Committee on Budgetary Oversight debate -
Wednesday, 19 Jun 2024

I welcome our guests. This engagement is with representatives from the Irish Fiscal Advisory Council. On behalf of the committee, I welcome the acting chairperson of the council, Professor Michael McMahon, and Dr. Adele Bergin and Mr. Niall Conroy. Twice a year, we have an opportunity, as part of the EU semester, to meet the Irish Fiscal Advisory Council to consider issues raised in the fiscal assessment report. The report was published earlier this month and raises a number of issues directly relating to the committee's work in our budgetary scrutiny role. We look forward to hearing what Professor McMahon has to say.

Before we begin, I will explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. Witnesses are protected by absolute privilege in respect of the presentation they make to the committee. This means they have an honest defence against any defamation action for anything they say at the meeting.

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 this privilege. 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 comment on, criticise or make charges against a person outside the Houses, or an official, by name or in such a way as to make him, her or it identifiable. I remind members of the constitutional requirement that they must be physically present within the confines of the place where Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she are not adhering to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.

I invite Professor McMahon to make his opening statement on behalf of IFAC.

The council is grateful to the Chair and members of the committee for inviting us to appear before them once again. We value our engagements with the Oireachtas highly and consider these opportunities an integral part of our work. As an official independent body established under the Fiscal Responsibility Act, the council's mandate revolves around four elements: endorsing and assessing the official macroeconomic forecasts, assessing official budgetary projections, monitoring compliance with fiscal rules, and assessing the Government’s overall fiscal stance. Our focus is on the broader fiscal perspective rather than individual tax or spending measures.

In our latest fiscal assessment report, we assess the Government’s official projections as set out in the stability programme update, SPU, 2024. The Irish economy is performing well and is operating at or above its potential. The labour market remains tight, with record high employment and record low unemployment. While inflation is falling, this is mainly driven by falling energy prices. Looking at domestically generated inflation, this remains high at approximately 4.4%. Given the strong economy, budgetary policy should not add to demand. This is not a time for the "everything now" approach of cutting taxes and increasing current and capital spending all at once. Choices need to be made. Increases in capital spending can be facilitated. This can be done without overheating the economy by increasing taxes or containing current spending.

The national spending rule is the best guide for budgetary policy in Ireland. The newly adopted EU rules will be a poor guide for the Irish fiscal position, given they are based on GDP and do not account for windfall corporation tax receipts. The national spending rule is a net rule. This means that tax increases allow a government to grow spending by more than 5%, if that is its priority. The Government is set to repeatedly breach the national spending rule. Net spending is set to increase by more than 5% this year and next year. Since the rule was introduced in 2021, breaches add up to €8.5 billion, or 9.7%, of core spending by 2024.

Given the position of the Irish economy, the council believes that current budgetary policy is not conducive to prudent economic and budgetary management. Our assessment of the breach of the national spending rule indicates it is larger than that shown in the SPU 2024. This is because we account for likely spending overruns and fiscal gimmickry. Health spending overruns have not been reflected in budgetary updates. This is despite health spending being well over budget early in the year. Overruns in spending are occurring earlier in the year than in past years, and at a higher level. These overruns are unsurprising. In the fiscal assessment report, FAR, we estimated that an overrun of €1.6 billion looked likely for 2024. The latest fiscal monitor data, not available at the time of the FAR, means our estimated overrun for 2024 is now €90 million higher.

Fiscal gimmickry is not a term invented by the council. It is a well-established term used by those examining government accounts in detail. Almost 2,000 academic articles can be found on the topic when searching Google Scholar. As we view that much of the spending labelled as outside of core spending in SPU 2024 is likely to be long-lasting, we believe it should be counted in core spending. Not doing so flatters the breach of the spending rule. This includes spending on health related to the pandemic, spending on humanitarian assistance for refugees, and a new category of capital spending labelled as windfall capital investment. These three categories of spending add up to more than €4 billion this year. The council is not opposed to these items of spending. In fact, we welcome these items of spending and that they are included in projections out to 2027. This is in contrast to budget 2024, where much of this spending was assumed to fall to zero in 2025. It is the classification of this spending that we find problematic.

On the revenue side, Government revenue is highly concentrated and hence could reverse suddenly. Corporation tax receipts are concentrated among a small number of large foreign-owned multinationals. Our work estimates that just three firms accounted for 43% of corporation tax revenues in 2022. Income tax is also highly concentrated. A small proportion of highly paid employees pay much of our income tax; the top 20% of earners pay 80% of income tax. A downturn in a small number of sectors would impact income tax as well as corporation tax. While Government revenue is concentrated, this does not mean we think it is about to reverse, rather, it is a risk, so a prudent approach is to not build permanent spending commitments off this revenue. While the Government is running headline surpluses, this is driven by windfall corporation tax receipts. The underlying budget balance, excluding excess corporation tax receipts, is forecast to remain in deficit out to 2026. This would mean 19 consecutive years of deficits.

We have calculated the costs of maintaining current spending into the future, which accounts for changes in demographics and projected cost increases associated with price and wage changes. These costs are significant. They exceed the Government's planned core current spending increases over the three years of SPU projections. These spending pressures will be significant in later years also. At the same time, Ireland’s infrastructure has become stretched due to the growing economy. As a share of GNI*, capital spending is now lower than was originally planned under the national development plan. The delivery of projects under the NDP has already seen delays, but getting value for money when the labour market is tight and some material costs remain elevated is difficult. Fixing infrastructure deficits is a slow process that takes place over many years. It is important that plans are in place and the Government adjusts these plans to maximise value for money to appropriately support the domestic economy at different points in the cycle, and to address the evident infrastructure gaps.

I will finish by mentioning a key medium-term issue. The council welcomes the setting up of the Future Ireland Fund. The council had advocated for a fund such as this, but the council believes that the Government could be more ambitious in saving into the fund. This would mean a larger fund would be available to offset the costs of an ageing population and climate change.

I thank members for their attention. We remain committed to assisting the Oireachtas in achieving fiscal responsibility and economic stability.

I welcome the IFAC representatives to the committee. I appreciate their attendance and their report, which is invaluable to our considerations. The national 5% spending rule was referenced, but this is not a national rule. It is a rule of three political parties, which does not exist in law, that they have never ever met. I would like it to be a national rule enshrined in law but it is not. The IFAC has a very important job and carries out that function, but I would appreciate it if this rule were not presented as something other than a Government rule. It has never come before the Parliament, it has never been voted upon, and it is not supported by Sinn Féin or, I argue, some of the other political parties as well. We cannot call it a national rule. That is a very important point. Until it becomes enshrined in law or something, it is not a national rule. The Government has never met this rule ever.

Professor McMahon said this Government rule is a net spending rule taking account of tax reductions or increases.

Can Professor McMahon clarify that if a package of tax reductions were introduced in the budget in September or October, would this result in expenditure growth of less than 5% to comply with the rule?

I will give two quick comments and then the Deputy can use the rest of his time. We have had this discussion before. We used national rules because we also have European rules and we need to delineate. We would welcome this rule or another domestic rule to be put into legislation, so we would support the Deputy in what he was pushing for. The answer to his question is "Yes". If taxes were reduced, then the amount of room left, according to the 5%-net rule, would give less space for extra spending. The way most people envisage this operating is the reverse. If taxes were increased and revenue would therefore be higher, there would be more space in which to spend.

It is important to note that what is set out in the SPU is core spending, not net core spending. Nowhere in the SPU does it set out net core spending, so it is core spending, net of tax measures. That is one thing that we have been calling out for a while as being inappropriate. It should be set out in a clear way. As it happens, on balance, the tax measures being introduced, or the path the Government sees, do not do a great deal in terms of raising or reducing revenue, overall. Our estimate of core spending is quite similar in terms of net-of-tax measures.

The main tax policy changes that have been envisaged in the SPU that are incorporated are some reductions in income tax. However, these are largely what would be achieved from basically indexing the tax system anyway. Essentially it is offsetting. If there were no tax cuts - as they would be labelled - that would essentially be the same as indexing the tax system. The only other major revenue-raising measure the Government has is increases in the carbon tax that have already been legislated for.

This is not based on projection, but on what the Government will spend. If it chooses not to increase social welfare at all and inflation has gone up, reducing the real value of that, core spending will not go up. When the Government chooses to increase it in line with inflation or with any other policy measure, then spending goes up and that is counted as extra spending.

I do not want to get stuck in semantics here but the point on the revenue is that these are often labelled as tax cuts but what they actually do is maintain an existing tax system. It is not about "We have projected how much", but-----

The way to think about this is that if everything was indexed, inflation would have an effect of not changing the tax system but would increase spending. If nothing is indexed, then what naturally happens is that revenue is gained and the real value of spending does not change. It has to be Government policy that shifts those two around.

I am running out of time. The IFAC's breakdown of stand-still costs is very clear in relation to health costs. It is very clear that the SPU forecast for spending in 2024 underestimates spending and looks unrealistic. It says that after four months of the year, the gross voted expenditure is already overrun by €500 million. It also says that this is expected because the inappropriate budgeting all but guaranteed overruns in 2024. The breakdown says that there is a bizarre situation in which the pay bill in health is expected to fall in 2024, despite expected increases in staffing and the improved public sector pay deal. It goes on to say that it is due to poor budgeting from the Government. We have had warnings from the CEO of the HSE, which said that the budget agreed by the Government would lead to grave consequences.

I know in preparation for this that there is a lot of toing and froing. This is serious. In my time on this committee, I do not think we have ever had such strong language used in relation to the health budget. This is very much calling out fiscal gimmickry, as the witness termed it. Has the Department given any comfort as to why it produced a budget of this nature, which will result in the types of overruns mentioned, that is inappropriate and that underestimates the spending and looks unrealistic? Do the witnesses have any indication of what the so-called overruns or under-provisions are likely to look like before the end of the year?

Yes, I will start at the end. Our estimate is now approaching €1.7 billion, at €1.69 billion. Some of that will be accounted for with the higher pay - an estimated €150 million - and there is some set aside in the pay deal, so some of that will be covered elsewhere. However, that is a significant overrun. The choice of language in the report, and our language even after the last budget, reflect the fact that we did not get any reason to feel comforted by the budgeting that was done.

Of the €1.7 billion overrun, how much of that is an under-provision? When we say an overrun of €1.7 billion it paints a picture the HSE as a runaway train, one that cannot be controlled and is splurging money on things. Many of us believed the Government under-provided and this was inevitable in a demand-led service. Is that the case?

We had a discussion with the committee on this before. I am certainly no expert on all the ins and outs of health spending. However, we had predicted these overruns, based on projections for pay, wages and demographics. Ireland is an ageing economy. There is a direct link between demographics and health service usage, particularly in the most acute parts of the health system. We were predicting a large part of this in advance of budget 2024. I think Mr. Conroy has the exact figure.

In our report in December we outlined that between the overruns from last year being carried forward and the shortfall in terms of the stand-still costs, the overrun this year will be just over €1 billion.

It does seem to be running a little bit ahead of that but some of it is due to this shortfall.

The council identified up to €1 billion of underprovision and now there is probably a bit more that is over-running. If an organisation does not get an appropriate budget, it runs on emergency services and is not able to plan properly. Is the council concerned that the underprovision is resulting in further overruns? Does the witnesses understand the point I am making in that the HSE is not able to plan, is working with locums, a recruitment ban is in place and some of this is costing more money than it should be? What correlation is there between both in their view?

I will repeat the answer I gave last time I was in front of the committee on this. The answer is we do not know exactly but I can see a situation where, at least from the evidence we have heard from other people who are much closer to health systems, it is very difficult to run a health system to meet existing levels of service particularly over winter months etc., if you are underprovided for. I cannot give the Deputy a breakdown as to how much or how much of the extra €0.6 billion would be due to having to pay extra for locums or these things. I can imagine there is an amount but someone from the HSE or the Department of Health would be better placed to answer that.

I have just one or two questions on this. First, I thank the witnesses for the overview and the detailed answers earlier. What influence do they think the idea of new fiscal rules and looking forward five years in a medium-term plan would have on the situation going forward? How big or small of a change would they see that being? What kind of a role do they see IFAC having in annual reviews on that and any reporting back on it? I will start with that.

It may not surprise the committee that we welcome a more medium-term approach to budgeting. We have been critical in the past of budgets that have only run two years out. It makes it incredibly difficult to think about medium-term sustainability, which is really the part about which we worry. We would welcome it. The role of the fiscal councils, in particular the role of IFAC with the new EU rules, is going to be as important if not more important going forward. As we have outlined, the new EU rules being based on GDP are not going to be a very tight, binding constraint for Ireland, or at least not while things are going well. They could become an incredibly binding constraint if we were to suffer a big swing in GDP and a very sudden drop. Over the foreseeable future, we do not think they will be a binding constraint and that is why we have argued for the domestic rules. Currently, the one we call the net national spending rule from the Government is the one we have and that is the one which will be the yardstick against which fiscal prudence and good fiscal management will be judged.

Like most commentators looking at Ireland, both from within and outside of Ireland, we have accepted the distortions in our GDP measures and have moved to a measure that tries to remove those. The GNI*, the gross national income with some adjustments, is the measure we use. It is the measure the Department of Finance now uses and it is the measure that most international bodies would use. The problem with the EU rules is that they wanted one rule to apply to all countries and GNI* is really an Irish issue.

I thank IFAC for all its work and I thank the witnesses for the presentation. If I understand correctly what they are saying, their advice is that the Government should not generally go beyond the 5% rule - the rule that is not a rule- and if it does, it needs to pay for that with additional taxation. I think that is essentially what they are saying. They seem to lean towards the most prudent way to spend the money we have being with capital and infrastructural development because of the huge deficits in housing, water infrastructure and climate mitigation. You can go through the list of infrastructural investment that is required. Would they agree we have a bit of a dilemma in that regard in that they also point to the fact that, as I noted as I was reading the section on construction, in order to do this infrastructural investment, we need workers and we are desperately short of those? It is not just true in infrastructure. It is true in just about every sector of the economy. We are chronically short of workers and skills in particular areas. If you talk to anybody in any or a lot of these sectors, they will say that one of the barriers to recruiting people is poor pay or at least pay that is not sufficient to put an affordable roof over their heads. That is why people ask why should they go and work in these sectors. In order to resolve the infrastructural deficits, in which they agree we need to invest, do you not end up having to increase pay at least to the level of inflation to deal with the cost-of-living hikes and particularly with the cost of housing? Does that not end up being prudential expenditure? In other words, in a situation where we are chronically short of workers, if we want to recruit people to build the infrastructure that everybody agrees has to be built - the housing that has to be built and the other infrastructural stuff that has to be done - the only way to square the circle is to pay workers more. However, that then brings you into current expenditure increases. Will the witnesses comment on that? It seems to me that these increases follow inevitably.

I do not think they follow as inevitably as the Deputy has suggested, but I agree with his broadest assessment. This is a difficult conundrum to be in and one we point out. This is partly why we talk about not being able to fix infrastructure deficits overnight. These are things that take long periods to solve. There is a section in the report - a box that talks about where we get the construction workers - but it is-----

-----not just about where we get them. We are not in a position where we can easily bring them in from Germany because we do not have anywhere to put them.

I wish to add a bit of nuance, at least, to the logic. You could target bringing in certain workers to address these deficits - that may increase some current spending because you may have to pay extra to get them in - but if you target it, you can prevent it from becoming a widespread increase in wages. What would not work well is simply saying we have a shortage of housing, which means everyone is struggling with housing and this is the known infrastructure deficit on the housing side, so if we just give everybody more money that will work fine. That would just pump up the value of housing and rent even more. The solution to a supply constraint is easing the supply which would require a potentially targeted amount of spend in certain sectors to overcome those deficits. That is the nuance I would put on the logic. It is not a widespread matter of giving everybody more money; it is targeted.

Even if the Government, or any government, were to choose to try to do that, one of the challenges would be that there is right now a very strong economy with a booming private sector that is trying to invest in these same things. Therefore, one is competing at the toughest time for the workers and raw materials whose prices remain at levels that became elevated after Covid. As we point out, it is a conundrum and difficult position. It requires careful policy, strategy and planning and may involve additional current spending that could easily be accommodated within any of the rules by not cutting taxes elsewhere or not reducing the tax paid by certain segments of society. That is the nuance.

My view is that we have to raise additional revenue. Workers deserve a break – for example, with the universal social charge – and loading taxes on people who are being hammered in one way or another by a cost-of-living crisis is not appropriate. The crisis has been alleviated a little but, as Professor McMahon pointed out, inflation is still way ahead of what it was before it started. Workers continue to lose out because of inflation, so they have to be given a break. We have to build the houses and infrastructure, which leaves only the option of raising additional revenue.

The Central Bank has simulations that show that spending above the net 5% amount probably added about 1%, or 0.5% over two years, to the level of prices in the economy. I am arguing that if we do things on too much of a wide, giveaway basis, we just make the problem we are trying to solve worse. As we have all identified, and as we have identified in the current report and many others, there is clear evidence in several areas of infrastructure deficits, but these are very hard to fix quickly. It is not just about throwing money at the problem; you really have to plan and proceed carefully.

Professor McMahon will be familiar with my party’s view. It is actually the most prudential party in the whole Oireachtas because it would pay for things by taxing profits and wealth, which has shot up. It is worth saying something not often said in these discussions, namely that corporate profitability has gone through the roof. Is that not an accurate statement? Net household wealth, which is clearly not filtering down to large numbers of ordinary people, has increased dramatically. Is that not true?

I will make two points. As the Deputy knows, we do not comment specifically on one particular tax measure or another, but the evidence on wealth taxes from Ireland and many other countries indicates that the devil is in the detail of their design. In a world where it is chosen to exclude primary residences and farmland, the calculus gets much harder. If you want to reduce the value of household wealth – I am not saying it is an objective of mine and I am speaking as an economist – one way of doing so is to build many more houses. If you remove the scarcity of housing, the value of houses will decline. I am not suggesting that as a policy but that there are many ways to do this.

I do understand that. I have two points. It is worth saying, although it is never referred to, that corporate profits are absolutely stratospheric at the moment. They are heavily concentrated, for sure, but I do not see pharmaceutical companies going anywhere. A huge amount of the wealth is concentrated in pharmaceuticals. From information gleaned from those who have started to examine household wealth distribution, we know it is heavily concentrated among a small group at the top. How you design a wealth tax is an issue but it certainly seems that a very legitimate policy option to consider is the imposition of wealth taxes on the very highest earners and the super profits being made by a small group.

I agree that if we solve the housing issue, we can begin to solve many problems. Has Professor McMahon any thoughts or comments on the issue of vacant and derelict properties? It seems that addressing this could benefit in meeting our climate objectives and also help to solve our housing problem quickly. When I examine some developments, such as at the former Israeli Embassy and the former Jurys hotel site, I note we are knocking down massive buildings in order to rebuild very similar ones. What a waste of labour. I have given just two examples but we have many vacant buildings. Knocking them down is bad from a climate point of view and is also a waste of labour. We build new buildings on the sites instead of refurbishing the old ones, which would be better for the climate and better with respect to the deployment of labour resources when there are major constraints concerning the availability of labour. Is that a reasonable thought?

I will do so in less than a minute because I am afraid the Deputy has pushed my knowledge of the construction sector beyond any expertise I have. I have heard on many occasions that retrofitting commercial property to make it residential is a difficult task, but I do not know enough about building regulations, building costs or building itself. I decline to answer beyond that.

I thank the witnesses from IFAC. It is a breath of fresh air to hear a person say his knowledge is only partial and down to just fire doors, but I know Professor McMahon’s knowledge extends far beyond fire doors.

In addressing money matters, Oireachtas colleagues and I have been listening to lobbyists from all the various sectors, including today and yesterday, and we will do so again next week. We will be meeting representatives of various groups, including from the disability and hospitality sectors, and everybody will put forward the case for what they want in the budget. I, like all Members, having had a very extensive local election campaign, note that the one message that seems to be coming across an awful lot is that people want it to be more profitable to get up in the morning and go to work. At present, there are workers who ask whether they would be better off financially if they were not working at all. I am a great believer that, no matter what happens, everybody should get up in the morning and do a day’s work, of whatever type, but it is very disheartening for people who are just over the qualifying criteria for certain benefits, such as the medical card, the SUSI grant or assistance with building or buying a home. I am referring to all the various benefits that working sometimes debars you from qualifying for. It is not for me to tell political parties that aspire to be in government what to do, but I humbly suggest to everybody, including those in IFAC, that every one of us, including every elected Member of the Oireachtas, should be working together and asking what we can do to make Ireland a more friendly place for people to work in so they do not feel they are cutting off their noses to spite their faces by doing so.

At the moment, there is that big problem. There are people who are diligent, might have to run two cars and pay a mortgage but do not get assistance with the students they sent to third level, for example, who find themselves having just enough, but not having enough, at the same time, to do without these supports. They are really hurting without the supports. There are all these fancy words for them like the squeezed middle and different things. There is so much different terminology, you would not know what to make of half of it. The way I would put it in my plain ordinary language is that there are people who go to work and feel they hurt themselves by doing so. That is one issue.

I am always very interested in hearing what Deputy Boyd Barrett says because sometimes, in my humble opinion, he makes great sense and other times I am left scratching my head. He knows that and we get on very well. I am sure he would say the same thing about me. Regarding the knocking of buildings and rebuilding them, I see it every day outside on the road. A great friend of mine worked with me for many years driving a digger. He used to say, "Sure, Mike, it is all job creation and work creation." You can be on about the carbon effect of knocking them down and building them up but somebody will make money out of that process. It will create work, which is welcome, and there are plenty of men who put on helmets and boots every day and will be doing so for a long time. They are happy enough with the decision to knock it all down and build it up again. Sometimes buildings have a sell-by date and, with the cost and practicalities of refurbishing them and jigging them around, it makes way more sense to erase the whole lot off the map, start from the ground up, build what you want and it is a future-proof building. Of course, there are other times, with the retrofitting grant and things like that, of which I am very supportive, when it is a fine thing to have a house in the countryside or in a town, let the majority of it, bring it back to life and do so with the Government's assistance. I warmly welcome the €50,000 and €70,000 grants. That is the building debate. Those are my main points. I wish to allow time for responses. I welcome the witnesses here today. I always appreciate hearing people's knowledge of their particular sectors. I thank the Leas-Chathaoirleach.

I will pick up on two aspects. On incentives to work, an important dimension of a tax and welfare system is to ensure that you provide the supports you want to whichever sectors of society - the poorest, the unhealthy and the disabled. There are many deserving sectors. At the same time, you must ensure that normal people getting up and going to work feel it adds value. We support that. We do not take a strong view on any particular measures apart from a tax and benefits system that achieves those social objectives while also encouraging work being a good thing.

On the construction question, the discussion reminded me of something which I will throw into the mix. We took part as a council in the national economic dialogue which, as most of the committee knows, brings together people from the full cross-section of Ireland - employers, unions and groups representing the unemployed and the youth. It is a wonderful occasion when people get together to express their views. An important point when thinking about housing, construction and the difficulties we have is we should make absolutely clear that the Government's role is not purely financial. There are regulatory considerations and progress with the planning system which would also help to make progress on this issue. On the issues the committee brings us in to talk about regarding the billions and millions being spent, it would probably not have a big impact, but it could have a big impact on the real world we are talking about and the infrastructure deficit. Unless the question is going to go back to fire doors, the decision on how to address this is incredibly important for Ireland, the economy and society. It is not just financial; there are other dimensions which are important to keep in mind.

I apologise for arriving late. I had another meeting I had to attend. This is an important meeting also. Evolving as a country and an economy is a challenge we all have to face in the future, without going into the dips and rises we had in the past. We are in a better position now than ever before to evaluate the effect of the things we did previously, how we did them, the sequence in which we did them and whether they were the right thing to do or not. I have great respect for Deputy Michael Healy-Rae and his views because they are usually down to earth. I am not so sure I agree entirely with knocking down buildings, although if they are obsolete houses and it is for a housing development, it is better, quicker and more effective to do that and rebuild. However, we need to keep an eye on it because I recall, after the financial crash, everyone was talking about how we had too many houses and would have to demolish them. Of course, they were wrong. We did not have too many houses; it just so happened that the market had slipped and the number of houses already built was built for a bigger market. That was the problem. As we now know, we still do not have enough houses and will not for have them for a considerable time. We have to think about the way in which we provide houses for an increased population and recognise that this is a new thing to us. We had a large population a couple of hundred years ago. We lost that population because we did not have jobs or anything to support that population in job creation. The Industrial Revolution did not come here because we were not regarded as a suitable place to invest in and develop the jobs market.

There are a few things we need to look at now as we proceed in the future. The benefits of the agri-rural economy should never be overlooked and cannot be overstated. When we were in really deep trouble in the midst of the economic crash, it was those areas - farmers and the pharmaceutical and tourism sectors - that put their shoulders to the wheel and held up the economy, took the nation by the bootlaces and helped us to recover. We should not forget that. There are people who would say we have to move on and it will not happen again, but it will. We must recognise that, whether we like it or not, it will happen again. It is up to us to provide and prepare for it and ensure we have a good foundation to withstand the shock and be able to call on various sectors to help recover the economy. There are those who will say we have to close down part of our economy because of climate change, which is not true. There are people in this country who have worked hard and made huge sacrifices to ensure we made a major contribution to carbon reduction and alleviating climate change.

We need to recognise there is an economic issue in this for everyone. There are those across the globe who will say while we must, of course, close down, we will not close down our own particular areas of interest because it is the farmers in Ireland or the food workers somewhere else. We need to realise everyone has a role to play. We must play that role well, not allow ourselves to become divided and recognise we are in this together.

Incidentally, on the issue of urban versus rural divides, in actual fact, it is the urban areas which will be the first to feel the most serious loss of a reduction in agriculture and food production. Let us never forget the European Union was first formed to ensure there would be an adequate supply of food. They knew what they were doing at that time. The story still resonates and continues. The need continues. We have to be conscious of that and do everything to ensure we have a well-rounded economy that is able to contribute to itself and to outside it. We have to compete in world markets at home and abroad. In whatever we do, we must always be competitive and have regard to the whole market, not just a chink of it. In whatever contribution we make, we must ensure we make it with the clear knowledge that we are doing it for ourselves and for those around us.

I will say a few comments on that. When we were before the committee a few months ago talking about our recent work on climate, one of the points we made is exactly in line with the Deputy's point. There are questions for all sectors, not just for the agrifood sector but for every commercial and household sector, and for all for us as to how we will confront the challenges of climate transition. One point we made in this regard was that there are decisions to be made, which have yet to be made, about the extent of supports and incentives which will be provided to help sectors, such as the farm sector, to adjust. One reason for doing this is not just to protect a valuable industry in Ireland but to make it resilient to future shocks. One thing we are noticing is that we are experiencing wilder weather. We have moments in which we have warmer winters but then we have snow more often. We have more rain in June. It is a very mixed experience. It is about building resilience in that regard. This links back to some of the earlier comments about incentives for work. Incentives for climate transition must be built into Government policy.

To go back to the point about building resilience to future shocks, and referring back to the Deputy's starting point about dips and rises in the economy and the construction sector, one thing for which we have argued many times before here and which I hope is explicit, or at least sufficiently implicit that people see it, is that having a well-developed national development plan and infrastructure planning plan is precisely so that when - and, as an economist, I am afraid there is a when and not an if - there is a downtown in the future, we do not allow our construction sector to be decimated. The construction sector was decimated in this country and basically flung to the far corners of the world because those were the only places where there was available employment. That is one of the reasons we struggle now; we lost a lot of capacity. Maintaining capacity by having a public investment plan that steps in to fill the gaps when no one else is there would not only give higher value for money but would also help support an economy through these dips. The sad reality of the macro economy is that it goes up and down. Currently, Ireland is in a very nice and envious position relative to most of our European neighbours, but there will be dips in the future. That is where the argument about planning comes in. Doing these things gradually helps builds resilience of the whole economy and not just of the construction sector or the agrifood sector. That is where our argument about prudent budgetary and macro economic management comes in. They go hand in hand in that regard.

I have a couple of questions. In his opening statement, Professor McMahon spoke about fiscal gimmickry, non-core expenditure and the way in which it is presented. He made the point that much of the spending is likely to be long lasting and, therefore, should be calculated in core expenditure. What is Professor McMahon's definition of long lasting?

The question should not be about the definition of long lasting but rather the definition of what is counted as core expenditure. We count as core expenditure anything that essentially is going to require revenue to be able to back it up. The reason I do not want to define long lasting is because, arguably, every construction project and each brick is a one-off expenditure. However, we know that, even when one project is completed, there are usually maintenance costs and other things that go with that. The idea of this not being the ordinary business of Government which needs to be funded through sustainable tax revenues is the definition we get to. There are occasions, and we have had this discussion in the past, in which it makes sense to do so, such as the Covid-19 pandemic. In the case of an event that only happens once every 100 hundred years, it makes sense to say it is a once-in-a-100-year shock and should therefore be paid over 100 years. However, if these things are going to repeat, such as the exact project repeating or if we are going to have to continue paying for some parts of it going forward, it makes sense to sustainably fund them with available revenue. I do not wish to sit here and put a figure on it by saying if everything is going to last for 18 months or less, it can be taken out of core expenditure. Part of the problem is that we have had things which were, at the outset, proposed as lasting for one year which continued to appear again and again. By the third or fourth year, it might be said it would only last for one more year but there had been four years of its spending by that time unaccounted for in a core-expenditure sense. That is where we have struggled more and more with the concept of core expenditure, even if we agree with it and there are occasions when it makes sense. When it gets too widely used, it makes the analysis of the medium-term position of the budget harder to look at. That is the argument in favour of including a lot more in core expenditure than the Government currently does, which we do.

I appreciate that. We have discussed this in the past in the context of how the Government has started to present the numbers, particularly regarding those who have come to these shores and the cost associated with them. It presented figures which suggested everyone was going to go home or there was no cost to be borne. That has been corrected here. I bring Professor McMahon back to his opening statement in which he stated, "As we view that much of the spending labelled as outside of core spending in SPU 2024 is likely to be long-lasting, we believe it should be counted in core spending." That is the rationale he gave the committee in his opening statement. I am just looking for direction. I hear what he says about undertaking a one or two-year project and whether that is classified as non-core expenditure. The question Professor McMahon is raising is nearly a trust issue, that is, can it be trusted a project will not go on for another year into a third or fourth year. In his response, he accepted non-core expenditure can be part of how a budget can be presented and Covid-19 was an example of that, but no one knew how long Covid-19 was going to go on for. It is the same with the issues with Ukrainians under the temporary protection directive. No one knows the length of time that will take.

It could be something completely unrelated. It could be a measure introduced for two years to do X, Y or Z. The question is how IFAC would define non-core expenditure in these circumstances. Does IFAC believe every Government project, despite the fact it clearly has a legislative end point, should be dealt with as core expenditure?

I will speak on my own behalf. We do use "long lasting" because we need some definition to get us between the lines of the budgetary spending that we get given and thinking about where they should go. For instance, ordinary capital spending is always included in core spending. We objected to the idea of windfall capital. It is just another form of capital and why would we call it something different? This would be included. Perhaps this is part of the reason I find that the distinction between core and non-core spending is less helpful now. We come to the idea that "in principle it could have been". We end up having these debates about whether one thing should be core or not core. After the second or third year, we have always included the Ukrainian assistance as part of core spending. Our big complaint about the budget was that, as Deputy Doherty said, it was just disappearing.

We welcome that it has been included out to 2027 in a more reasonable way, subject to the fact that, as Deputy Doherty said, we do not know how long this will last or how much it will cost. This is the nature of budgeting. Imagine if Covid disappeared more quickly than we had expected. If it is included in core spending, it is budgeted for appropriately, and if it goes away, it provides more space for the Government to spend that money on other things. The problem we end up having is these mistakes go in one direction. Spending is not included for years and years and then suddenly we realise it is ongoing and not disappearing. The prudent approach is to put more into core spending and when the items disappear it creates revenue that can be spent on other things and other demands of the day.

I hear what Professor McMahon is saying. We will move on from this point with regard to core and non-core spending, although I would argue that there is a rationale for windfall capital expenditure. I have argued for years that we need a catch-up programme for capital expenditure. Itemising it as a catch-up programme would create a baseline of what we believe is the permanent capital programme over a period of time. We have the issue of what is the additionality of a catch-up programme. There is a rationale for it and it is about how it is presented. I do not think it is fiscal gimmickry. Far be it for me to defend the Government as it has only done a pittance of what I would do with regard to its windfall capital programme.

We will get the numbers. When we speak about living standards the challenge is that a lot of macroeconomic data looks at averages. Typically when we think about living standards and wages, they have a very long upper right tail. The mean, which is what we reflect in most macroeconomic aggregates, can be quite different from the median. I agree with what Deputy Doherty is saying and I am giving Mr. Conroy time to get the numbers. Certainly for many years, while inflation was running much higher than expected, real wages were falling even on average. Within this there is a distribution of people, and we spoke about this in previous reports, whereby in some sectors of the economy not only have higher earners been higher earners but they have also been able to get wage increases that have been at or above average. If the average is that wages are falling and some people are doing better, there must be some people who are losing out a great deal. I will hand over to Mr. Conroy to give the exact number we have in the report.

We used real hourly wages and competition of employees and compared these with inflation. We saw strong growth in this from 2014 to 2021. Then there was large inflation in 2022 that has been eroding the purchasing power of the wages that people receive. It is forecast in the stability programme update that there will be fairly strong real growth in hourly wages this year, of approximately 3%. This would still leave people just below the level they had in 2021. It emphasises how costly high inflation can be to many people in society. Professor McMahon has outlined how the Central Bank has estimated that a large budgetary package has added to inflation. This has eroded the purchasing power of all citizens.

The report also addresses the cost of existing level of service. IFAC's estimate suggests the stability programme update forecasts of current spending increases are on average €700 million lower than the annual standstill costs in 2025, 2026 and 2027. IFAC suggests there is an under-provision on this end also and draws attention to the ageing population. I want to clarify how IFAC deals with existing level of service compared to the Department. IFAC includes the indexation of social welfare within existing level of service. Is that correct?

We are dealing with apples and oranges in a way. The Department is stating that IFAC is taking it as granted that social welfare rates would be indexed. It will state it is a policy decision and it will strip out existing level of service. The IGEES recommendation is 3% of total current expenditure for the year. Would the IGEES's model of calculating existing level of service be an appropriate measure, with regard to 3% of total current expenditure for that given year? If IFAC were calculating on this basis, would the stability programme update still be under-providing? If so, by how much?

We may have to get back to Deputy Doherty on the exact number. We are looking at a big table of numbers and trying to add up many of the columns ourselves and we might not do it on the spot. We have had discussions with Deputy Doherty previously about the difference between the standstill and the existing level of service. Weirdly, I am going to say I do not disagree with departmental colleagues who might say it is a policy choice. We are not saying the standstill is the policy that anyone should pursue. It is a hypothetical. Were the decision to be made to maintain the value of public services and the value of transfers and social welfare payments, adjusting for these costs and recognising the population evolves and there will be more people in retirement, when we do these calculations this is how we come up to the standstill. It is a benchmark against which to compare. Is it a policy choice? Absolutely. It is a policy choice to make these decisions. All we are saying is that at the time when an ageing population is having an evident effect on the cost of the existing level of service or the standstill, along with the fact we know there are higher wage settlements and prices are increasing, maintaining the standstill is more expensive. In this case, as we pointed out, it exceeded the amount that would be allowed under the pure 5% growth rule. If we want to maintain this as a policy choice and stick to a net 5% level of expenditure growth, we would have to raise revenue somewhere.

That is the sort of case-----

I understand. Therefore, the point is that one would need to raise approximately €2.4 billion per year in net taxes in order to stand still if it is the case that there is an under-provision of €1.7 billion in health. The IFAC is suggesting that there is another under-provision of €700 million for standstill costs.

I thank Mr. Conroy and Professor McMahon for responding to Deputy Doherty. I also have some questions and observations, while we are on the issue of under-provision in the health budget, which is well known. It has been ventilated here, on the floor of the Dáil and elsewhere that the Minister for Health in the Estimates process last year requested approximately €2 billion from the Minister for public expenditure. That was his Department's assessment of what was required to operate the health service at a certain standard this year. The Minister was offered €800 million by his colleague, the Minister, Deputy Donohoe. He accepted that but he made the very clear case that it was essentially an inadequate Estimate for his Department and the HSE.

We are being prepared again, for the presentation of a significant Supplementary Estimate to the Dáil this year. It was rather casually mentioned by the chief executive of the HSE at an event in Dublin in recent days. It was also reported in the media that it is likely that we will have a Supplementary Estimate this year. This has become routine over the last number of years. Not only are operating in an environment where fiscal gimmickry - and that is a legitimate charge - has more or less simply been accepted and this is the modus operandi of this Administration, but we are also now inured to the fact that there will always have to be Supplementary Estimates. That is no way to budget. I would appreciate the representatives' comments on that. Those of us who remain in this room do accept that our health service is inadequately funded, our public services should be prioritised more and there are political and policy decisions to be made in that regard. Undoubtedly that is a form of abuse of the budgetary system, quite frankly. There is an assumption that the Dáil will wave it through. This also does away with constitutional responsibility in this regard because it is an abuse of the budgetary system. There is therefore fiscal gimmickry on the one hand and there is also the misrepresentation, and in my view, the deliberate misclassification of expenditure. It is a three-card trick designed to con the Dáil. That is the first thing I will say.

My other question is regarding a function of the Dáil that is not being respected. The budgetary process in this State is evident and has been established through successive Governments. It has been the case for as long as anybody can remember. It is a creature of the Executive and there is very little parliamentary oversight. This point was well made by experts who have been engaged to advise the Irish system post crash on how we could better monitor, evaluate and plan for budgets and public spending, etc. In effect, we are looking at a supplementary budget. Whatever way you slice and dice it, it will more or less deliver the €2 billion the Minister for Health requested last year. Is that not the case?

In order to be helpful, the witnesses might also do the following before moving on. It is now evident that we are close to the point at which the HSE recruitment moratorium is about to be lifted. That will probably add to it. I do not know if that has been factored into the anticipated deficit for the rest of this year. Public calls were made by the Minister for Health and the Taoiseach in response to me before the Dáil yesterday. They stated that it is likely that approval will be provided for the potential hiring of an additional headcount of 2,500 in the HSE. That will have implications as well. Has IFAC factored that into its own assessment? The health budget is a bit of a movable feast. Has it factored it into its own assessment of the overrun in health and what that might involve?

Yes. There are a few different ways to try to estimate what the overrun will be. We took what we felt was quite a conservative approach. We basically took the percentage overrrun for the first four months of the year and assumed it would continue for the following eight months. If some of these other measures come into play, we could see the acceleration of that. We have even seen that in the one month since that because the overrun seems to have increased further.

As I said, that is even before this moratorium is lifted. We were just talking about this outside. The overruns look as though they may be slightly accelerating. It may be the moratorium or it may be something else that is causing it to accelerate further and, if that is the case, our estimates would be an underestimate.

One might want to say we are overshooting, and in that case, one would be able to say that we might get health spending right back on track for the last seven months of the year. However, that has not been indicated through history. In fact, history has always shown that the overruns tended to expose themselves in the second half of the year and we have seen really significant ones already. However, these are estimates.

As I said before this committee before, I am not a health expert so I do not know the precise way in which one should budget and negotiate on the health side or about the right thing to do from a health perspective. Yet, from a macro perspective, let me tell the committee about why we should not do this process of underbudgeting and then expect for the money to be suddenly made available towards the end of the year. Shocks can occur during the year.

Shocks can occur to the point at which it suddenly becomes really difficult or costly to be able to pass through €1 billion, €2 billion, or whatever it is in extra funding. From a budgetary perspective, which is where we have the expertise, that is not a very good way of budgeting. It is absolutely normal that budgets might be off and we should expect them to be off. Sometimes a bit too much is allocated and sometimes a bit too little is allocated. Yet, we would not be able to call it good budgeting when there are repeated, one-way errors that build in a predictable fashion.

I will go back to the charge of fiscal gimmickry and the misclassification of non-core spending. The figure of €4 billion for the classification non-core spending is absolutely a case of fiscal gimmickry. We sometimes lose sight of the significance of the scale of what we are talking about here. I am old enough to remember a point in time, eight, nine or ten years ago, when €4 billion was the extent of what we are generating in corporation tax. It is absolutely bizarre. I recall how at that time, which was when I was a Government Minister, I was quite proud that we happened to generate €4 billion in corporation tax. At the time, that was not insignificant, but look at where it is now. Is the Government listening to IFAC’s advice on the presentation of spending plans?

The SPU included some of the things we did not want to drop to zero. They went out to 2027 and we welcome that. More broadly, we pushed for a long time to think about some kind of vehicle through which we could save in order to think about the future challenges we know are coming. That is coming on stream. Again, it is our job to push them to be as prudent as possible right now.

I have been on this council for five years and in that time, there have been occasions in which we have supported large-scale spending to support the economy because it needed it, such as during Covid.

One thing we often talk about is given how well the economy is doing when do we run prudent budgetary policy if not now. Prudent budgetary policy is not just not spending money. It is also budgeting well, budgeting carefully and thinking carefully about how you want to allocate within sectors and across sectors. That is what the job of the Government is.

I am sorry for side-tracking things into a discussion about construction. It was only because the witnesses had quite a lot about construction workers in that section they talked about. They did hint at policy in terms of that because the council, rightly, recognises the capacity constraints that are a serious problem for us. Professor McMahon more than hinted at it when referring to the policy levers available and looking at the various possible ways we could access more construction labour, while seeing the difficulties in a whole number of areas for getting them, and these were identified. It was said we are not going to attract many from the rest of the EU because it is not as attractive here anymore and that many of the people who left the country are probably going to come back and so on. Professor McMahon went through the list, the last two of which are the apprenticeship area, and said there are limits to this. I believe we need to ramp that up dramatically but there may be limits to how much we can do that. Reference was also made to non-EU labour and that maybe this would be, to quote the report, a possible lever the Government could utilise. I agree completely with this but I would like to hear Professor McMahon elaborate on that.

Obviously the issue of immigration has become very contentious. I find it ridiculous and laughable that people are talking about the country being full when we are chronically short of workers in almost every sector. It is kind of preposterous but some people are pursuing that narrative. Maybe the witnesses would like to say a little bit more. The report of the council points to that as a possible policy lever, and it seems to me a very logical and sensible direction to look at to deal with those capacity constraints. The Government has been bandying around a figure, which is a good figure to put out, of the tax contribution of immigrants to this country. I believe it is €3.5 billion per year. People are saying immigrants are a cost when actually they are putting huge amounts of money into the country. On the same theme do the witnesses have any picture figures, or does anybody compile figures, of the GDP impact, or any economic measurements, of the positive impact of immigrants? I would say it is a positive impact when you looks at it because they are actually adding to the economic wealth of the country. It would be useful to have those figures in the context of the quite difficult debates that are being had. Are they objectively adding to the wealth of the country, which I suggest they probably are?

I will say something and then Dr. Bergin and Mr. Conroy will add something so the Deputy will get the full hat trick. There are two things I will say. On the apprenticeships, even where there are limits, that does not mean they are not necessarily a policy worth pursuing. It is just worth bearing in mind that they do not bear fruit super quickly. It is not a machine where you push a button and there is a whole bunch of ready-to-go builders, plumbers and electricians. We talked about having a steady and high capacity in the construction sector and not one that dips and then people disappear and do not come back. That is important.

On immigration, there is one fact I tell many people about Ireland that they generally do not know. We are one of the few countries in the world - I believe there are only two of us - that have a lower population now than in 1820. If we had the same population growth that most other countries had this would be a country of some 25 million or 27 million. This is calculated on it being an all-island economy back then. That is a phenomenal difference from where we actually are. On the value of immigration, I do not know if I have seen the exact figures - I am hoping someone beside me will tell me this - but given a sort of eyeball or ocular assessment of what has been going on, I suspect that a lot of the immigration we see tends to be younger working-age people. I do not know if people come here just to retire. I suspect that the weather suggests they do not but I may be wrong, at least in aggregate. At least the evidence from many other countries of attracting prime working-age people is that they tend to use health services less. They do use education services as they tend to have families, but they also add a lot on taxation, as the Deputy has said. I do not have an exact number but we are also a country that has a long history of sending people to other countries. We argue ourselves, and if we go to the EPIC museum, it is there, that we added a lot to many countries financially and in other ways. I agree with the Deputy that there is definitely a strong case to be made for immigration as a generally welcome policy subject to the challenge we talked about at the very start, which is you have to address infrastructure deficits.

I will just expand a little on what Professor McMahon has said. There is some literature in an Irish context on the impact of immigration. It is a little bit older now. A lot of it was done in the ESRI. As Professor McMahon said, one of the things about Ireland's immigration story is that the people who come to the country tend to be younger and they also tend to be better educated on average than natives. They are more likely to be employed and less likely to be in receipt of welfare payments and that kind of thing. On average they are, in that sense, contributing to the economy. We have done work, and work has been done in the past, looking at things like the Celtic tiger era towards the end of the late 1990s where Ireland was running out of workers to keep everything going. Initially a lot of Irish people came back and then it was migrants who were there to fill the labour demand. There is some literature there covering a lot of the 2000s. I am just not aware of anything more recent but we are really happy to hand over anything on that.

On the apprenticeships, when we consider the collapse in construction after the financial crisis, one of the things that happened then was a collapse in the further education and training system and the courses that were aimed at construction and all the relevant occupations around that. The further education and training sector is one of the more flexible components where we can ramp up. It takes time but we can start producing more from that. It is not just about increasing courses, however. It is also about saying to young people this is a viable option. Offering career guidance and so on is relevant there as well.

I will make it really hard on Mr. Conroy because I am going to make one last point so he has none left to make. On the Celtic tiger era, one of the other facts about Ireland is that when the crash came, actually quite a few of those people who had come in for three, four or five years then left . That is a loss; they leave friends and so on. From an economic point of view, that is a very flexible labour supply adjustment. These people did not then suddenly become unemployed. When it looked like they were unemployed, they went to other places. That really helped Ireland even though it was a very difficult adjustment. It could have been a lot worse if everybody who had been here had stayed. Again, there is a benefit.

With regard to the profile of immigrants into Ireland, as Dr. Bergin said they are mainly of working age. Typically about 85% would be of working age between the ages of 15 and 65. Most would be in that employable category and would be contributing positively there. More specifically in recent years, we saw after the pandemic there was a big increase in the high-wage sectors of tech and pharmaceutical and the sort of high-paying sectors whose output seems to have increased a lot in Ireland.

There seems to have been a lot of inward migration filling some of those roles. A lot of the skilled labour to which Dr. Adele Bergin was speaking seems to have flown into those sectors. In some ways, given the shortages in the construction sector, it would have been almost better had it gone into those sectors where it is more required. As we outlined in the report, there could definitely be a role for non-EU labour to fill those roles in the construction sector because there is no large wage deferential like there was in the mid-2000s when we had that big influx of labour from those new EU states who filled positions in the construction sector during the last large housing output we had at that time.