Minister Noonan opening statement to the Finance Committee on Expenditure under the Finance Group of organisations

15.02.17

Introductory Statement by Minister for Finance, Michael Noonan T.D. 

at the meeting of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach

15th February, 2017

Finance Group of Estimates 2017

I am pleased to have the opportunity to appear before the Finance Committee today in connection with the 2017 Estimates for my Department and for the other Votes within the Finance Group: the Comptroller and Auditor General, the Revenue Commissioners, and the Tax Appeals Commission.

If I may, I will focus on my own Department first.

As you know, the Department was restructured around two Directorates in 2016 – the Economic & Fiscal Directorate and the Finance & Banking Directorate. This structure remains largely unchanged in 2017. There are a number of divisions in each directorate and I will briefly set out the key outputs from each of those divisions.

The EU & International Division deals with the cross-Departmental coordination of EU policy, and with the development and implementation of strategies at European Union/Euro area/International level in relation to economic, fiscal and financial policy formulation. It manages the EU budgetary process and EU economic governance. It also builds relationships through Ireland’s diplomatic network and ensures that the Minister and Department is fully appraised of EU and international developments.

The UK decision to leave the EU will result in major challenges for Ireland, as a small open economy with very strong economic ties to the UK. It is one of our most important domestic and EU level issues. In addition to the economic impacts, Ireland’s key priorities are our economy, Northern Ireland, the Common Travel Area and the future of the EU itself.

Within Government, work has been ongoing since well before the referendum vote in the UK. Since then preparations have been intensified across all areas of Government to best safeguard Ireland’s interests, and to minimise any adverse impacts on our economy and on the free movement of people, goods and services on these islands.

A Brexit unit has been established within my Department which is responsible for the coordination of the Department’s contribution to the overall Government response on Brexit, preparation for the upcoming negotiations on the UK’s withdrawal from the EU, and future relationship; ongoing cross-department and inter-departmental consultation contributing to a whole of Government level response; and liaison with the Central Bank of Ireland, NTMA and other agencies as appropriate.

We know that as result of our close economic ties, there are challenges to be met as was highlighted by further macro-economic analysis undertaken in November 2016 as part of the Joint ESRI/Department of Finance research agreement.

The best and most immediate policy within the Government's control, to counter the likely negative economic impacts of Brexit, is to prudently manage the public finances in order to ensure that Ireland's economy continues to remain competitive in the face of future economic headwinds. In that regard, Budget 2017 contained a number of prudential budgetary policy measures which will help our economy prepare for Brexit. Additionally, the last Budget 2017 laid out an extensive range of policies targeted at the most exposed sectors, including measures to support SMEs, entrepreneurship, agri-food and Irish exporters. These measures are an important step in mitigating the impacts on the Irish economy from the economic implications of Brexit.

Furthermore, where Brexit presents potential opportunities, we will of course seek to maximise these. For example, in the area of Financial Services, where Minister of State Murphy T.D. has responsibility for the IFS 2020 strategy which will build on and compete for mobile international investment in the IFS sector. There are undoubtedly opportunities for financial services firms to locate here as Ireland remains a committed member of the European Union and single market.

The EU Financial Services Division of the Department continues to represent national interests in a European and international context. During 2016 the Division made an extensive contribution towards Council agreement on a range of financial services dossiers, including the Anti-Money Laundering Directive and the European Venture Capital Funds Regulation.

The Department's Review of Policy in the Insurance Sector was also initiated in 2016, in consultation with the Central Bank of Ireland, other Departments and Agencies and external stakeholders. In July 2016, a joint report on the Review of the Framework for Motor Insurance Compensation in Ireland was published, and work on the implementation of the report is already underway.

International Financial Institutions Division

International Financial Institutions Division provides the primary interface with, and management of Ireland’s shareholder interests and obligations in, a number of international financial institutions, including the International Monetary Fund, the World Bank Group, and the European Investment Bank.

The opening of the European Investment Bank’s new Office in Dublin in December 2016 was an important milestone for that Bank and will serve to underpin and build upon the strong relationship that already exists between the Bank and its counterparts in Ireland.

Banking Division - SME credit

Small and Medium Enterprises (SMEs) make up the vast majority of businesses in Ireland and account for approximately seven in every ten jobs. The latest Department of Finance Credit Demand Survey for the period April to September 2016 indicates that, while demand for credit remains subdued (at 23%), trading conditions for SMEs remain broadly favourable despite the significant economic uncertainties. Profitability also remains high with 87% of the SMEs reporting they had made a profit or broke even in the last six months.

The Strategic Banking Corporation of Ireland (SBCI) continues to make low cost, flexible finance available to SMEs across all sectors of the economy and all regions of the Country. To the end of September 2016, over 10,600 SMEs, operating across all business and economic sectors of the Irish economy, have benefited from €458 million of SBCI loans.

Banking Division - Financial Stability

The Financial Stability Group, established in January 2017, replaced the Principals’ Group as a forum for senior officials in the Department of Finance, the Central Bank and the NTMA to monitor and discuss financial stability risks facing the Irish economy. The FSG will have a more forward looking mandate, which is appropriate as the financial system moves from crisis management and resolution phase into a growth phase.

Banking Division - Consumer Protection

My Department also constantly monitors and reviews the consumer protection frameworks that are in place in the area of financial services including, in 2016, the implementation of the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015. Under this Act, relevant borrowers, whose loans are sold to third parties, maintain the same regulatory protections they had prior to the sale, including under the various statutory codes issued by the Central Bank of Ireland.

Banking Division - Mortgage Lending

Another very important issue is the Central Bank tracker mortgage examination. The Government is fully aware of the seriousness of this matter. It is essential that affected customers receive acknowledgement for the harm they have suffered from lenders, and appropriate redress and compensation packages are put in place. Therefore the Government is committed to supporting the Central Bank in its independent examination of this matter in order to ensure a prompt and transparent conclusion.

Banking Division - Mortgage Arrears

Central Bank figures contained in its Residential Mortgage Arrears and Repossessions Statistics to end Q3 2016 show that progress continues to be made on Mortgage Arrears. The number of mortgage accounts in arrears for principal dwelling houses (PDH) has declined for the last thirteen quarters. 121,140 PDH accounts were also classified as restructured, of which 88% were reported to be meeting the terms of their arrangement.

Shareholding and Financial Advisory Division

Throughout 2016, officials in my Department continued work on our strategy to monetise the State’s remaining investments in the banks. Given its size, our immediate strategy prioritises the return of our AIB investment as the next milestone with disposal strategies for BOI and PTSB kept under review. We have received strong advice that a stock market IPO is best way to optimise the return from AIB, with the earliest possible IPO window being Q2 2017.

We intend to be ready to avail of this window and recently appointed three firms from our Panel of Advisors to form the core of our selling syndicate. The appointment of these firms as advisors does not signal any intention or obligation for us to proceed with a transaction, which will be subject to a number of factors including favourable market conditions.

 

Tax Division

In the Budget 2017 income tax package I provided, for the third year in succession, for reductions in marginal tax rates for low and middle income earners. The Government’s policy of phasing out the USC over time, as resources allow, will increase take-home pay for taxpayers, increasing their spending power and allowing for consumer confidence to generate positive knock-on effects for businesses and jobs in the domestic economy.

Economic developments

The well-established economic recovery is maintaining momentum.

GDP grew by 6.9 per cent in the third quarter on an annual basis. As a result, the annual average GDP growth rate was 4.7 per cent in the first three quarters of 2016.

Encouragingly, the exporting sector appears to be holding up reasonably well despite the weakness in sterling.

Recovery is perhaps most clearly evident in the labour market with annual employment having increased in each of the last sixteen quarters, representing an increase of over 194,000 jobs since the low-point in 2012. The number of people in employment has exceeded the 2 million mark since Q2 2016 and is now at its highest level since Q4 2008 - though with a more sustainable composition.

While the indicators of domestic activity are encouraging, the international outlook underlines the need for caution supported by prudent economic and fiscal policies.

Notwithstanding this, my department is forecasting real GDP growth of 3.5 per cent this year and 3.4 per cent in 2018.

Fiscal developments

Public finances also continue to move in the right direction, with significant progress being made on the general government deficit. As you know, Ireland exited the Excessive Deficit Procedure during 2016.

Underpinned by a growing economy, the hard won improvements in our public finances provide a sustainable budgetary platform upon which funding for the provision of public services can be provided in the years ahead.

The most recent bond sale, where €1.25 billion was raised through auction at yields of 0.088% and 1.026%, demonstrates that international investors have confidence in the Irish economy and its continued growth

The market reaction to our management of the public finances has been positive but it is vital that we sustain our progress. We must guard against complacency, maintain our prudent management of the public finances and continue with competitiveness-oriented policies.

Presentation of the 2017 Estimates

Turning to the business of the committee today – the funding allocation sought for the Finance Group of Votes for 2017 totals €389m which compares to a 2016 Vote Group total of €379m. This represents an increase of €10.3m or 3%. The primary driver of this increase is the provision of a €10m increase for the Office of the Revenue Commissioner relating to increasing Staff numbers and other Staff Costs, which I will address later in my speech.

The allocation sought for the Department of Finance Vote in 2017 is €39.47m, of which some €10m is provided for a fuel grant scheme for disabled drivers. Leaving this scheme aside my Department’s allocation provides for the administrative and non-administrative costs of the Department. The vast majority of this, some 61%, is provided to cover salaries and allowances, with a further €6m (20%) to cover facilities and non-pay administrative costs. The remaining €5m is provided to cover the legal, advisory and committee costs necessary to support my Department in the proactive delivery of its remit.

 

The allocation for Vote 8, the Office of the Comptroller and Auditor General

This is an independent, constitutional office which has a number of responsibilities including controlling the release of funds for public services as approved by Dáil Éireann, auditing public accounts, undertaking independent examinations on the management and use of public resources, and reporting the results of the work to Dáil Éireann. The C&AG’s public audit role covers 290 sets of financial statements and accounts produced by public bodies. Together, those bodies have financial transactions that total over €200 billion of public money each year. The allocation for this office in 2017 is €6.915 million, which is broadly unchanged from 2016.

Vote 9, the Office of the Revenue Commissioners, have requested a budget allocation of €331million, an increase of €10 million or 3% on the 2016 net Estimate. Nearly three quarters of the budget is related to payroll for an employment ceiling of just over 6,000 officers. The Office of the Revenue Commissioners plays a vital role in our economy, by collecting taxes and duties due to the State. In 2016 Revenue collected a record €47.9 billion for the Exchequer. In its recently published Statement of Strategy 2017-2019, Revenue is committed to two key strategic pillars, which are to provide a service to support compliance and to confront non-compliance. 

In 2016, Revenue continued to support taxpayers in meeting their tax and duty obligations, and almost 2.1 million payments were made through the Revenue Online Service (ROS), an increase of 8% on 2015. The use of electronic business and PAYE self-service channels continued to increase in 2016, and almost 1.4 million customs declarations were processed by the automated entry processing system, an increase of 7% on 2015.

During 2016, Revenue extended their electronic service channels through the introduction of RevPay, which facilitates online payments for non-ROS customers, and Jobs and Pensions, a new online facility that allows first- time employees to register for tax online. In the annual report published by the World Bank last November, Ireland was once again ranked first among EU countries (and fifth worldwide) for ease of paying taxes.

Looking forward, a key priority for Revenue will be the fundamental redesign and modernisation of the PAYE system, which I announced on Budget day.

Non-compliance with tax and duty obligations is an ever present challenge and those who engage in evasion can expect a robust response from Revenue. Through targeted and risk focused compliance interventions, Revenue continued to pursue those who do not meet their tax and duty obligations, and to detect those involved in tax evasion, shadow economy and smuggling activities.

In 2016, the yield from Revenue’s audit and compliance interventions was €555m and there were 17 criminal convictions for serious tax and duty offences. There were also 1,672 summary convictions, with a total of €5.1m imposed in fines, as well as the publication of 372 settlements on the List of Tax Defaulters. Revenue has also introduced a new data analysis system to its debt management operation, which facilitates very sophisticated case base segmentation and compliance tracking, and allows for quicker intervention in non-compliant cases.

Tackling tax evasion is an important element of Revenue’s non-compliance focus and in my Budget speech I announced significant changes to the disclosure regime for Revenue audit. From 1 May 2017, tax defaulters who use offshore facilities to hide income, accounts or other assets will no longer have the facility to make a voluntary disclosure. This means that those who do not come forward before the end of April will face penalties of up to 100% of the tax evaded, publication in the List of Tax Defaulters and potentially criminal prosecution.

In strengthening our commitment in tackling non-compliance, the 2017 Estimates provides for an additional €5m to the Revenue Commissioners for increasing staff resources by 50 (full time equivalents) on audit and investigation activities as well as enhancing ICT systems capacity for data matching and data analytics. This will lead to a direct increase in tax and duties yield from compliance interventions.

In other areas, Revenue continues to assist and support the Department of Finance in the formulation and implementation of tax policy. Revenue also has a key role, and is actively involved, in cross departmental discussions on the implications of Brexit.

Additional funding has also been allocated to the Revenue Commissioners to deal with challenges associated with Brexit. As Deputies will be aware, the Government's position is very clear in that we want the closest possible trading relationship with the UK. In that regard a key priority is to ensure the continued free flow of trade on the island and the need to avoid a hard border. The Revenue Commissioners are actively engaged examining a range of scenarios, in order to support Ireland's stated objectives. In this regard, the estimate makes provision to increase Revenue staff by 40 (full time equivalent).

On Vote 10, the new Tax Appeals Commission (formerly the Office of the Appeal Commissioners), the Commission requested a budget allocation of €1.605 million, a net increase of €165,000, or 11% on the 2016 net estimate. The increase in the 2017 Estimate is to provide for the Commission to continue to advance its programme of modernisation and reform and to address its caseload in an efficient and effective manner. Specifically, the increase is largely accounted for by the need to provide for a significant number of additional personnel - temporary Commissioners and support staff - to deal with a large number of open appeal cases that were transferred from Revenue to the Tax Appeals Commission in 2016, and to complete an ICT development programme for the Commission necessitated by it becoming an independent statutory body. With regard to the latter, an amount of spending originally anticipated for 2016 in respect of the provision of an electronic case management system is now expected to fall into 2017.

I thank members for their attention and I commend the Estimates for the Finance group of Votes to the committee.