to see the patterns that are there. IFAC endorsed the macroeconomic projection we received on budget day. Apart from the element I outlined, it also looked at the comparisons on the benchmark projections and forecasts from other bodies. IFAC said that the projections were within endorsable range. How did the projections of others compare to IFAC's benchmark projections?
Dr. Eddie Casey:
They were a lot closer than in many rounds. On this occasion, they would have been very close to what we had. We were not terribly surprised to see the forecast they initially presented to us. We finalised our own benchmark projections before we saw theirs. We go through a lot of internal rigorous exercise. This time, there was not a massive difference.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Okay. Do the witnesses think the inclusion of BEPS pillar 1 kicking in in 2026 is a credible expectation?
Mr. Seamus Coffey:
There seems to be some international disagreement or disharmony about the implementation of pillar 1. We have seen some progress with pillar 2, the minimum tax, but there does seem to be some disagreement on the reallocation of taxing rights under pillar 1, particularly when it comes to the US and whether such changes would get through the US Congress and the US Senate with the required number of votes. With pillar 1, you need more multilateral agreement because it is a reallocation of taxing rights across countries. When it comes to pillar 2, the minimum tax, countries can essentially implement that. The EU has taken an approach and can implement the minimum tax on profits subject to its jurisdiction. When it comes to pillar 1 and reallocation, we need that multilateral approach of countries to agree. At this remove, it looks like implementing pillar 1 by 2026 is unlikely.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Does IFAC have any oversight of the multiplier that is used by the Department for current and capital expenditure?
Rose Conway-Walsh (Mayo, Sinn Fein)
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I refer to the multiplier that is used which means that if we put X in, we get Y out.
Dr. Eddie Casey:
It depends. I do not think they have one overarching multiplier that they use. I have not seen one. We have our own estimates. We know there is lots available from Irish literature in particular, but I have not seen one that the Department endorses as being its official favoured estimate. These things are generally very uncertain and there is a massive range of them.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Does IFAC have any impact on the multiplier that is used by the Department? It is difficult to tell. There are lots of moving parts.
Rose Conway-Walsh (Mayo, Sinn Fein)
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It might be something worth looking into in terms of the transparency of future estimates.
Does IFAC assess the level of public expenditure based on the share of the real economy, which is obviously GNI*? From my own estimates, when I compare either net expenditure or general Government expenditure, it shows we are spending less today than we were in 2019, the year before the current Government came into power. That paints a very different picture from that portrayed by the Government when it talks about the millions and billions being spent. It is very different from the one given by IFAC. I would appreciate IFAC's views on the potential to use public spending as a share of the real economy, GNI*, and the potential for something like that to be used by a party for its own fiscal approach.
Mr. Seamus Coffey:
Our publications use public spending as a share of GNI*. This would be tracked, for example on a general Government basis, which would be the one that would primarily be used. Yes, it has trended down once we take out the Covid years. It would have been slightly over 40% in 2017 and 2018, maybe, and it is slightly under 40% now, according to the latest estimates for 2023, which is the last complete estimate we would have. Regarding what that indicates, I suppose you would have to look at what is in GNI* and consider whether that is reflective of the tax raising capacity of the Government.
The answer is, to a large extent, "Yes". We certainly think that GNI* is a much better measure of these issues than GDP, for example, which has various problems. We could look at GNI* itself and ask if there are issues with this measure. We do, though, think GNI* is more appropriate. Putting Government spending as a share of GNI* is a useful indicator and is something we have done.
Dr. Eddie Casey:
I will add that some things not really related to what might be considered real expenditure, in the sense of whether we are adding more services and supports to the economy, would not be reflected in that number perfectly. This is because we will have things like interest costs having fallen over a period, as well as payments on unemployment, which might have fallen too simply because the economy is doing a lot better. This is something to watch for when we look at these measures.
Rose Conway-Walsh (Mayo, Sinn Fein)
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It is also necessary, though, to look at inflation. We never signed up to the restrictive Fine Gael 5% spending rule. I believe we have been proven right in relation to inflation. Of the three examples that IFAC gave us in its submission, namely, the Netherlands, Finland and Sweden, the first two specifically take inflation into account and look at the increases in spending in real terms. Does IFAC now accept the inherent weakness in the 5% spending rule of Fianna Fáil and Fine Gael?
Mr. Seamus Coffey:
I suppose it is necessary to take into account the circumstances in which you find yourself. Previously, IFAC assessed that Government spending in 2022 and 2023, when inflation was higher, at least partially recognised the need for spending to grow faster than the nominal 5% limit set out in response to the inflation. It is necessary, therefore, to take into consideration where you stand. There are different ways of doing this. It would be possible to have a rule that would adjust automatically for inflation or there could be a get-out clause that states that if inflation is above a particular level, the limit would be adjusted on that basis. Inflation, however, is a factor of economies. Inflation is key for determining living standards if prices are rising and incomes are not, and there should be a response.
Does this in some way discredit having a spending limit? No, but it is something that must be taken into account. When we look at the increases during 2022 and 2023, even if we allowed for inflation, the increases we saw went beyond it. It did, therefore, add to pressures in the economy. I do not, then, think it inherently limits the approach but inflation is certainly something that must be taken into account. Would it be done explicitly, with inflation added in and have a sort of a real change and then put inflation on top of that? That would give us a variable sort of limit based on whatever inflation is forecast. Alternatively, would there be a fixed limit and a decision that if we were to go through a high-inflation environment there would be a get-out clause mandating a response to it? I do not think that either approach undermines the credibility of such a rule. One or the other, however, should be done. There should be a response to inflation. The council recognised this in 2022 and 2023. What the Government did, though, in respect of the increase in spending we saw in those years, went beyond what would be necessary just to respond to inflation.
Rose Conway-Walsh (Mayo, Sinn Fein)
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It is less today than it was in 2019 in terms of spending. It is a kind of contradiction in one sense. The concern is that all this highlights some of the risks associated with legislating for the spending rules.
Dr. Eddie Casey:
It does, I suppose. One of the things we often talk about with the rules is that there can be sensible get-out clauses for these things. We do not think they are going to be perfect and capture every circumstance, but it should be possible to design a reasonably simple rule that works most of the time, with an allowance for exceptional periods, a lot like the energy shock. That was a good example of a time when things should be looked at, a step back taken and an acceptance that inflation of the type coming from an external energy shock is something very different and that the rule may perhaps not be equipped to deal with it. This is what we would have said at the time.
In normal times, however, having an assumption of 2% inflation can actually be a good feature and not a bug in the rule. This is what we would have said, in the sense that if a lot of demand is being added to the economy and if unemployment is very low and employment is very high, it is possible to end up in a situation where there is very high inflation. It is then a good idea to pull back on the rule and do a bit less than allowing for all that inflation and chasing it. The reverse of this is true as well. If inflation happened to be low, that could be a sign that not enough demand is being added to the economy-----
Rose Conway-Walsh (Mayo, Sinn Fein)
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No, exactly. What we are trying to get at here, however, is to be fiscally responsible but still have enough flexibility to be able to adapt to and respond to external changes that occur. It is about the balance rather than about tying ourselves into something if we were to legislate for the rule.
Rose Conway-Walsh (Mayo, Sinn Fein)
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I thank Dr. Casey for that.
The EU fiscal rules state that the medium-term fiscal plans will commit member states to an agreed net expenditure path for a five-year period. The plan will subsequently be endorsed by the Council of the European Union. It is stated that once endorsed by the European Council, it is generally not possible to deviate from the agreed net expenditure path unless a new government takes office. I think this is quite extraordinary. The stability programme update earlier this year set out in stark terms how restricted the national governments of member states will be. It goes on to state that a member state government cannot alter the net expenditure path once it has been endorsed by the European Council. Under the new fiscal rules - which the Government, in my view, shamefully supported - will this mean that Ireland will require an election to deviate from the five-year plan and increase or decrease net public expenditure?
Mr. Seamus Coffey:
I guess there are different ways of looking at it. If we look at it from the perspective of the strict text and the strict numbers put into the five-year plan, the answer is "Yes". A government would not necessarily be allowed to deviate from that. The issue, though, is what would happen if a government were to deviate from that five-year plan. As currently proposed, designed and likely to be enforced, the key will be the original benchmarks from the Maastricht treaty, namely, the 60% debt-to-GDP ratio and the 3% deficit-to-GDP ratio. Countries not meeting those measures, and perhaps deviating away from their agreed net spending plans, would be subject to scrutiny and, potentially, to enforcement and required to introduce measures to bring them back into line with their net spending plans.
For countries like Ireland, however, where the 60% debt to GDP ratio is not really appropriate, because of problems with measuring GDP, and that are unlikely to get to a deficit of 3% of GDP, then if a government of the day in a budget were to put out spending plans that differed from those set out in the medium-term plan, it is unclear to us what enforcement would come about at an EU level, given that Ireland, technically, would satisfy the 60% debt rule and the 3% deficit rule simply because of the very large nature of our GDP due to the presence of multinationals. Technically and legally, then, we would imagine it would be necessary to stick to the five-year plan as set out in the medium-term plan over the five years.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Yes. I think this is crucially important because we are adding an additional national restriction to an economic decision of a democratically-elected government. I think this is extremely serious. IFAC's submission refers to it having an enforcement role in regard to the EU fiscal rules. Will the witnesses expand on this statement? I refer to what IFAC having an additional enforcement role would look like.
Dr. Eddie Casey:
I do not think we will have any additional enforcement role. It is a possibility that bodies like the fiscal council could be asked to monitor these rules and whether a government is adhering to them, but I do not realistically see that being a requirement of fiscal councils very soon. One thing we could do, obviously, would be to look at the rules and whether they are reasonable given the nature of the Irish economy and how unique it is. I refer whether sufficient account is being taken of things like excess corporation tax and distortions caused by the activities of foreign multinationals. These are things through which we could add value to the rules and how they are assessed, but realistically I do not see a formal role for us any time soon.
Mr. Seamus Coffey:
Yes. Some early proposals from the European Commission in early communications in late 2022 did see a more significant role for fiscal councils. Once those proposals got as far as the European Council level, at ECOFIN, there was a big step back from it. The European Commission was proposing that the fiscal councils would be involved in the design phase of budgets, perhaps in terms of assessing whether there was compliance with parameters previously agreed.
In March 2023 ECOFIN said that fiscal councils will have no role in the design phase of budgets. As my colleague Dr. Casey said, when it comes to the assessment, it does at this stage seem to be driven primarily by the Commission. The Commission is saying that it would like more national and domestic ownership of these plans and would like a domestic first line of assessment to be undertaken by fiscal councils but without any formal legal status. The final decision would ultimately be with the European Council and whatever the Commission's assessment was and that a local or national fiscal council could undertake its assessment but it would only be something that feeds into the process and would not have any legal standing.
Rose Conway-Walsh (Mayo, Sinn Fein)
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What about the decision of the democratically elected Government? I really have concerns about this.
Rose Conway-Walsh (Mayo, Sinn Fein)
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Five years is a long time in politics.
Aindrias Moynihan (Cork North West, Fianna Fail)
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We will move on. I will give Deputies a chance to come back in again later.
Seán Canney (Galway East, Independent)
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I thank our guests for coming in today. From a lay person's point of view, we are talking about economies, budgets and five-year plans but a five-year plan is not worth the paper it is written on in the context of what happened in Ukraine or of Covid, for example. Basically, such plans are for an ideal world, if everything was right. When we have a spike in inflation, all kinds of reactions have to be taken to try to curb it. How do our guests see their role in that type of situation? We can all look at projections, at what might happen and at how close that is to somebody else's opinion but how does one advise governments and Ministers for finance when they are in that situation and have to make the adjustments that are required to deal with whatever has been thrown at them?
Mr. Seamus Coffey:
There should be flexibility to deal with and respond to the environment in which a government and a country finds itself. We are not talking about restrictive parameters that cannot change or be adjusted. If we go through an inflationary period, there should be the ability to respond to that. What we are looking for with a five-year framework is a structure for what is happening in normal times so that we do not just glide along or end up in a position that has not really been intended or planned. When it comes to problems with public finances, they tend to build up during the normal or the good times and then get exposed when a problem hits. Generally when there is a problem, whether it is an inflationary or recessionary problem, we know what the appropriate response is but the key is to have the capacity to actually deliver that response. We saw with Covid and the recent bout of inflation that various means were taken to allow governments to spend additional money, including through a relaxing of policy from the ECB and the suspension of the fiscal rules. Governments right across the EU stepped in and were able to expand their government spending in response to these significant crises. What is needed is the capacity to do so. When a global or widespread shock like Covid or the energy crisis driven by the Russian invasion of Ukraine hit, there was a global response.
The issue from a national perspective is if we get hit with a unilateral shock that only affects us - whether that is to do with FDI, corporation tax or the nature of the economy - and we then require the Government to have the capacity to step in. If it is a unilateral shock we might not have the support of the ECB and the fiscal rules might not be relaxed for us. We are dependent on having that capacity built up ourselves. It is during the good times, the normal times, that we want a framework and guidance from a fiscal rule because when the shock comes there should be a response and there should be flexibility. The key is to make sure we have the fiscal capacity to do the right thing. We have long seen Ireland be hit by shocks and not have the fiscal capacity to respond. We saw it when the Government spent too much money in the late 1970s and then the correction required a protracted recession in the 1980s. We saw it again in the run-up to 2008 whereby problems built up during the good times and when the recession came, the fiscal policy exacerbated it by increasing taxes and cutting spending. However, we saw the good side of fiscal policy with Covid and the energy shock, where the Government was actually able to step in. Certainly flexibility has to be there but if we are going to experience a unilateral shock, we have to make sure that we have both the flexibility and the capacity to respond. That is why we want these guidelines or frameworks in the more normal times to actually allow us to deal with some of the problems that Deputy Canney just described.
Seán Canney (Galway East, Independent)
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If one considers the surplus taxes that we have coming in now and the fact that some of that is being stored away in the so-called rainy day fund, is that the type of action that a good government should be taking so that we have reserves when we need them?
An example of an area about which people are very frustrated is that of house building. Private housing is not being built. That market is dysfunctional. Do we throw money at it? Do we nationalise house building? Now that we have reserves, should we be doing that because it is not just a housing crisis but a crisis that is damaging our economy?
Mr. Seamus Coffey:
There are two points there. The first is about the appropriate fiscal position for Ireland to be in now. It is clearly to be running surpluses and there are two reasons for that. The first reason is that in terms of our finances and revenues, we are collecting significant amounts of corporation tax but it is a revenue source that we do not have full control over. It is possibly as likely to continue to rise as it is to potentially fall but because of the risks associated with it, we would not like to see permanent spending measures being dependent on that revenue coming in. The second reason is the position of the economy. We are at very low levels of unemployment, with a rate that is close to 4%. Employment rates are at record highs and there is simply no case for fiscal stimulus when it comes to the current position of the Irish economy. If we look at the corporation tax that it is coming in, it is being paid by a small number of mainly US multinationals. While they have activities in Ireland, the transactions, trade and sales are all to foreign markets. They are not here to service the domestic market so the payment of corporation tax is on exports. That is like an injection into the overall Irish economy. The Government is collecting it and if the Government spends it that is, in turn, an injection into the economy. If the economy is operating at as high a level as it is, then the Government is perhaps stimulating demand beyond the capacity to supply so it could just end up driving up prices.
There are legitimate concerns about housing supply and the ability to meet the housing needs of the population and there certainly is financing there to increase spending and have a greater provision of public capital spending for housing but the issue is whether we actually get more houses. If we have a 4% unemployment rate, we do not have tens of thousands of skilled labourers on the live register available to step in and come onto sites and build the thousands of new houses that everyone agrees we need. Do we have the capacity in the economy to actually deliver them? One could say that rather than saving money and setting some money aside in various savings funds, which the council has welcomed, perhaps we should be spending more of that money now in the area of housing. However, the key concern would be whether we actually get real changes and real increases. If the capacity simply is not there, we just end up putting more money into the economy and having more money chasing a pretty fixed supply of resources. Maybe we could attract more workers into the construction sector but the sectors that lose those workers will try to attract them back and then we could end up in a cycle of significant wage inflation that, over the medium to long term, could have a big impact on our competitiveness. If we were to say that housing is our priority, and I am sure lots of members would agree that it is a priority, perhaps we have to make space in the economy to deliver it. Maybe certain other things should be scaled back or reduced and maybe some of those choices might not be palatable. Perhaps we need to continue the roll-out of retrofitting of existing housing but maybe we should focus on building new housing if that is the priority. If we want to do both, we must ask if we have sufficient workers. We could look at the commercial area, at public infrastructure, at transport and at workers being used to build data centres and so on who could perhaps be redirected to other areas. These choices are not easy but given that we are at 4% unemployment, just putting more money into something like housing is not necessarily going to provide more housing.
Seán Canney (Galway East, Independent)
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What is Mr. Coffey's take on people promising that we are going to build 60,000 houses? How does he see that being done when we cannot even build 30,000 at the moment? That is not a political question. I am asking how the council sees this being done.
Will something else have to be sacrificed, for example, retrofitting or something like that? Does Mr. Coffey have any comments on that?
Mr. Seamus Coffey:
We would like to see the capacity of the construction sector increase, but there is such low unemployment it is a Catch-22 problem. Previously, when we were building significantly more housing - up to 90,000 units in 2006 - we brought in many of those workers from abroad, particularly eastern European countries that had recently joined the EU. They had the skilled labour force that we were able to benefit from. They were able to come because there was a surplus of accommodation at the time so there was somewhere for them to live. Whereas now, when the Deputy talks about bringing in workers to build additional housing, there is no housing in the first place for these workers to live.
Second, their own economies are performing much better than they were 15 or 20 years ago, so they are much more likely to stay. It is a bit of a problem. Can we build 60,000 units? There is possibly scope for a continued increase in the output of the sector, but it is difficult to see it happening pretty quickly unless there is to be a diversion of existing resources away from other areas to the construction of residential housing. We might get there over time but we need the increased housing output now.
Again, it is not necessarily a problem of money. The money is certainly there. It is a capacity issue. There are also some non-fiscal issues not related to spending, such as planning, etc., that might impact on the private sector. It is undoubted that we need the housing; we just seem to have difficulty in actually providing it.
Seán Canney (Galway East, Independent)
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The way Mr. Coffey describes some of the difficulties in getting foreign workers or getting our own people who have gone abroad to come back is like a chicken-and-egg situation. We have to provide the houses for them to live in to give them the permanency they need. They would want a guarantee that they would get a house here if they came back.
Mr. Seamus Coffey:
We are not saying that it is easy. It is actually quite difficult because the unemployment rate is so low and the pressure on the housing system itself is so tight, in particular in the rental sector. If people move back to Ireland from abroad or move from other countries to Ireland, they are not necessarily going to buy a house. The pressures on the private rental sector are higher than in the owner-occupier or the first-time buyer sector. It is not an easy one to solve.
Again, the issue is whether we make choices to push down other areas. We would like to do everything but we just do not have the capacity to do it. We are not saying we have an easy solution but the concern is that given the Government is running surpluses and the money is available, one option would be to just throw more money at it and hope that it would provide something, but that could lead to an indirect tax on everybody by driving up prices.
Seán Canney (Galway East, Independent)
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This is not a loaded question but it relates to the role of IFAC. Do the witnesses find that nobody listens to what they say when they have concerns about fiscal rules or projections and forecasts that are being made? Are they being listened to by governments? Do they feel that their role is effective? People say the Government is composed of the elected representatives of the people and the role of IFAC is advisory only, as in the organisation's title. Do the witnesses see themselves as being effective in steering things through the rough and tumble of the economy?
Mr. Seamus Coffey:
That is a very fair question. One way to look at it is the different types of audience that IFAC tries to address. First, there is the Government and the role in the endorsement of the macro forecasts and the assessment of the budget. The second is the Members of the Oireachtas via our valuable appearances here with the Committee on Budgetary Oversight. The third is the general public.
It is very difficult to measure whether we are having a direct impact on policy because we do not know what the counterfactual is. We do not know what the budget would be if there was not a fiscal council. It is really hard to know if it would be different. What we want to do is to get an awareness right across the government, Members of the Oireachtas and the general public of the need to make sure that we maintain the fiscal capacity to respond when we do hit problems. Economies do hit problems from time to time. We have a history with that in Ireland.
One reason for having a body like a fiscal council is to keep a focus on the difficulties that arise when we get fiscal policy wrong, and try in some way to keep either the Government, politicians or the public informed of those. How effective can a fiscal council be in doing that? We think it is important to get our message across. We have those interactions with the Government when it comes to doing the macro forecasts before the budget and then the assessment after. We have our appearances here. We take very seriously our role in discussing these elements with the general public. We would like to think that is having an impact even in informing or contributing to the debate. It is very difficult to say whether that has a direct impact on policy. These decisions are made by the Government and the Oireachtas. A body like a fiscal council is outside of that but can provide a valuable contribution to the decision-making process while not being centrally involved with it itself.
Seán Canney (Galway East, Independent)
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I have one last question. I did my leaving certificate in the mid-1970s and for whatever reason, there were no jobs at the time. When I was in the construction industry there was very little work in the early 1980s, then we had the boom and it was followed by the situation in 2008. Should we be doing specific analysis to generate lessons for the future? I include how we performed during Covid and in the energy crisis to see what we did right and whether what we did was by good luck or good management. We should learn from these kinds of events so that we are better prepared for unknown events in the future.
Mr. Seamus Coffey:
Absolutely. The key lesson from Ireland's fiscal history in the past five decades or so is to try to avoid the cycle of boom and bust. The Deputy mentioned the 1980s, which were preceded by a very significant expansion of government spending in the late 1970s, in particular following the 1977 general election. That left us exposed and a shock hit with the oil crisis of 1979 that drove Irish and international economies into recession. We simply did not have any capacity to respond. In fact, the response in Ireland when we were in recession was to increase taxes and try to cut spending, which prolongs a recession.
Again, in the run-up to 2008, when things were going well – in that instance it was the private sector that was doing a significant increase in spending via a lot of borrowing from the banks - there was an external shock that left us exposed. The Government was collecting all the tax revenues from stamp duty, income tax from construction workers, VAT on new housing and, by and large, it was spending it as quickly as it was coming in. That left us exposed to an external shock. We had the credit crunch of 2008. Again, Irish and international economies plunged into recession. The response here was to increase taxes and to cut spending, which made the recession worse.
Some instances where we saw the positive use of the public finances was Covid and the cost-of-living crisis, where the Government was able to step in when there were difficulties and increase spending in response to those. What we have learned is to try to avoid the boom-bust cycle, which as the Deputy said, is most pronounced in the construction sector. We went from building 90,000 houses a year in 2006 to approximately 5,000 in 2011. We essentially stopped the construction of housing and, as we are finding out, it is very difficult to ramp it up again.
If we had a smoother approach and avoided the boom-bust cycle, we could probably still end up in the same position we are in now. One example I give is on government spending and the thoughts about rules, nominal amounts and how much of an increase to make. The widest data we have – general government data – go back to 1995. If we look at the nominal increases and what Governments did in terms of spending from 1995 to 2023, on average, it increased by just over 6% a year. On average, we are not doing too badly, but there were periods where it was increasing by 15% or 20% a year, and then there were periods when it was being cut, whereas if we increased by 6% every year we would be in the same position we are in now, but we would have avoided many of the problems that gave us the boom-bust cycle we have seen in recent years.
That is not a problem unique to Ireland, but if there was one lesson we would take it would be to try to avoid that, so that we would have the ability to respond when the crisis hits. We cannot predict what it is. Who would have predicted an oil shock in 1979? Even in the 2008, could a global credit crunch have been predicted? No. However, if an economy is performing well, and if the Government is not running surpluses when that is the case, we leave ourselves exposed. One change we would like to see is that if there is a unilateral shock to Ireland, whether it is corporation tax, foreign investment or something we cannot predict at all, that we do have the capacity to respond, and that unlike previous occasions, we do not make recessions worse.
Dr. Eddie Casey:
The lesson is also important for construction, in particular. This links to the Deputy's earlier question, related to how we solve what is an intractable problem. One problem is the number of workers. When the 2008 financial crisis hit, we lost about two thirds of the workers in construction through migration and other means. They left and went into other sectors, which means the killing of capacity. If public investment could be maintained in a recession like that – it was slashed in half after 2008 – it might be possible to keep the capacity. This was one of the big lessons from the financial crisis. It cast a massive shadow. Capacity was gone for a very long time and we were not able to ramp up when we needed more housing. Additionally, there are other effects. We know the Irish construction sector is one of the least productive by comparison with the world’s top performers. With regard to the numbers of units built per hour worked, our level of productivity is about half of that elsewhere. One reason is that if there is less certainty in the sector, fewer people invest in training and new technologies. These need certainty to thrive. Looking forward, you would like to see that certainty spanning out over a much longer horizon rather than having the boom to bust Mr. Coffey described.
Patricia Ryan (Kildare South, Sinn Fein)
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I thank our guests. I apologise about the voting; it just makes everything very awkward. Anyway, we will move on swiftly.
Would our guests recommend that the Government disregard or disapply the net spending rule when allocating funding for the likes of State old age pensions, especially considering that the recent increase of €12 granted in budget 2025 has caused a real decrease in the value of average earnings from 32% to 30%? If not, will they expand on the reasons?
Mr. Seamus Coffey:
Decisions like that are political in nature. We do not have a benchmark or indexing system in Ireland whereby we would get the number for, say, average weekly wages and benchmark or index weekly social welfare payments such as the State pension against it. This gives potential for the pension rate to change the share of weekly earnings. I am not quite sure of the numbers but a change from 32% to 30% can happen because we do not have a formal system. It is very much down to the decisions taken by the Government and Oireachtas in the annual budgets. While there might be arguments in favour of benchmarking or indexing the payments in the current environment, it is not something that is in place in Ireland at the moment.
Patricia Ryan (Kildare South, Sinn Fein)
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What are Mr. Coffey's thoughts on benchmarking?
Mr. Seamus Coffey:
That would certainly be beyond the scope of the role of the fiscal council. Before I wore my fiscal council hat, I sat on the Commission on Pensions, which would have examined the possible role benchmarking could play in the Irish system. It can create difficulties. The UK had what became known as the triple lock, whereby they tied increases in state pensions to wages, inflation or a minimum of 2.5%. There were periods in which it led to increases beyond inflation. I realise the Deputy is talking about increases lower than inflation. The fiscal council has no view on this and it is not part of its remit. Benchmarking and indexing are useful for social welfare payments, however, because they should keep up with what is happening elsewhere in the economy. Doing it formally, by taking the decision-making ability from the Oireachtas or politicians, is a bigger step, but doing a benchmarking exercise and seeing where the payments stand are important. That is a personal view rather than a view of the fiscal council.
Patricia Ryan (Kildare South, Sinn Fein)
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That is fine. I asked Mr. Coffey for that reason. I thank him.
To minimise the risk caused by the current overreliance on the tax take from just three corporations, would the council recommend the Government remove vulture funds’ charity status, making their rental and other income subject to tax? The funds have a considerable presence in the housing, rental and mortgage markets. I just want to get a feel for this and the thoughts of the council on it.
Dr. Eddie Casey:
We would not advocate that specifically, but we would advocate the broadening the tax base if we thought the Government wanted to spend more. The idea that spending has fallen to levels that might not be acceptable to some parties is fine. If there is a desire to increase it, it should be done in line with a sustainable suspending rule or taxes should be increased so you can go even further. The idea we are trying to get across regarding these types of rules and the whole system the EU is trying to move towards involves having sustainability at the heart of the system, so that if you do want to do more, it should be taxed sustainably. The danger with Ireland’s corporation tax receipts is that, because they are so concentrated, there are huge risks over what would happen to one or two companies or over our not knowing what would happen to them. That gets into an environment in which there is really a need to assess the sustainability of the tax base if you are to examine spending as well.
Patricia Ryan (Kildare South, Sinn Fein)
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Is there anything extra we could be doing to alleviate some of the problems caused for people by vulture funds?
Patricia Ryan (Kildare South, Sinn Fein)
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That is fair enough. That is all I wanted to ask. I thank all the guests very much. I appreciate the chance I have been given.
Aindrias Moynihan (Cork North West, Fianna Fail)
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I have one or two questions myself. I understand the kind of enforcement or pushback that would be put into execution by the European Commission in the event of rules being broken is unclear. Is that unique to Ireland, or is it across all EU countries?
Mr. Seamus Coffey:
It would not be unique to Ireland. It is a matter of the emphasis or approach taken to have additional scrutiny and perhaps go as far as formal enforcement. The current proposal, as passed earlier in the year, is on the basis of the key benchmarks being the 60% debt-to-GDP and 3% deficit-to-GDP ratios. It is proposed that if countries exceed those, the Commission will look more closely at them. If those countries are exceeding their net spending limits, as set out in their medium-term plans, the Commission will be likely to step in. In the case of countries like Ireland, however, and maybe there are not many in a similarly strong position but a number of countries are not exceeding the 60% debt limit or the 3% deficit limit, the Commission will examine what is happening and perhaps comment on it but will not be likely to go further than that. There would not be formal enforcement, with the Commission saying a country has to introduce measures to get back on the path agreed in the five-year plan, as published at, say, the start of the term of a new government. A country would get a comment rather than be subjected to strict enforcement. If the plans are to be credible and have merit, there should be some form of enforcement. Otherwise, you are simply setting out limits that are not being enforced. If rules are not being enforced, their effectiveness is limited. You want the design of the plan to be taken seriously and to be correct.
Consider what occurs if a plan is not enforced and we just publish it and maybe go back to the annual cycle of budgets we have in Ireland, whereby we do things on a year-to-year basis. The key here is to try to take a more medium-term view by having Departments say that within two, three or four years their budgets will have reached a certain level that will allow them to plan to provide additional services or supports. It is a question of having a more medium-term plan. At present, we have a 12-month budgetary cycle, and it can be even shorter because of various mechanisms like Supplementary Estimates and policy decisions made during the year. The hope is to move to a more medium-term plan that would allow us to say where we are going to get to over the next five years. If medium-term plans are not enforced or lack credibility, maybe owing to difficulties with the numbers that go into them, we just go back to short-term view that has dominated our fiscal system in recent years.
Aindrias Moynihan (Cork North West, Fianna Fail)
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What kind of enforcement does Mr. Coffey envisage?
Mr. Seamus Coffey:
If you were to deviate from it, the European Commission could get the Council to pass a Council decision requiring a country to introduce measures to get back on the path set out in its medium-term plan. That would be a very significant step. While the possibility of doing that exists, it seems like it would be done only in the cases of countries exceeding either the debt limits or deficit limits.
In the case of Ireland, because they are done on the basis of GDP, it would almost take an extreme scenario for Ireland to breach either. If you consider the 3% deficit, as our current GDP is over €500 billion, it would be a deficit of €15 billion. That just gets us to the 3% limit. For the Commission to look at this seriously, one would have to go above that. Last year Italy had a budget deficit of around 7% of GDP. That rightfully attracts attention. Although it does look likely to fall in 2024 it will still remain above the 3% limit. The revised fiscal framework is about addressing those sorts of scenarios.
From an Irish perspective, we have our own problems. They are somewhat different and maybe do not fall under the remit of the revised rules. The first is our reliance on corporation tax that really would not be taken into account at all. Number two would be the nature of our GDP, which is well recognised does not reflect the sort of the debt-carrying capacity of the economy. Third would be the very strong economic position we find ourselves in. We are unlikely to get enforcement from the European Commission, which looks at Ireland as being in compliance legally with this framework. That means it puts much more emphasis perhaps on a domestic surveillance, from the point of view of the Irish Fiscal Advisory Council, and also perhaps on policy from the point of view the Government and the Oireachtas. So, one would like to think that something could be done but our reading of it at this stage is that as long as we stay below the 60% debt and 3% deficit thresholds then we are unlikely to face that type of enforcement where we would face a Council decision that could tell us to introduce additional measures to get back on a medium-term next spending plan as set out in a five year plan. In the current environment it is unlikely that a country like Ireland would find itself in that position.
Aindrias Moynihan (Cork North West, Fianna Fail)
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Mr. Coffey had mentioned flexibility. It was also referenced with regard to the 2024 budget and the setting aside of the two funds. What is the council's take on the capacity of those to give that kind of flexibility?
Mr. Seamus Coffey:
The issue here is that one is looking for flexibility down the line. As we said, there is no argument, or no case can be made, for the Irish economy needing fiscal stimulus now. Given that a large part of these funds are coming from corporation tax, if the Government was to spend them it would be an injection into the economy. If we look at the contributions made this year to the Future Ireland Fund and the infrastructure and climate fund, there is a sum for 2024 of about €6 billion, and if we take the Government's own figures for what it deems to be the windfall or excess corporation tax - whatever word one wants to use to describe it - the current estimate for 2024 is around €12 billion. The contributions are about half what is deemed to be the windfall or the excess. So, yes it is a positive step but it does not even go as far as the Government's own estimates of those windfall corporation tax receipts. These funds have the potential to accumulate and actually become a revenue stream in and of themselves, setting aside the capital amount now. If we keep making those contributions over a number of years, the amount in those funds will grow and those funds have the capacity to earn a return if invested in financial assets. That return could be used perhaps to meet some additional costs due to demographics or maybe to meet some ongoing spending pressures the Government might face. At a time when we would need it, rather than having to look for additional tax revenue measures in future, we might have the income coming from those funds. The council would welcome it. The primary issue is that Ireland should be running budget surpluses for the well-known reasons of corporation tax and the strength of the economy. If that then is used to build up some savings funds, that would be viewed as a positive.
Aindrias Moynihan (Cork North West, Fianna Fail)
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Does Deputy Canney have any further questions? No. Okay, they were pretty much the questions the members and I had. I thank the witnesses for their input and their patience with the votes and everything. That concludes our session. I thank the witnesses for participating.