Check Against Delivery

17 May 2018

Introduction
Good morning Ladies and Gentlemen. I am delighted to be here with you today and I would like to thank Irish Funds and Pat Lardner for inviting me to speak with you this morning at the 20th Irish Funds Annual Global Conference.
This is an event that has gone from strength to strength and, which mirrors the remarkable development of the Irish Funds sector.
As I was traveling here this morning, I reflected on what might have been said at that first conference, back in 1998, when the net asset value of authorised collective investment schemes was just under £60 billion.
While, I am sure the focus was on growing and developing the sector, it is highly unlikely that anyone present could have quite imagined the thriving picture that we now have.

Irish funds sector
Today, as you know, Ireland is the third largest fund jurisdiction in the world, and the second largest in Europe with 6,800 funds domiciled here, managing €2.39 trillion of assets domiciled in Ireland at the end of 2017.
And, the funds industry has assisted in positioning Ireland as a competitive and vibrant economy, not least through the 16,000 jobs which it supports across the country.
This annual event is vital in bringing together key thought-leaders in the industry to seek and discuss innovative solutions to some of the key challenges of our time.
The agenda is forward looking and ranges across areas such as digitalisation and Fintech, investment trends, regulation and the risks and opportunities presented by Brexit.
I am pleased that my colleague, the Tánaiste, Simon Coveney, T.D. will be joining you this afternoon, where you will have an opportunity to get his perspective on the current position of Brexit.
The funds industry has, indeed, been a successful and significant element of the Irish financial services landscape for many years.
This success has been underpinned by changes in the legislative landscape that have made Ireland an attractive domicile for promoters in Asia, across Europe, the U.S. and further afield.
We provide a supportive environment with a robust and consistent regulatory regime that underpins confidence in Irish domiciled investment funds.

Investment Limited Partnership (ILP) Legislation & Irish Collective Asset-management Vehicle (ICAV)
Currently on the domestic front, our Investment Limited Partnership (ILP) legislation is being reviewed to make it more relevant to today. We have engaged with all stakeholders and are continuing to work on the updated legislation.
In tandem with updating the ILP, a number of technical changes are being made to the Irish Collective Asset-management Vehicle (ICAV) which will help to make the ICAV framework more efficient.

Economic and Fiscal Developments
Turning to the economy, our recovery is continuing at a robust pace. GDP grew by 7.8 per cent in 2017. Recovery is perhaps most clearly evident in the labour market with employment growth of 2.9 per cent recorded in 2017 over 2016, representing the creation of over 61,300 additional jobs over the year.
In terms of our fiscal outlook, public finances are continuing to move in the right direction and are being placed on a more sustainable footing, with a balanced budget in sight and a falling debt ratio.
In this regard, it is important to stress that I am continuing to prioritise the reduction of our debt burden so that the economy can withstand any adverse developments in the future.
One of the challenges we face is to build upon these economic and fiscal successes, and to ensure that our recovery continues to grow at a strong and sustainable pace.

Capital Markets Union
I now want to touch upon Capital Markets Union, which has been a key project for this Commission and a project that we in Ireland have been very supportive of.
Capital Markets Union is important in order for Europe to establish the building blocks of an integrated capital market in the EU through supporting the development of alternative sources of finance, complementary to bank-financing – including venture capital, crowdfunding and market-based finance.
Economic analysis suggests that purely bank-based financial systems are more prone to crises and might produce lower growth performance whilst cross-border capital market integration can complement fiscal risk sharing.
We, in Europe, are only a small percentage of the global market. This is a point often overlooked by some.
Retaining, and where possible, increasing the attractiveness of the European package to non-European investors is paramount and something we will continue to press for in discussions at the European level.
For EU capital markets to prosper, they must be open and globally competitive, and able to attract additional investment and expertise internationally.
In terms of achieving progress on this important project, we must focus on those aspects of the Commission proposals that relate to CMU and can be realistically completed before the European Parliament elections and the end of the existing Commission’s term.
With that in mind I want to highlight some of the recent Commission proposals that can be progressed in the coming months within Council and Parliament.

Cross Border Distribution of Funds
One of the best ways to develop our capital markets is to eliminate as many barriers within Europe for the transfer of capital between Member States.
The Commission’s proposals to reduce barriers for the cross-border distribution of investment funds is a positive step in this direction.
We believe the proposals will go some way towards simplifying requirements for the distribution of funds cross border and make improve transparency for investors.

Fintech
Building upon innovative solutions for the industry, Ireland is supportive of the Commission’s recently published Fintech Action Plan as this area is a key strategic objective of our strategy for Ireland’s international financial services sector.
We believe that fragmentation of Fintech along national lines should be kept to a minimum and we support the development of a European framework to help prevent such an outcome.

Crowdfunding
One good example is the proposed European regulation of crowdfunding service providers.
Crowdfunding is an emerging and innovative industry and my Department carried out a public consultation on the potential regulation of crowdfunding where there was general support for regulation from industry and stakeholders.
It is anticipated that the regulation of crowdfunding service providers on a harmonised European level will allow for the possibility of Irish crowdfunding platforms to passport their services to other European Member States, thereby widening their prospective market and making the European crowdfunding market more competitive. This is welcome from an Irish perspective.
Focusing our efforts on these important files, should ensure that we have gone a good way towards enhancing European capital markets and thus further the very important goals of developing our Capital Markets Union.

IFS2020 (and new IAC international member position)
As many in this room will be no doubt be aware, we are now in the fourth year of our International Financial Services 2020 Strategy (IFS2020).
Against the backdrop of the increasingly competitive and dynamic international environment for financial services our aim was to increase the numbers employed in the sector by 30% or 10,000 net new jobs by 2020.
We are on track to achieve this target with almost 7,000 net new jobs created in the first three years of the strategy.
Irish Funds played a vital role in IFS2020 during which they acted as Secretariat and in this regard I would like to say a particular word of thanks to Pat Lardner and his team.
The IFS2020 Action Plan 2018 contains a suite of measures to be implemented by private and public sector stakeholders throughout this year.
As part of the development of the Action Plan my colleague Minister of State Michael D’Arcy TD identified six key priority areas for 2018.
The strength of IFS2020 lies in combining the talents, and experience of both our public and private sector stakeholders to ensure we have a consistent and focused approach to development. It is also key that the strategy benefits from a global perspective, and thus there is an international member on the Industry Advisory Committee.
I wish to take this opportunity to thank the outgoing international member Professor Michael Manelli for his contribution to the IFS2020 strategy.
And also, to highlight that a selection process was started last week by Minister of State, Michael D’Arcy T.D., to identify a new international member for the committee.
We look forward to receiving expressions of interest in the position.

Brexit
Before I conclude I wish to highlight that Brexit is clearly one of the key issues for us, and as I stated earlier, the Tánaiste, Simon Coveney T.D., will address you on this topic later in the day. In that context, let me just refer to it briefly to outline our current position as we are in another crucial stage of negotiations.
Following on from the adoption by the European Council in March of additional guidelines, a schedule of negotiations is underway between the EU and the UK leading up to the European Council next month.
These negotiations are focused on all outstanding issues in the draft Withdrawal Agreement, including the Protocol on Ireland and Northern Ireland, as well as the future relationship.
We are putting important plans and strategies in place at national and sectoral level, including the Action Plan for Jobs, the Trade and Investment Strategy and with the 10 year National Development Plan launched last February.
The Government is well prepared for the Brexit process and will continue to work to protect and promote Ireland’s interests.
While Brexit will pose challenges to the Irish economy, there will also be opportunities and the Government will work to maximise those where possible.
Following Brexit, we will be the only country in the EU that is an English speaking common law jurisdiction.
We have ensured additional resourcing of Enterprise Ireland and the IDA to help retain, attract and develop businesses within Ireland and to help Irish businesses export to new markets.

Conclusion
To conclude, the Irish funds industry has come a long way since the establishment of the IFSC in 1987. In the intervening years the sector has grown dramatically to become a global leader and major contributor to the Irish economy.
While there are clearly challenges ahead, the industry appears to be well placed to face these. We share the goals of growth and development for the industry and look forward to continuing our collective efforts to develop Ireland as a hub for investment funds.
I wish you all the best with your programme today and look forward to seeing the outcome of your discussions.
Thank you again for the opportunity to speak with you this morning.

 

Ends

 

Contact:

Deborah Sweeney – Press Adviser to Minister Donohoe – 086 858 6878

Opening Statement by the Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD to the Budget Oversight Committee – Stability Programme Update 2018

18th April 2018

 

Check Against Delivery

 

Chairman, members, I welcome the opportunity to be here today to discuss the draft Stability Programme Update.

The Stability Programme sets out the Governments macroeconomic and fiscal forecasts for Ireland and is the first update of the Government’s projections since Budget 2018 in October of last year.

The Stability Programme is presented in draft form – I am of course willing to take on board constructive suggestions from members of the Committee. 

The final version will be submitted to Brussels later this month.

I wish to stress that the macroeconomic forecasts underpinning the Stability Programme have been endorsed by the Irish Fiscal Advisory Council.

The Council also welcomes the progress my Department has made towards developing alternative models for its medium-term forecasts.

 

ECONOMIC DEVELOPMENTS

Turning firstly to the economic situation, I am greatly encouraged by the latest data showing that the economy grew by 7.8 per cent last year.

I would stress that while the headline GDP figure can be exaggerated in an Irish context, other indicators such as consumer spending, labour market trends and taxation receipts confirm the strong recovery.

My Department has increased its GDP growth forecast this year to 5.6 per cent reflecting the stronger economic momentum in the second half of last year.

For next year, GDP growth of 4.0 per cent is forecast.

So the economy is in good shape. However, yesterday I stressed that this growth cannot be taken for granted and I want to emphasise this again today.

The UK’s impending exit from the EU, changes to the international corporation tax landscape and rising geopolitical tensions could all potentially derail the recovery.

From 2020 onwards, the economy has the capacity to grow by around 3 per cent per annum with positive contributions from both exports and domestic demand.

 

THE LABOUR MARKET

The economic recovery is perhaps most clearly evident in the labour market with employment growth of 2.9 per cent recorded last year, representing the addition of some 61,000 jobs.

As a result, there are now more than 2.2 million people at work for the first time since 2008.

In other words, we have now recovered 9 out of every 10 jobs lost during the crisis.

The labour market will continue to benefit from strong growth in domestic demand, with employment growth of 2.7 per cent forecast for this year.

On this basis, there will be more people at work in Ireland this year than ever before. 

Accordingly, unemployment is set to fall further to 5.8 per cent this year and to 5.3 per cent by 2019 – down from a peak of 16 per cent in 2012.

Indeed, the economy is fast approaching full employment. In this context, it is important that Governement policy does not overheat the economy.

 

THE PUBLIC FINANCES

Turning to the public finances; they continue to move in the right direction.

In terms of the underlying General Government deficit targets, progress continues to be made.

I am pleased to outline that, notwithstanding the additional expenditure, as a result of the reclassification of approved housing bodies, the deficit of 0.3 per cent of GDP recorded last year is in line with the Budget day estimate. This provides further evidence that the public finances are becoming increasingly sustainable.

Furthermore, a prudent approach to fiscal policy is being implemented, with tax revenue in 2017 growing by 6 per cent year-on-year, while gross voted expenditure is up by 4½ per cent.

This demonstrates the Government’s commitment to maintaining sound public finances, thereby ensuring that the policy mistakes of the past are not repeated.  

Turning to this year, the latest Exchequer Returns to the end of the first quarter show that the Government continues to deliver on its commitments.  

It is also important to point out that annual growth has been strong with tax receipts 3.5 per cent higher compared to the same period in 2017 and positive annual growth witnessed across most tax heads.

Turning to expenditure, it is being managed by Departments within their allocations thus far, with overall expenditure slightly below profile (2.3 per cent).

Capital investment to enhance our growth potential and address key infrastructural bottlenecks is slightly behind profile but still well up on last year, reflecting the substantially increased resources allocated at Budget 2018.

These are resources to improve our society by building the houses, schools, roads and hospitals our people need.

For next year, €2.6 billion in expenditure has already been committed. Included in this is €1.5 billion for additional capital spending, €0.4 billion to provide for demographic-related costs, €0.4 for public sector pay and €0.3 billion for carry-over costs associated with measures introduced this year.

A key Government priority is to reduce the level of public indebtedness we are experiencing and we are making significant progress in this respect.

However, it must be acknowledged that the recent evolution of the debt to GDP ratio present an overly benign view of our public indebtedness. 

The debt to GDP ratio has decreased only because GDP has increased.

Other measures, notably the ratio of debt to GNI* show that while declining – public debt still remains high in Ireland.

The legacies of the crisis persist with the total stock of debt amounting to €206 billion this year.

This represents around €40,000 worth of debt for every man, woman and child.

It is essential that we start to reduce this burden so that the economy can withstand adverse developments if, and when, they occur.

 

CONCLUSION

Despite the strong momentum, a continuation of robust growth cannot be taken for granted as there are a number of significant external and domestic risks on the horizon that could potentially derail the recovery.

Principal among these are the potential fallout from the UK’s impending exit from the European Union and the possibility of a significant disruption to world trade from increasing protectionism.

Domestically, notwithstanding the well-known limitations with GDP, it is clear that the recovery continues to outperform expectations and while this is to be welcomed, it creates its own challenges.

Indeed, if the economy continues to grow in excess of its potential, capacity constraints will begin to emerge.

In these circumstances, it is essential that budgetary policy does not contribute to overheating and that the pro-cyclical policies of the past are not repeated. 

The best way of dealing with these risks is through prudent management of the public finances and competitiveness-oriented policies.

This is what the Government will continue to do.

ENDS

Speech by Minister Donohoe to the Irish Business Network, Buenos Aires, Argentina

15th March 2018

 

Introduction

It is a pleasure for me to be here with you this evening to represent the Government at the St Patrick’s Day celebrations in Argentina.

Thank you to Matthew Moran, Richard Fenning and Orla Treacy for leading the Irish Business Network Argentina (IBNA) and helping it grow

Thank you to the representatives of Enterprise Ireland who have come from Brazil to be with us tonight – Conor Fahy (Director for Latin America, Eastern Europe, Russia and the CIS), and Melissa Feddis (Manager South America).

I wish to begin by encouraging the Irish Business Network, as a body, to continue your excellent work in fostering and further developing business links between Argentina and Ireland that lead to mutual economic benefits for both our nations.

Argentina and Ireland are faced with an entirely new set of challenges in a rapidly changing international political and economic environment. Certainties about global trade and politics are changing. The final magnitude of the change is still to be determined but change is happening.

Amid this global volatility, Argentina is successfully re-positioning itself as a significant regional and global actor. Important milestones have included the hosting of the WTO Ministerial Conference here last year, attended by my colleagues, Ministers Pat Breen and Andrew Doyle, as well as Argentina’s G20 Presidency this year.

For our part, thanks to the hard work of the Irish people and the right policy choices, Ireland’s economic recovery is strongly embedded. Our priority now is to ensure that the huge economic progress we have made in recent years is matched by greater momentum towards a social recovery so that the fruits of our success are broadly shared by all our citizens and in every region of the country.

As many of you will be aware St Patrick’s Day represents an important opportunity for the Irish Government not just to represent Irish business abroad but also to meet some of the key players in that business. Ultimately, the benefits that come to Ireland from international trade come from your dedication and your hard work.

The role of the Irish Government, and mine as Minister for Finance and Public Expenditure & Reform, is to make it as easy as possible for you to establish your business, to grow your business, and to not put any obstacles in the way of the success of your business.

 

Shared Outlook

Ireland and Argentina are different in many ways, Argentina’s population is nearly nine times larger than ours. Buenos Aires alone has a population more than half that of Ireland.

However, we also have a lot in common.

Over the years, many thousands of Irish people have made their way to Argentina and I think the fact that Argentina is home to one of the largest Irish communities in the world is testament not just to Argentinian hospitality, but also to a shared understanding and view of the world.

I think it is that shared view of the world and similar outlook on life that has led to so many close relationships between our countries; be it business, as with so many here in this room or the personal connections that have been formed over the years.

Ireland and Argentina both now share a common outlook on the volume of trade and the importance of openness and engagement with the global economy.

It is fair to say that this outlook has been etched in forty years of Irish foreign and economic policy. But it is clear that President Macri and his administration have developed an ambitious agenda based on openness, trade and reform.

The external changes which the Argentinian Government is responding to are regularly described as globalisation.

 

Globalisation

There are a wide range of opinions and arguments regarding what exactly globalisation means. Without getting into those debates, I would say that I think it is a useful term that manages to capture how a range of complex forces across the world are broadly bringing the world closer together.

As successful business people you are probably more aware than most about the range of challenges and opportunities that can arise from globalisation. More customers can also mean more competitors. Balancing the risks and opportunities is what international business is all about.

From my perspective, globalisation is a force that has lifted hundreds of millions of people out of poverty, laid the basis for our economic prosperity and created a safer world. But equally it is not a panacea to every problem.

It can also be a disruptive force. Particularly when combined with the incredible rate of technological progress the world is experiencing, globalisation can often be painted as something that people should be concerned about.

This anxiety has been a significant factor in many of the rejections of the status quo we have seen in recent years, including most recently the outcome of the election in Italy – the mother country for many Argentines.

My view is that populism will never deliver people the real remedies they are seeking to today’s problems of rapid change and economic insecurity. However, we should be less swift to dismiss the very real anxieties that have spawned them. Nor should we delude ourselves that the globalisation that has transformed lives and pulled millions out of poverty is irreversible.

I need hardly remind an audience in Argentina, which was a huge beneficiary of the first age of globalisation in the 19th century, that nothing is pre-determined in human affairs or with political institutions and that progress and decline are two sides of the same coin. The first era of globalisation came to a tragic end on Flander’s Fields with the First World War. It took generations after that for our current global era to come into being.

We cannot be complacent and indeed there are real challenges to our current global system. We need to make the case for it and defend it at a time when its enemies are gathering strength.

 

An Open Economy

That is why Ireland is committed to remaining an open economy. We made a choice to focus on international trade as one of the cornerstones of Ireland’s economic strategy.

While this approach does require careful management of the vagaries of international trade, as Minister for Finance and Public Expenditure & Reform, I am acutely aware of the contribution that international trade brings to Ireland which is why I continue to emphasise the need to support it as much as possible.

 

Mercosur

This global outlook is one of the reasons Ireland is fully committed to the ongoing work to agree a trade deal between Mercosur and the EU. This deal will represent an opportunity for over 400 million people in the EU and nearly 300 million in Mercosur countries to improve their business relationships.

Ireland remains fully committed to the Mercosur negotiation, especially in view of the important economic gains expected for both sides from a comprehensive, ambitious and balanced EU-Mercosur Agreement.

While we do have concerns in relation to agriculture, and the potential impact on the EU beef sector, I am confident that we will ultimately achieve that comprehensive and ambitious trade agreement. And that trade agreement will contribute to future prosperity in every member state of the EU and Mercosur.

 

Changing Minds

Actually, persuading people about globalisation can be difficult. It can be very hard to combat a fundamental misunderstanding about international trade because it can require the audience to change a preconceived notion they themselves may not give a lot of thought to.

The idea of globalisation as a harm, and of trade as a threat, is a seductive one. It takes economic insecurity and points to ‘the other’ as the cause. That is always a very appealing answer when the reality is usually significantly more complicated.

I recognise that trying to combat that perception solely with numbers and statistics does not always work. What is needed is to put some human faces on those numbers. Be it the Irish entrepreneur who is now selling his product in a new market of 500 million people strong or an Irish company now hiring Argentinian workers in an Argentine based plant, the actual benefits of trade need to be made real for people.

And we also need to recognise that not every person will benefit in every way from trade right away. But every citizen is also a consumer. International trade and globalisation reduces the cost of goods and services and provides new opportunities for business.

 

Brexit  

From Ireland’s point of view any discussion of globalisation and trade must include reference to Brexit.

Britain’s exit from the European Union will be a defining moment in our relationship and I would like to speak to you briefly today about what Brexit means for Ireland and the EU.

In the first instance, and without getting bogged down in all the detail available, I want to emphasize the scale of the challenge that Brexit brings. While Ireland’s trade with Britain has dropped from over 50% in 1973 to 17% today they are still our single largest trade partner.

Estimates vary somewhat but over one hundred million border crossings take place between Ireland and the UK every year. Irish people cross the border for vacations, for university, for work, and even for marriage.

So we share not just trade but language, history and culture.

We also share the hard won peace process in Northern Ireland.

Brexit negotiations between the EU and the UK are ongoing but I can confirm that Ireland’s priorities remain unchanged.

We must protect the peace process. We must ensure that there is no introduction of a hard border.  We must maintain the Common Travel Area between Ireland and the UK.

And finally we must ensure there are effective transitional arrangements leading to the closest possible trading relationship between the UK and the EU.

This challenge can be met but we are under no illusions about the complexity and difficulty that must be overcome.

 

Conclusion

Globalisation is an incredible force but it does need to be managed carefully. Neither Government nor business should assume that everything will work out. Nor can we take it for granted.

For Ireland a crucial national challenge is Brexit.

But despite the scale of the challenge we are not facing it alone.

Our EU membership has been central to the success of our small, open, trading and competitive economy.  Membership of the Single Market and Customs Union is a core element of our Economic Strategy. Access has allowed our economy to prosper and has greatly assisted in attracting business.

It has given us full access to EU trade agreements with other major markets and a capacity to engage in global free trade that we could not possibly have on our own. The EU is a home which we have helped build and while there are many challenges, the Irish Government is confident that we can work together as 27 countries, to deal with all of those challenges.

While Brexit will pose undoubted challenges to the Irish economy, there will also be some opportunities and the Government will work to maximise those where possible.

The world will continue to change and our role as Government and leaders is to ensure that whatever the challenges we are ready to meet and overcome them.

In conclusion, I want to again wish you well in your work to further enhance our bilateral economic ties and to assure of our Government’s ongoing support in this regard.   I look forward to meeting you all in our networking session later but before that I am happy to take any questions you may have.

Thank you.

ENDS

 

Check Against Delivery

 

Contact:

Deborah Sweeney – Press Adviser to Minister Donohoe – +353 86 858 6878

Aidan Murphy – Press Officer, Department of Finance – +353 85 886 6667

Press Office pressoffice@finance.gov.ie

LAUNCH OF OECD ECONOMIC SURVEY ON IRELAND 2018

PASCHAL DONOHOE T.D., MINISTER FOR FINANCE AND PUBLIC EXPENDITURE AND REFORM

DEPARTMENT OF FINANCE ANNUAL POLICY CONFERENCE, RADISSON BLU GOLDEN LANE THURSDAY 8TH MARCH 

 

Check against Delivery

 

INTRODUCTION

Good morning everyone.

I am very pleased to open the Department’s fifth annual Policy Conference and to welcome you all here today for what I expect will be an interesting and thought-provoking event.

I am particularly delighted to welcome Mr. Angel Gurría, Secretary-General of the OECD to Dublin today to launch the OECD’s biennial Economic Survey of Ireland.

It is appropriate that we are launching the survey at this conference. As you are all aware, this year’s conference title is “Gathering Evidence Ensuring Growth”.

THE OECD REPORT

The OECD’s is universally recognised for the quality of its analysis.

The survey being launched today is objective and evidence-based research at its finest and today’s first presentation, covering research on firm-level productivity, represents a joint research collaboration between economists in my Department and the OECD.

It also fed into the findings of the OECD’s Economic Survey.

The second topic concerns SME investment decisions and whether or not they are under-investing today.

And the third and final topic today investigates how responsive taxpayers are to their marginal rate of income tax.

Both the second and third topics are outputs of the Department’s joint research programme with the ESRI, which is now in its fourth successful year.

I believe that it is vital that policy decisions are informed by a high quality, robust evidence-base – be it analysis conducted by my Department alone or in conjunction with other institutions.

But as well as producing the evidence, we need to disseminate it and debate it with policy stakeholders.

And that is the purpose of today’s conference – why great brains like your own are here to stimulate debate and discussion with policy makers, social partners, tax practitioners, academics and other stakeholders.

 

IRELAND’S RELATIONSHIP WITH THE OECD 

I would like, if I may, to say a word about Ireland’s long and mutually beneficial relationship with the OECD.

Indeed Ireland was among the founding members of the OECD in 1961.

The OECD provides expert policy advice supported by evidence-based analysis, peer learning and exchanges of best practice.

As a small open economy, with important trade relationships both inside and outside the EU, it makes sense for us to work towards global consensus on important issues of policy.

This approach has already delivered an unprecedented level of progress under the OECD BEPS process, and Ireland has not been slow to deliver on our international obligations.

 

FINDINGS OF THE SURVEY

As for today’s report itself, our economic and financial position have improved considerably since the last survey was published in 2015.

The prudent policy choices over recent years have placed Ireland in a stronger place in 2018.

There has been robust economic growth perhaps best reflected in the labour market – which has seen strong employment growth and a corresponding fall in unemployment – to just 6 per cent at present.

 

MACROECONOMIC DEVELOPMENTS AND CHALLENGES

The report focuses on the main developments and key challenges facing the economy and I believe that it addresses important issues in a comprehensive, balanced and fair manner.

I broadly share its assessment regarding the short-term economic outlook and associated challenges.

The economy is performing strongly with growth expected to moderate to more sustainable rates over the medium-term.

The challenges and risks identified in the report are similar to those which my Department identified in Budget 2018.

The sensible economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to better weather these challenges, although vulnerabilities remain.

But the biggest uncertainty on the horizon is, of course, Brexit.

In the report, the OECD assesses the economic effects of an illustrative Brexit scenario, and finds that the negative economic impacts of Brexit may be much larger for Ireland than for the average of all other EU countries.

This finding is consistent with research my Department published last year.

I can assure all attendees here today that the Government is not under any illusions about the complexity of Brexit.

Detailed work is continuing at home to prepare for the UK’s exit, in parallel to work underway in Brussels.

This includes contingency planning for all possible scenarios.

We have already taken important steps to prepare our economy, including the Action Plan for Jobs process, and our Trade and Investment Strategy, in addition to dedicated measures in the Budget and extra capital supports for the State and its agencies to factor Brexit into our longer-term economic strategy.

A key message of the report is that the resilience of the economy to future shocks needs to be buttressed by improving the stability of both the public finances and the financial system.

This has been an important focus of Government policy over the past number of years.

To that end, our public finances are now in a much better position to withstand fiscal shocks.

Based on Budget 2018 forecasts, we will broadly balance the books this year and meet our medium-term budgetary objective, or MTO.

However, as the survey notes, our public debt per person remains among the highest in the OECD.

It is therefore essential that we continue to reduce our debt burden.

In this context, I am determined that we do not repeat the mistakes of the past.

We will operate a countercyclical fiscal policy and ensure that it does not contribute to overheating.

Measures such as the Rainy Day Fund are an important part of this and this countercyclical approach will help improve the resilience of our public finances in the event of an economic downturn. 

 

CREATING THE CONDITIONS FOR SUSTAINABLE PRODUCTIVITY GROWTH 

Focusing now to the special theme of the OECD review, namely reforms for sustainable productivity growth, I would like to thank the OECD for taking on this topic.

My own Department has been working with the OECD over the last number of years, using OECD models with Irish data to understand what is going on beneath the aggregate statistics.

This work has helped to provide the evidence-base for the OECD’s thematic chapter on productivity and its associated recommendations.

This topic is of particular importance given the role of productivity growth in sustainably increasing living standards in the long run.

Economies cannot solely rely on increases in capital and labour to improve living standards in the long-run.

It is therefore crucial that our endowments of capital and labour are used more productively, thereby enabling firms to improve their efficiency and profitability. This in turn enhances our ability to maintain international competitiveness, while supporting wage growth and sustainable increases in living standards.

As the presentations today will show, Ireland has one of the highest levels of labour productivity among OECD members.

However this is largely as a result of high productivity levels in a small number of foreign-owned sectors, and a small group of firms within these sectors.

As the results from our research from the OECD have shown, and which you will see today, a large number of firms have experienced a decline in productivity since 2006.

Therefore, as the OECD quite rightly points out, that a critical question to further raise living standards in Ireland is how to enhance the productivity of local firms and I welcome the OECD’s recommendations in this regard.

And you might be interested to know that I will be discussing productivity challenges with colleagues in Europe next week.

Given the worrying evidence of a slowdown in productivity growth across advanced economies, including Ireland, productivity enhancing reforms have been given a particular emphasis under the European Semester process.

 

IMPROVE WELL-BEING FURTHER OVER THE MEDIUM-TERM 

As we launch the report today, we are now the fastest-growing economy in Europe.

Having said that, we must not become complacent.

We need ensure that the recovery becomes more inclusive.

One of the main messages of the Survey is that there are several areas where well-being could be improved over the medium-term.

These areas include the supply of housing, water infrastructure, health services and labour market participation.

I firmly believe that I, as the Minister for Finance and for Public Expenditure and Reform, along with the rest of the Government, must continue to take the necessary actions in order to improve well-being.

After all, our most important resource is our people.

We have made substantive structural reforms to the labour market.

It is crucial that we continue to invest in human capital so that our workers have the skills and knowledge to succeed in the economy.

My Department is focused on ensuring that the taxation system is balanced in such a way so as to support the growth prospects of our economy and improve living standards within society.

The Government’s strategy for tackling housing issues is set out in Rebuilding Ireland – An Action Plan for Housing and Homelessness.

The Government has committed to spending €5.35 billion to implement the plan, with the overarching objective of significantly increasing housing supply.

It is essential that our economy sees continued investment in public infrastructure that facilitates the priorities like high-speed broadband and public transport, in better cities and in better communities.

The National Development Plan commits to investments totalling over €110 billion in the next ten years.

It will be transformative in nature, supporting our economy and society in the most ambitious manner in the history of our young country.

 

CONCLUSION

To conclude, I want to express my gratitude to the Secretary-General Gurría and to all who worked on the OECD report for being here with us this morning and for producing what is a very balanced and constructive assessment of the Irish economy.

The Survey provides us with some valuable policy insights and recommendations which we can use to inform and shape economic and social policy in the period ahead.

Thank you and I hope you enjoy the Conference.

ENDS

Minister Donohoe’s speech to Dáil on Fianna Fáil Private Members’ Bill Consumer Protection (Regulation of Credit Servicing Firms) (Amendment) Bill 2018

Tuesday 6th March 2018 

 

Check Against Delivery

 

INTRODUCTION

I wish to thank the Deputy for the work that he has put into preparing this Bill.

Before getting into the details of the principles of the Bill, I believe that it is important to give the issue some context.

This is an emotive issue and people are understandably fearful.

One of my key priorities as Minister for Finance, is to normalise the banking system, to ensure that the banks continue to support the economy by providing access to credit to households and businesses, within an appropriate framework of consumer protection.

This also includes ensuring that there is an appropriate framework in place for the resolution of complaints.

We must be careful to ensure the fairest and most effective support for any borrower who faces great difficulty. 

We must be careful that any actions we take to further protect borrowers whose loans are sold do not have unintended and very negative consequences for the banks, their relationship with the regulator and all our citizens who depend on a functioning banking system in their day to day lives. 

 

ADDRESSING FEARS

I fully recognise the position that families in arrears are in when dealing with firms who they are not familiar with and whose reputations, whether warranted or not, are likely to make them extremely concerned about how they will act.

I want to put these fears in context.

The most recent Central Bank figures show that the number of mortgage accounts for principal dwelling houses (PDH) in arrears fell further in the third quarter of 2017; this marks the seventeenth consecutive quarter of decline.

The number of PDH mortgage accounts that were classified as restructured at end-September was 119,070.

Of these restructured accounts, 87 per cent were deemed to be meeting the terms of their current restructure arrangement, up slightly from the previous quarter.  

Repossession numbers in Ireland remain low in comparison with other countries and repossessions take longer in Ireland than elsewhere. 

To drill down further into the repossessions figures in the context of our debate here this evening, the following Central Bank statistics illustrate quite clearly the proportion of repossessions which have been taken by Banks and non-Bank entities. 

 It is worth stating them here.

  • In 2015, the total PDH properties repossessed was 1,535, this was made up of 1,299 by Banks and 236 by Non-Banks.
  • In 2016, the total PDH properties repossessed was 1,693, this was made up of 1,452 by Banks and 241 by Non-Banks.
  • In 2017 (up to end September), the total PDH properties repossessed was 1,106, this was made up of 982 by Banks and 124 by Non-Banks.

This is because the Government has also reformed personal insolvency legislation, and banks no longer have a veto on insolvency arrangements.

In addition, the Abhaile service helps borrowers in arrears to find the best solutions and keep them, if possible, in their own homes.

This is assisting borrowers, particularly those in longer term arrears. A dedicated legal and financial adviser can work with borrowers in arrears and their lender to find the best solution for them. 

If called to court to face repossession proceedings on their home, they will be able to meet a Duty Solicitor at the court. 

A MABS staff member will also be present at court to help them.

Take up of the Abhaile scheme has been high, with over 10,000 vouchers for these consultations issued since the start of the scheme in July 2016.

 

ADDRESSING NON-PERFORMING LOANS

So a lot has been done which is helping keep people in their homes.

As I say, context is important, things have improved in the Irish economy over the past years from the worst of the crisis and we are in a considerably better place than we were a few short years ago.

Non–performing loans (NPLs) at the banks in which the State has invested have reduced by 60% from €54 billion at their peak in 2013 to an estimated level of c. €22 billion at end-December 2017.

That said, they are considerably higher than is acceptable in the long run and the Single Supervisory Mechanism – the system of banking supervision in Europe-  has ordered that action be taken to ensure that the banks get back into a strong position so that they can provide support to the real economy.

Even if the SSM had not ordered something to be done, it would have been incumbent on the individual banks to take action.

Properly addressing and resolving NPLs will normalise the banking sector and should create more scope for proper competition between the banks which should benefit the customer in the long run.

We need to return the banks to a normalised state where they can provide funds for SMEs, for consumers and for people looking for mortgages without the drag on their funds caused by non-performing loans.

Banks with a low level of NPLs are an important element of a secure economy.

 

CONSUMER PROTECTION

So what has the Government done to protect mortgage holders who have gotten into difficulties?

The Government brought in the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 to fill the consumer protection gap where loans are sold by the original lender to an unregulated firm. 

Under the 2015 Act, if the firm who bought loans from the original lender is an unregulated firm, then the loans must be serviced by a ‘credit servicing firm’ which is regulated by the Central Bank. 

Because the credit servicing firm is regulated by the Central Bank, the full range of protections which applied before the loan was sold continue to apply after the sale.

As things stand, the Code of Conduct on Mortgage Arrears is a statutory code which provides a strong consumer protection framework, to ensure borrowers in arrears or pre-arrears in respect of a mortgage loan secured on a primary residence are treated in a timely, transparent and fair manner.

The Code is part of financial services legislation and applies to all regulated financial service providers.

This Bill seeks to apply the CCMA to mortgages which are not already covered by the Code.

Presumably this would include buy-to-let mortgages and mortgages where the borrower is not in any danger of falling into arrears.

I have asked the Central Bank to review the existing CCMA to see areas where it may need to be strengthened and to report to me on the issue as soon as is practically possible.

We also have to look at the other side of the equation, at the lenders who have issued the loans that are now in arrears.

We have to acknowledge that PTSB, one of the banks in which the State has a significant investment has particular difficulties which it needs to resolve.

PTSB’s latest published NPL ratio of 28% is one of the highest in the Eurozone. It is over five times the European average.

Therefore, PTSB must deliver a significant reduction in its NPL ratio, and within a timeframe that meets the expectations of the Single Supervisory Mechanism.

Under the terms of the Relationship Framework with the bank, loan sales do not require my consent as Minister for Finance. 

This Framework is a legally binding contract which cannot be changed unilaterally.

It was put in place at the insistence of the European Commission to protect competition in the market place.

However, the bank is required to consult with me when a loan sale reaches an advanced stage and is of significant scale and will do so in due course. Although

I have been briefed on the matter, the formal consultation has not yet taken place.

It is important to again highlight that all mortgage holders receive their full contractual conduct rights, regardless of the owner of the loan.

They still have the same rights and obligations as they had before the sale.

 

THE BILL

As I have said, I fully recognise the very real concern that the public have in relation to this sale and I also acknowledge the good intent behind the Private Members Bill.

The Government has agreed to support the Bill.

However, there are a lot of significant drafting issues with the Bill which need to be addressed in order to make it more effective and even to make it practical to implement.

My officials have consulted with the Central Bank and it has raised a number of specific issues which will need to be addressed including some concerns that it has in relation to the possible impact that the Bill as currently drafted could have on the independence of the Bank.

It would also appear that it may be appropriate that this Bill be referred to the European Central Bank for their observations. Under Standing Order 149(3), it would be a matter for the relevant Committee to consult with the European Central Bank.

I am also aware that as part of the European Council Action Plan on NPLs published in July 2017, the European Commission will publish in the next week its proposals for the authorisation of credit servicers across the European Union.  

The definition of “credit agreement owner” in the Bill appears to include securitisations while there appears to be an intention to exclude them in section 9 and I would welcome further exploration of this issue.

It is always an issue for legislation of how to achieve the objective while avoiding unintended consequences.

I think that I need to stress that it may be difficult to formulate the Bill in a manner which permits securitisation vehicles as they are currently formulated to continue to function as unregulated entities, without also providing an opportunity for more active loan owner purchasers to structure themselves in a way which falls outside the scope of the Bill.

This is not just a theoretical matter, if Irish banks cannot use securitisation effectively they will have less finance to provide to the real economy and it will come at a higher cost.

I also have concerns about how we square the circle of the practicalities of regulating loan owners who are based outside Ireland with the free movement of capital in the EU and with EU competition law and these issues will require further exploration.

Some of the issues with the Bill as drafted are fairly easy to resolve. For example, the Bill refers to the Financial Services Ombudsman in a number of places but the appropriate reference should be to the Financial Services and Pensions Ombudsman since the passage of last year’s legislation.

There are a number of other technical issues which are too detailed for discussion here today where we are looking at the high level principles of this Bill. 

Regulation comes with consequences and the Bill as initiated could have a number of unintended consequences which we should seek to mitigate as far as possible.

I would hope that any technical issues can be resolved relatively quickly and without controversy.

Therefore I would like to take this opportunity to make my officials available to provide whatever drafting assistance they can to the Deputy in advance of the consideration of the Bill at pre-legislative Committee.

We may be able to progress the Bill quicker in this way than the line by line amendment process which takes place at Committee Stage.

I should also say that I met with a number of the main banks last week as part of my normal engagement process.

I took the opportunity to again make it clear to the banks that they need to be fully cognisant of customers’ concerns in relation to their actions.

 

CONCLUSION

In conclusion, I welcome the Bill as introduced by the Deputy and support the policy intent behind it but it will take significant work to develop it to a level where it can be an effective piece of legislation.

The Government has committed to support this Bill and I will provide whatever assistance that my Department can to ensure that the Bill attains its objective.  

Thank you.

ENDS

 

Check Against Delivery

 

Contact:

Deborah Sweeney – Press Adviser to Minister Donohoe – 086 858 6878

Aidan Murphy – Press Officer, Department of Finance – 085 886 6667

Check against delivery

 

INTRODUCTION

Good evening everyone – it is a pleasure to be here.

I would like to thank David Fennell, President of the Irish Tax Institute, for inviting me here this evening to address you as the guest of honour.

I know that the annual ITI dinner is an important occasion.

At an engagement last year I told my audience of a very telling exchange between Michael Faraday, the British scientist, and William Gladstone, who was Chancellor of the Exchequer, at the time the two met.

An audience of the best tax brains in the country might appreciate it also.

Faraday was demonstrating to Gladstone his latest discovery in the field of electromagnetic induction when the elder statesman grew impatient and asked what use all of this new technology was to him.

Faraday, without missing a beat said;

​Why, sir, there is every probability that you will be able to tax it.
The response from Mr Gladstone was not recorded, unfortunately.

But tonight is a night for giving those hard working brains a rest, and to catch up and network with colleagues and friends.

OVERVIEW

I am pleased to say that we continue to make good progress on the public finances.

Taxes are a tangible indicator of the underlying economic performance and they continue to perform well across a broad range of headings.

Last year overall revenues grew by a robust 6 per cent on 2016 and were in line with expectations.

For this year we expect receipts to grow by a similar magnitude to just under €54 billion, some 14 per cent or €6½ billion above our pre-crisis peak level.

As would be expected in an improving economy, expenditure demands exist; however spending is being managed within expectations, and is growing at a lower, more sustainable rate than the tax revenues which help fund these public services and investment.

Other metrics continue to move in the right direction – we are close to achieving a balanced budget which is a significant achievement against the backdrop of our recent fiscal difficulties.

This is reflected in improving market perception of Ireland whereby in recent months Irish Government bonds have been trading at yields in the region of just 50 basis points above equivalent German debt.

However, while our general government debt-to-GDP ratio is now down to about 70 per cent of GDP we need to continue to make progress on reducing our elevated stock of debt to provide ‘shock absorption’ capacity for future challenges which may lie ahead.

The latest data indicate that the economy is continuing to perform strongly.

While the headline GDP growth rate was driven by the multinational sector and in particular exports linked to contract manufacturing, the domestic economy also made a strong positive contribution with modified domestic demand – which adjusts for distortions in the Irish national accounts – up 5.2 per cent on an annual basis.

As of January, unemployment is down to 6.1 per cent, from 7.4 per cent a year earlier.

But while we can be confident, there is no room for complacency in a changing world.

Since taking on the privilege of becoming Ireland’s Minister for Finance, I have emphasised that my priority will be tax certainty.

The 12.5% rate remains a cornerstone of our corporation tax offering and that will not be changing during my term as Minister.

However, there is more to Ireland’s position on corporation tax than a committed defence of our rate.

In recent years we have been on a path of modernising our system to meet the best international standards, while also playing our part in shaping the direction of international policy making.

Ireland has played a full part in early delivery of key OECD BEPS commitments:

• The OECD Global Forum on Transparency and Exchange of Information awarded Ireland the highest possible rating on transparency and exchange of information. Only 22 countries have this rating.
• In keeping with our commitment to transparency, Ireland was among the first countries to implement Country by Country Reporting.
• The Knowledge Development Box was the first OECD-compliant patent box in the world.
• Ireland was among the first countries to sign the OECD BEPS multilateral instrument in June in last year, which makes important reforms to our international network of tax treaties.
• We have eliminated stateless companies and introduced mandatory disclosure of aggressive tax planning.

Where change to our domestic regime has been required, we have taken the necessary decisions, though they were not always easy to take.

Our ability to tackle important challenges in the past stands to us now.

It shows Ireland’s ability to adapt and evolve while retaining the core strengths of our offering.

A SMALL, OPEN ECONOMY

As a small open economy, with important trade relationships both inside and outside the EU, it makes sense for us to work towards global consensus on important issues of tax policy.

This approach has already delivered an unprecedented level of progress under the OECD BEPS process, and Ireland has not been slow to deliver on our international obligations.

Our regime is among the most transparent in the world.

The policy of having a low rate and a broad base is founded on sound economic reasoning.

We expect companies to pay their fair share, and all the evidence and analysis shows that we collect every cent of corporation tax due in this country.

And while corporation tax receipts remain buoyant, I will not get carried away.
Concentration risks remain and I must ensure that we spend today is not just what we expect to collect tomorrow.

CHANGE IN THE INTERNATIONAL ENVIRONMENT

Given the emphasis on stability and certainty, you might expect that a Minister for Finance would be in a position to dust off last year’s ITI speech and repeat the same points.

But as we all know, the international tax environment has never been more changeable.

For many years the prospect of US tax reform was considered a perennial uncertainty.

Even late last year, some people were telling me that it would never happen.

They said that the numbers simply didn’t add up, either in Congress or on the books.
But they did.

But it is my job to ensure that Ireland is ready and positioned to compete whatever the outcome.

I am known for being positive in my outlook but even leaving aside my outlook, every indication is that we remain competitive.

Of course, I am not ignoring the concerns that remain about how the reforms might affect some companies and their future investment decisions.

Nor am I underestimating the very real concerns around WTO compliance and other international obligations.

However, for many years we have argued that companies pay their fair share of tax in Ireland, but that we cannot be held responsible for taxes that are properly due and payable elsewhere.

We have found it hard to get that message through at times and our reputation has suffered – unfairly – as a result.

Now, deemed repatriation means that the United States is calling in its taxes.

Companies will be required to pay hundreds of billions of dollars in US tax liabilities, dating back to 1986.

This is a vindication of what Ireland has been saying for many years.

Though others have called on Ireland to claim these taxes, we have always been clear on what was Irish and what was not.

The global collection of taxes that are not due to us is important.

Reputation is a proxy for certainty: A tax system that meets international standards, while seeing this significant change in global tax collection, is better protected from external pressure for change.

FACING THE CHALLENGES

This matters because those pressures are there.
But this is a shared challenge.

Tax advisors and the professional services industry must also play a part.
It is in your long-term interests that it comes from within the industry, that you make long-term decisions with your clients, conscious of my objectives and the standards that we must maintain.

The price of certainty is legitimacy.

I offer stability to a system I stand over.

This is a game changer.

So I want to be clear.

I see Ireland’s future as a country that competes from a position of legitimacy.

I intend to make durable policy choices that we can sustain and stand over for the longer term.

In the coming years, it will be my job to position Ireland to compete in the next evolution of the international economy, which, in my view, will be digital.

DIGITAL TAXATION

The digital tax debate has brought together many of the most important issues in international tax, such as questions about how value is created, and the underlying tension between residence and source taxation.

I very much welcome the work being done by the OECD in this area and look forward to the forthcoming report on digital taxation in April.

This will provide the blueprint for how we build a global consensus in this area.
At European level, 28 prime ministers, including An Taoiseach, have reached a unanimous view on the need to ensure that companies pay their fair share of taxes, but also on the necessity of a global playing field in this area.

The European Commission will shortly bring forward its proposals, but it will be for the Member States to decide on any course of action.

I will be coming to table looking for the EU to align with the OECD and to ensure European competitiveness.

I expect that a number of my ministerial colleagues share this view.

CONCLUSION – THE COFFEY REPORT

Before I conclude, I would like to thank those who took part in the consultation process on the Coffey review.

I believe that stakeholder engagement is essential if we are to provide certainty about our future direction, both in terms of the choices we make and the timing of changes.

My Department is reviewing the submissions received and reflecting on the contributions made from across a diverse range of stakeholders.

This consultation process was not a once-off exercise, but the beginning of a rolling series of engagements between my Department and stakeholders.

My Department has a good track record in open and engaged policy making, and that approach will continue.

There will be important opportunities between now and the summer to provide feedback to interested parties and for you to provide further input.
As we move forward to determine the policy choices guiding the implementation of those recommendations over the coming period that stakeholder engagement will continue.

I am clear in what I want to achieve, but I hope I have been equally clear in what I expect.

I want a competitive and stable tax system that is above reproach.

I want to take the decisions now and in the coming years that will serve as a platform for the continued evolution of our economic model.

At a time of great change it is easy to lose sight of what is not changing.

Ireland’s constancy on international tax is not just part of our message: it is part of our track record.

Thank you and enjoy your night.

ENDS

THE NEW, NEW ECONOMY

Speech by Minister for Finance and Public Expenditure and Reform, Paschal Donohoe at Ibec

 

Check Against Delivery

 

INTRODUCTION

Good morning everyone.

As we approach the bicentenary of the birth of Karl Marx – a milestone I am not sure is marked very festively in this building, or maybe it is- his famous observation from The Communist Manifesto of 1848 feels relevant, when he wrote that ‘All that is solid melts into air’.

We are not experiencing the melting of investment and trade, but we are seeing a change, even if that change is to less solid, but no less real, investments.

I want to talk to you this morning about that change in an Ireland that, compared to twenty years ago, has changed profoundly.

New communities of new Irish people live, work and thrive throughout our country.

New technologies have transformed the way we work, rest and play.

And new companies – new in every sense of the word – trade and operate here.

New in the sense that some companies- some of your companies- are long established, but new to Ireland – international brands choosing to locate in this country.

New in the sense that long established companies now engage in new forms of investment.

And finally, new in the sense that many companies did not exist even a few short years ago – nearly 88,000 companies were registered in the 2012 to 2016 period.

When last year’s numbers become known, it will likely rise above 100,000 registrations since the depths of our economic crisis.

 

OUR JOURNEY

Our modern economy has added layers of investment and success at different points in our recent history.

Our journey away from a closed economy was led by the export of goods.

To this we added excellence in the trading of services across many different sectors.

The more recent layer of development has been the increasing importance of investment and trade in intangible assets.

Of course, all of this has allowed a journey away from our historical status as an exporter of our own people.

So what are these intangible assets and how valuable are they in our global and Irish economy?

The OECD describes an intangible asset as something;

  • which is not a physical or financial asset,
  • which is capable of being owned or controlled for use in commercial activities, and
  • whose use or transfer would be compensated in a transaction between third parties.

So by intangible assets we mean branding, product design and development, working systems and the type of intellectual property synonymous with the modern high-tech sector but in fact existing in industries way beyond just that- the innovation we have seen in our food and drink sector being a case in point. 

The very recent Capitalism without Capital by Jonathan Haskel and Stian Westlake adds greatly to our understanding of intangible assets.

As well as explaining what intangible assets are- the design, branding and so on to which I have already referred- it also talks about the qualities of these assets and what they can bring to the companies and the economies that nurture them.

The authors focus on four qualities in their work, the ‘four Ss’ of

  • scalability,
  • sunkenness,
  • spillovers and

All of these qualities make investment in intangible assets very different to investment in physical or tangible assets.

Indeed, intangibles are now the largest component of headline investment in Ireland.

In the first three quarters of last year, for example, almost 35% of modified investment – that is, total investment with the distortionary effects of globalisation removed – was in intangible assets.

That is up from just 9% in 2000.

It is a similar story in our nearest trading partner.

A report published by the UK Government in 2016 suggested UK investment in intangible or knowledge assets has been greater than that for tangible assets since the early 2000s.

In 2014 it stood at £133bn, as opposed to £121bn in tangible investment.

Looking at it differently, from an industry rather than country perspective, sectors like computer technology, entertainment and media, consumer products and services, and healthcare have huge levels of intangible, rather than tangible, assets on their balance sheets.

This move is hugely beneficial to the so-called “frontier firms” who know how to make the most from the investment.

This frontier element is now a vital part of our economy.

And with all this in mind, I want to address three key questions;

  • The first is about how to measure, how to properly capture this new type of economic activity.
  • The second is how to deal with the political questions this new economic activity poses- and I mean political in the broadest sense of that word.
  • And thirdly, having sought to answer those questions, or at least mapped out a path to answering them, I want to talk about how Ireland can continue to win in the new, new economy.

 

MEASURING THE NEW, NEW ECONOMY

Measuring and interpreting the size of the Irish economy is particularly challenging given that our economy is so deeply embedded in global supply-chains.

The 26 per cent growth rate recorded in 2015 is the clearest example of this challenge.

This growth rate was driven by movements from the multinational sector, in particular from the on-shoring of intellectual property and outsourcing of production – two key features of the new, new economy.

But just because it is difficult to measure, does not mean this new, new economy is not real.

A key challenge related to mobile intellectual property, and globalisation more generally, is measuring economic activity.

In response to the well-known limitations with GDP and GNP figures as measures of economic activity, an Economic Statistics Review Group was established by the CSO in late 2016.

One of the key recommendations of the Group was for the CSO to develop a new indicator of the size of the economy that excludes the effects of globalisation.

In July, the CSO published for the first time an alternative measure of the size of the economy, so-called “modified Gross National Income”, i.e. GNI-star.

Without getting too technical at 10.30 on a Wednesday morning, GNI-star excludes:

  • the depreciation of foreign-owned intellectual property assets located in Ireland, which was one of the main reasons for the 26 per cent growth rate in 2015; and
  • the depreciation of aircraft owned by aircraft-leasing companies.

The level of GNI-star is estimated at €189 billion in 2016.

This compares to GDP of €276 billion and GNP of €227 billion.

This has important implications. 

For instance, if this new measure is used to scale our debt, the debt ratio was 106 per in 2016.

It can be seen easily then that the debt-to-GDP figure of around 73 per cent paints an overly benign picture.

So just like other forms of capital, intellectual property generates income flows which boost GDP.

However, unlike most tangible assets, intangibles and their associated benefits are highly mobile – intellectual property can move very quickly.

My key point is that despite this complexity, we can measure this new economic activity.

However, we will need to look at our economy through a different lens to get a clear picture of performance.

 

QUESTIONS THAT THE NEW, NEW ECONOMY POSES

So, we are making progress in understanding how and why the knowledge economy works.

We must champion it as a driver of a better country and a better society.

Not everyone will immediately benefit from technological progress and increased global integration and the transition towards the knowledge economy.

There will be both winners and losers.

Which leads to me the second question I posed- how do we solve the political issues that new, new economy raises?

How do we build a stable consensus for the new, new economy?

The key way to share the wealth, as it were, is through our tax system.

So I want to make two points – one on international tax and one on our domestic taxation system.

I am on record as saying that the OECD is the place to deal with this issue, as it will in the coming weeks.

The key principles for me are;

  1. That we tax where value is created.
  2. That any new rules on taxation are supported globally.
  3. That we define what a digital transaction is.

I am on record as having spelled out these principles as the best way to make progress in this area.

The third principle is of particular importance.

Too often, we speak of “digital companies“ or the “digital economy“ , as if it was something different, something external to the economy in which we operate.

In fact, we now live in a digitised economy, where digital transactions are a big part of every company’s business, be it an American tech company, an Irish food producer or a German car manufacturer.

The future of digital tax is important to all such companies- and to all of us.

These taxing issues are the result of the disconnectedness, of the discord, of multiple tax systems.

This really matters because, to quote from David Pilling’s new text, The Growth Delusion;

There are many competing explanations for what has caused popular rage in countries that have, judged by conventional measures, never been richer. There is, though, a common thread. People do not see the reality of our lives reflected in the official picture, painted principally by economists.

This lack of recognition could only fester amidst talk of concepts like intangible qualities and assets.

And this is why our system of domestic taxation must be seen to be fair.

Of course, Ireland is recognised as already having a highly progressive and redistributive tax system.

The OECD said so in 2016, and this will not change during my tenure as Minister for Finance.

Indeed, in 2018, it is estimated that the top 1% of earners in Ireland, in receipt of 12% of total income, will pay over 25% of all income tax and USC.

But the need for our economic system to be fair, and seen to be fair, will only deepen in the future.

 

HOW IRELAND CAN KEEP WINNING IN THE NEW, NEW ECONOMY

So with issues of measuring the new, new economy and of ensuring that is fair and equitable on the table, the next obvious question is how to make it work for Ireland.

How do we keep on winning?

Is there an economic Johnny Sexton drop kick?

Or, instead, are there not multiple phases, coordinated over a long period, that we must participate in?

In my view there are five key policies for success.

The first is the need to focus on so-called public goods that will support the new, new economy.

It is essential that our economy sees continued investment in public infrastructure that facilitates the priorities like high-speed broadband and public transport in better cities and in better communities.

The Taoiseach and I, to that end, will publish the National Development Plan in the coming weeks.

These investments – totaling over €100 billion in the next ten years- will be transformative in nature, supporting our economy and society in the most ambitious manner in the history of our young country.

 

The second is to foster the correct legal framework for intellectual property.

Ireland has, now, the necessary legal framework that allows inflows of intangible investment into this country.

The Higher Education Authority has been engaging in this work and will shortly publish its analysis of intellectual property policies and their implementation, looking at how Ireland can best strengthen practices in this area, and manage conflicts, for example in relation to commercialization of IP within the higher education sector.

Given that the technology is constantly evolving, it is of paramount importance that we continue to keep this under review and take the necessary steps to ensure that our legal code is fit for purpose.

 

The third is to have a tax system that fosters the development of intangible assets

Our new, new economy must remain an attractive location for investment in intangibles and the new economy more generally.

That is why our core offering is a competitive, business-friendly regime with a rock solid commitment to the 12.5 per cent corporation tax rate. 

It will not be going up, and it will not be coming down.

Certainty in the tax treatment of intellectual property – indeed in relation to our tax regime – is a vital component of our competitive offering; a point which was considered in the public consulation that has just closed on Seamus Coffey’s report on corporation tax that my Department published late last year.

 

The fourth policy is to develop our human capital as well as our physical infrastructure.

The most important resource in the new, new economy is our people.

It is crucial that we continue to invest in human capital so that our workers have the skills and knowledge to succeed in the new economy.

Indeed, retraining and upskilling will become increasingly important as technological progress disrupts existing industries, in particular, through automation.

Our decision to increase the national training fund levy was an example of our determination to make progress in this area.

 

And the fifth key policy is to foster the development of clusters in important growth areas in order to attract new investment.

At the moment, clusters exist in Ireland in areas like the technology, pharmachemical and audiovisual sectors as well as many others.

All of you, I am sure, know of our reputation in this area.

Many of you work in just such a cluster.

 

The Government will continue to nurture the clusters we have and attract new ones.

That way, we win.

Pursuing these five key policies,

  • on public goods;
  • on the right legal framework;
  • on tax certainty;
  • on human capital;
  • and on clusters;

will best place Ireland to succeed in the new economy and will help re-position the economy further up the ‘value chain’.

We need a national conversation on the new, new economy – on how to make it fair and how to make work for this country- and I hope that this will continue.

 

READY FOR WHAT LIES AHEAD

I am an immensely optimistic person, and I am immensely optimistic for the future of our great, little country.

The years that lie ahead, notwithstanding the many threats and risks that exist, will be good for us.

They will be good because we have equipped our economy to meet the changes that have occurred and will occur in finance, in technology, in human life itself, and stand at the centre of that change.

Many of you are proof of that.

The question is not “has the economy has changed?”

Because it has.

Nor is the question “is this new, new economy real?”

Because it is.

The question is “what are we going to do to sustain this new, new economy for Ireland in the future?”

Are we going to, as a country, enthusiastically embrace an economy of ideas, based in substantive economic activity that brings jobs and creates wealth that allows for the continued healing of our society after a lost decade?

Are we going to use the new, new economy to make Ireland a safer, fairer, cleaner and a better place to live?

Or are we going to view this new way of doing things with negativity, distrust and skepticism?

Small countries like Ireland- agile and open- are particularly well placed for what lies ahead, as we are more able than bigger countries to adjust to the changes and developments around us.

Small really is beautiful.

And while we are small, we are thinking big.

Many of you have heard it said that Ireland has, up to now, endured a “lost decade”- lost jobs, lost investment, and lost hope.

The next ten years will be about so much more than simply recovering those losses.

Going back Mr Haskell and Mr Westlake’s book Capitalism without Capital again, they point out that two small countries- Singapore and Ireland- have taken the steps necessary- steps like the correct tax code and the development of financial and intellectual clusters- to lead the way on the fostering and development of intangible assets.

With that in mind, the next ten years for Ireland will be about change and ambition to deliver better standard of living, greater fairness and a better life for those born here, and those who choose to live here.

And wanting those things for our people is nothing new.

Thank you.

 

ENDS

Wednesday, 7th February 2018

 

Check Against Delivery

 

Contact:

Deborah Sweeney – Press Adviser to Minister Donohoe – +353 (0) 86 858 6878

Aidan Murphy – Press Officer, Department of Finance – +353 (0) 85 886 6667 

pressoffice@finance.gov.ie

Check Against Delivery 

 

Introduction

Thank you Chairman for the opportunity to speak with the Committee alongside officials from my Department.  I am accompanied today by John Palmer and Eoin Dorgan, both of whom have been involved in developing the range of options as set out in the Rainy Day Fund Consultation Paper.

 

Background and Context

I would like to begin firstly, by providing some background and context to the proposal I have set out in relation to the setting up of a Rainy Day Fund.  The concept was originally mooted by my predecessor as part of the Summer Economic Statement or SES in 2016.  It was announced that once the Medium Term Budgetary Objective or MTO of a balanced budget was achieved, a rainy day fund would be set up.  The establishment of the fund forms part of a wider policy commitment to ensuring sound public finances.  It will play an important role in creating a fiscal safety buffer to help absorb inevitable future shocks to our economy, while at the same time ensuring the long-term sustainability of Ireland’s public finances.  In the 2016 SES, the Government committed to consulting the Oireachtas before bring forward detailed proposals.

 

 

Outline of the proposal

The initial proposal for a rainy day fund envisaged an annual contribution of €1 billion per annum to commence post achievement of the medium-term budgetary objective or MTO.  Subsequently, the government reduced the planned contribution to €500 million per annum for the years 2019 to 2021, in order to fund additional capital expenditure over the same period.  The level of contributions thereafter was left as an open question and it is one of the many topics on which I welcome your views today.

 

Oireachtas Consultation

In Budget 2018, I announced that government had decided to transfer €1.5 billion from the Ireland Strategic Investment Fund to the Rainy Day Fund when it is established.  I also published the Consultation Paper to initiate this Oireachtas consultation process and I welcome the paper that I have received from Fianna Fáil along with the papers from the Fiscal Council and the Parliamentary Budget Office.  Before I form any particular view on the specific details of the fund, I would hope today to get some initial views from the Committee in relation to the outstanding questions I have set out in the Consultation Paper.  Some of these matters relate to the design, operation and purpose of the fund; as well as the issues of how it is resourced; withdrawal triggers and its governance, etc.

 

Contingency Reserve Fund

Broadly speaking, the current proposal is to design a rainy day fund that will primarily meet budgetary demands which may arise from specific, one-off shocks.  As set out in section three of the Consultation Paper however, a natural question arises as to whether the rainy day fund should be used, in the first instance as a contingency reserve.  It would be necessary to clearly define the circumstances under which funds in such a reserve fund could be deployed, so as to ensure it is used only during a time of crisis.  Force majeure events which might necessitate access to the contingency reserve may include either natural disasters or public emergencies for example.  Expenditure based on a withdrawal from a Contingency Reserve Fund would be permissible within the parameters of the fiscal rules.  If at the end of a given budgetary year, the funds within the contingency reserve remained unused, they could then be transferred to a separate rainy day fund, the establishment of which would require primary legislation.

 

These are just some of the issues outlined in the Consultation Paper which require further consideration in relation to a possible Contingency Reserve Fund.  Other important questions to be answered include:  whether such a contingency reserve should be held within the Exchequer account or within a rainy day fund; how the withdrawal triggers should be determined; and what kind of shocks or events should be considered as triggers.  As I mentioned at the outset, I am keen to hear the views of the members of the Committee today in relation to these and other questions put forward as part of the Consultation Paper.

 

Operational and Administrative issues

Sections 4 and 5 of the Consultation Paper raise questions on Operational and Administrative matters associated with the overall Rainy Day Fund.  These design and operational issues relate to the deposit mechanism, the withdrawal mechanism, the size at which the fund should be capped and the replenishment methodology.   Other practicalities to be considered include how the fund might be invested, what governance structures would be most appropriate and who should administer and manage the fund.

 

It is on these issues, as on all other points raised in the Paper, which I am looking forward to hearing the views of the Committee today.

 

Deposits, withdrawals and size of fund

To begin today’s discussion, I will identify some of the key design concepts of the fund on which your views will be important.  The design of the fund is important, as it will underpin the effectiveness of its use.

 

Deposit mechanism

At present, the proposal envisages a deposit mechanism whereby, aside from the €1.5 billion seed funding from ISIF, there will be an annual contribution of €500 million from the exchequer until 2021.  Is this sufficient?  Should additional seed funding be made to the rainy day fund?  How should the size of annual contributions be determined thereafter?  A number of options spring to mind.  One would be to have a fixed contribution key in either nominal or as a percentage of GDP or GNI* terms.  An alternative could be to lodge windfall tax revenue on the basis of revenues above target in general terms or in relation to specific taxes.  I am sure that there are other options as well.

 

Withdrawal mechanism

In respect of the withdrawal mechanism, clear and defined rules will be required in respect of the events and conditions which could trigger a withdrawal proposal, and the process by which such a proposal would be progressed by the various State actors. International evidence shows that these triggers tend to comprise economic and fiscal triggers, based on indicators such as unemployment, and revenue and expenditure levels, as well as democratic triggers relating to approval by the executive and parliament.

 

The design of these triggers will be a critical task in developing the fund. The triggers should be appropriate and relevant, as well as being based on data which is timely and transparent.  There is a need to also strike a balance between sufficient checks and balances, and a process that allows the speedy utilisation of the funds given it will be needed in a crisis.

 

Maximum fund size

Associated with the interplay between deposits into and withdrawals out of the fund are the issues of the overall fund size and the process by which it should be replenished, if it used. The optimum size must be determined, so that we have sufficient capacity to address challenges emerging, but while also avoiding the carry costs of a cash or near cash fund which could become too large.  Given the State’s debt levels are consistently identified as one of the State’s top risks, the State should always be seeking to pay down debt except where there is a better return for the State.  In this case, the rainy day fund provides resources to mitigate tail-risk events that would have a significant impact on the Irish economy and public finances, thus justifying the additional interest costs on the debt that could be paid down by the rainy day fund.

 

Once the maximum size is achieved, should annual contributions continue for the purposes of budgetary discipline or cease?  If they continue, should the surplus in the fund be used to pay down debt?

 

I consider that the rainy day fund should be of a sufficient size to act as a fiscal buffer to bridge the impact of the shock.  The rainy day fund should give the economy and public finances time to make the longer term adjustments to re-establish debt market access at normalised levels.  This is connected to the paying down of debt as the lower the State’s existing debt level, the more sustainable the cost of debt from markets.

 

Potential replenishment of fund

Subsequent to any withdrawal, and determined by the target fund size, the fund will need to be replenished to rebuild the fiscal buffer. Clearly, replenishment will also be influenced by the prevailing economic and fiscal conditions, which might impact on the timing of the exchequer’s capacity to recommence contributions to the fund.  Should the provisions for the replenishment of the rainy day fund be determined now or should they be determined post the withdrawal of the funds so they can fully take account of the circumstances of the State at that time?

 

Compliance with EU fiscal rules

It is also important to note that a key consideration in the design of any rainy day fund, is that it must be compliant with Ireland’s legal obligations as set out in the Stability and Growth Pact, as well as the Fiscal Compact.  The fiscal rules dictate that use of funds from a contingency reserve or payments into the Rainy Day fund would be treated as expenditure by the Exchequer.  Payments made to the Fund are deemed a financial transaction within general government, but not counted as part of the general government deficit.  In terms of withdrawals from the fund however, these will result in expenditure that worsens the general government balance.

 

In addition to all of these issues, the Consultation Paper outlines some options on the governance structure for the fund, and how it might be managed, with the NTMA indicated as a possibility.

 

Conclusion

In concluding, I look forward to a constructive engagement with you all as this will help us to form an evidence-based and considered proposal.  Accordingly,

I welcome the views of the committee on the Consultation Paper and the various issues to which I have referred.

ENDS

 

Check Against Delivery 

Statement by Minister Donohoe to the Joint Oireachtas Committee on Finance, Public Expenditure & Reform and Taoiseach – Tracker Mortgages

Tuesday, 16th January 2018

 

Check against delivery

 

Introduction

Thank you Chairman.

Firstly, I would like to thank you and the Committee for the opportunity to attend before the Committee to discuss the tracker mortgage issue and also the “Our Public Service 2020” initiative.

I would also like to acknowledge the considerable work and public service this Committee and its members have carried out in bringing the tracker scandal to the fore, and in particular in hearing the testimony of people who have been significantly harmed by the unacceptable actions of banks.

I can assure Committee members and the public that the Government is treating this matter very seriously and that it is determined to see the situation resolved to the satisfaction of impacted customers as quickly as possible.

Owing to the work of the Central Bank, particularly in its implementation of the industry wide Tracker Mortgage Examination, it has been clearly demonstrated that mortgage lenders have failed significantly in their regulatory and contractual responsibilities to many of their tracker mortgage borrowers.

The failure of the banks in this regard has imposed significant harm on their customers.  It is now their responsibility to put that right and to do so without further delay.

 

Background

The fair treatment of consumers is a key requirement of the financial services regulatory framework and of the Central Bank Consumer Protection Code. The Code requires all residential mortgage lenders to act honestly and fairly in the best interests of their customers, and not to mislead customers about the products they provide.

It also requires lenders to make a full disclosure of all relevant information to a consumer in a way which seeks to inform the consumer and to enable a consumer to make an informed decision before entering into, or changing, a loan or other financial services agreement.

Through their treatment of some of their mortgage customers, lenders have shown a complete disregard for the Code, and have demonstrated that within these financial institutions ethical cultural issues still remain.

The Central Bank has for some time made clear to lenders that they had and have a duty to act in the best interests of their consumers when recommending that a borrower switch a tracker mortgage to another type of mortgage product.

Prior to the commencement of the industry wide tracker investigation, the Central Bank identified and pursued a number of tracker related failings with a number of mortgage lenders.

These failings related to issues ranging from a lack of transparency for the borrower, a failure to fully inform customers of the consequences of switching from a tracker mortgage, the application of incorrect tracker rates and a failure to afford customers their contractual entitlements to specified tracker interest rates.

At the same time, the Financial Services and Pensions Ombudsman was receiving individual tracker related complaints. The Ombudsman was adjudicating on these cases and in addition some of these cases were also coming before the Courts.

 

Central Bank industry wide examination

The growing number of issues arising relating to tracker mortgages raised concerns in the Central Bank that there may be other tracker related issues which could be impacting upon borrowers across the system. As a consequence of this the Central Bank announced in October 2015 that it had commenced a broader industry wide examination of tracker mortgage related issues. This systems wide review was intended to cover, amongst other things, the transparency of communications with, and the contractual rights of tracker mortgage borrowers.

Over time the Examination has grown to become the most complex and significant consumer protection review ever undertaken by the Central Bank. It covered fifteen mortgage lenders who may at any time have sold a tracker mortgage product to a consumer borrower from the time the lender commenced selling tracker mortgages until December 2015, and involves the review of more than two million mortgage accounts by lenders.

As such, it covers both banks and other regulated mortgage lenders, and also includes lenders who are no longer providing new mortgage credit. It also covers mortgages which have been redeemed or borrowers whose tracker mortgage has been transferred to another creditor.

The industry wide examination requires all lenders to examine the extent to which they have been meeting their contractual obligations to their tracker mortgage customers or their compliance with their obligations under the Central Bank’s Consumer Protection Code and other consumer protection regulatory requirements.

 

Central Bank progress update on the examination

Since it commenced its industry wide examination, the Central Bank has published a number of update reports the latest of which was on 20 December last.

That latest update indicated that approximately 26,600 customers have been identified as having been impacted pursuant to the industry wide examination. This is an increase of 13,600 on the position as outlined in the earlier October update. The acceptance of further impacted tracker mortgage accounts by lenders, such as the 6,000 additional impacted accounts accepted by Bank of Ireland in November, is proof that the Central Bank’s strategy of continuously challenging lenders is having important benefits for consumers.

In total circa 33,700 customers have now been identified as being impacted owing to tracker mortgage failings. This includes the 7,100 impacted tracker borrowers that were identified prior to the commencement of the industry wide examination.

While the Central Bank now believes that the vast majority of impacted tracker customers have now been identified, it will continue to review, challenge and verify the work undertaken by lenders.

 

Redress and compensation

Following the Central Bank’s October progress update report – and owing to both my and the Government’s concern relating to very slow progress in the provision of redress and compensation to impacted customers – I met with the CEOs of the five main banks at the end of October and made it very clear to them that all affected customers are to be identified and provided with appropriate redress and compensation as a matter of urgency.

While some payments had been made at that time, these were small in number and many impacted borrowers were still unclear if or when they would hear from their lender.

Following these meetings, the banks in question made certain and specific commitments with regard to the payment of redress and compensation to impacted customers. I note that, in its December update report, the Central Bank confirmed that the five main mortgage lenders were on course to meet their October 2017 commitments, and also that known issues around disputed groups in respect of certain lenders have been resolved to the satisfaction of the Central Bank.

As at end-December, approximately €250 million in redress and compensation has now been paid to 12,900 impacted customers as identified from the industry wide examination, and this includes payments to 3,700 impacted accounts identified since last September.

This is additional to €47 million in compensation and redress which was paid for impacted cases identified before the commencement of the Central Bank industry wide examination.

The prompt payment of remaining redress and compensation payments to outstanding impacted borrowers is now a key requirement, and indeed it will be a practical demonstration of the regret that banks are now expressing for the harm they have inflicted upon their impacted tracker borrowers.

It is the case that the level of compensation offers are, in the first instance, a matter for the individual mortgage lender. It is the lenders which caused the harm to their own customers and therefore the primary responsibility for putting that right should also rest with them. The level of compensation offered should of course be proportionate to the level of harm and stress which was incurred, and individual lenders should have regard to this when they make compensation payments to their own customers. The provision of fair and appropriate compensation offers up front will minimise the risk of causing further inconvenience and hurt for impacted customers and will go some way towards giving a practical expression to the words of regret which have been heard in recent months.

Of course in the more difficult cases, such as where people lost their homes, the lender will need to consult closely with the impacted borrower on the level of detriment which has occurred and therefore the total level of redress and compensation which is appropriate in in their particular circumstances.

However, urgent consideration should also be given to these cases by the banks and they should not be deferred or put to the end of the line for payment.

It is also important to have an independent appeals process in place to deal with customers who are dissatisfied with any aspect of the redress package that they receive from lenders, and the Central Bank Tracker Redress Framework provides for this.  This will give any customer the right to challenge any aspect of the redress and compensation offered; this can, in the first instance, be to the appeals panels set out under the tracker framework but of course impacted tracker borrowers also have the right to take their case to the Financial Services and Pensions Ombudsman or ultimately the courts.

Of course, a fundamental element of the redress and compensation process is that the upfront payment which is made by a lender cannot be reduced by any subsequent appeal that may be made by the borrower, either to the appeals process under the Tracker Examination framework or ultimately the Ombudsman or the courts.

The detailed appeals process set out in the Central Bank’s framework for the Tracker Examination allows borrowers to take the matter further, without risk to them, if they consider that the level of the upfront payment is not appropriate in their particular case. This appeals process will also allow the individual borrower to set out their full individual circumstances and to set out in detail the full harm which was imposed upon them by their lender, and consequently why a higher level of payment may be appropriate in their case.

 

Enforcement

In terms of enforcement, I believe the existing supervision and enforcement powers of the Central Bank are strong and should be used to punish wrong doing where supported by the evidence. The Central Bank has already demonstrated that it is willing to use the full extent of its powers as evidenced by its imposition in 2016 of a monetary penalty of €4.5 million on Springboard Mortgages Limited for serious failings in its obligations to its tracker mortgage customers.

The Central Bank has advised that it is also pursuing enforcement investigations in relation to Permanent tsb and Ulster Bank Ireland, and that they have commenced another enforcement investigation. The Central Bank has also stated that it expects all the main mortgage lenders will face enforcement investigations in due course.

It is also important to note that the Central Bank also has statutory reporting obligations to An Garda Síochána or another relevant statutory agency where information obtained by it at any stage prior to, during, or after an investigation, gives rise to a suspicion that a criminal offence may have been committed.

 

Other Actions Taken

In light of the appalling behaviour of mortgage lenders, I have taken a number of actions with the interest of consumers in mind.

As Minister for Finance, I have mandated the Central Bank under section 6A of the Central Bank Act 1942 to prepare a report on:

  • the current culture and behaviour and the associated risks in the retail banks, and
  • the actions that may be taken to ensure that banks prioritise customer interests in the future.

On foot of this report – which is expected to be provided in the second quarter of this year – the Government will determine whether any additional legislative and regulatory changes are needed that would enhance accountability in the banks to ensure customer interests are prioritised.

In addition, following the publication of the Central Bank December update report, I announced two additional measures to further promote the interests of consumers and which are to:

  • double the level of compensation – to €500,000 – that the Financial Services and Pensions Ombudsman may award to a consumer who has been adversely affected by the action of a financial services provider.
  • appoint two new members to the Central Bank Commission who will have a strong consumer protection profile.

I also note – and indeed welcome – the initiative from the banking industry to establish an Irish Banking Standards Board which will broadly mirror the approach adopted in the UK.  However, this is an initiative from the banking sector itself and it will not minimise or reduce any existing or proposed legislative or regulatory measure.

 

Conclusion

This Examination has laid bare the fact that very poor cultural and governance issues still exist within lending institutions in Ireland post the banking crash and that if banks are to regain the trust of customers than they must be prepared to change their attitudes significantly. Customers of these lenders have been treated appallingly and in some severe cases have even lost their homes, either directly or indirectly, due to the shameful behaviour of their lenders. This behaviour is simply unacceptable.

This Government will continue to support the Central Bank in its efforts to complete the Tracker Examination as quickly as possible, and it looks forward to receiving a further update report from the Central Bank in due course on the basis of end-March 2018 data. If further sufficient progress regarding the payment of redress and compensation to impacted customers has not been made at that point, the Government will be prepared to consider further possible actions.

Thank you for your attention and I look forward to your comments and questions.

ENDS

 

Check Against Delivery

 

Contact:

Deborah Sweeney, Press Adviser to Minister Donohoe – 086 858 6878

Aidan Murphy, Press Officer, Department of Finance – 085 886 6667

pressoffice@finance.gov.ie

 

Opening Statement by Mr Des Carville, Head of the Shareholding and Financial Advisory Division, Department of Finance

Public Accounts Committee

Thursday, 14th December 2017

 

 

Minister D’Arcy’s statement on tracker mortgages made to Seanad Éireann on 22 November 2017

 

Check against delivery

 

Introduction

I thank Senators for raising the important issue of tracker mortgages.

The fair treatment of consumers is a key requirement of the financial services regulatory framework and of the Central Bank Consumer Protection Code.

The Code requires all residential mortgage lenders to act honestly and fairly in the best interests of their customers and not to mislead customers about the products they provide.

It also requires lenders to make a full disclosure of all relevant information to a consumer in a way which seeks to inform the consumer and to enable a consumer to make an informed decision before entering into, or changing, a loan or other financial services agreement.

However, it has now clearly been demonstrated that mortgage lenders have significantly failed in their regulatory or contractual responsibilities to many of their tracker mortgage borrowers.

 

Background

The Central Bank has long warned lenders of their duty to act in the best interests of their consumers when recommending that a borrower switch a tracker mortgage to another type of mortgage product.

Indeed the Central Bank specifically provided in the Code of Conduct on Mortgage Arrears that mortgage lenders must not, except where it would be in the interest of the borrower, require a borrower to change from an existing tracker mortgage to another mortgage type as part of an alternative repayment arrangement to address a mortgage difficulty.

Over time, the Central Bank identified and pursued a number of tracker related issues with some lenders.  These included issues ranging from a lack of transparency for the borrower, a failure to fully inform customers of the consequences of switching from a tracker mortgage, the application of incorrect tracker rates and a failure to afford customers their contractual entitlements to specified tracker interest rates.

Separately individual tracker related complaints were also presenting to the Financial Services Ombudsman and that Office was making determination on these cases, some of which were also coming before the Courts.  Also, due in part to these developments, the matter was coming to greater public attention more generally.

In total, the Central Bank had identified around 7,100 mortgage accounts where tracker failure were identified and which adversely impacted upon mortgage borrowers, prior to the commencement of the Bank’s industry wide tracker mortgage examination.

 

Central Bank industry wide examination

Having regard to these developments, and to Central Bank concerns that there may be other tracker related issues which could be impacting other consumer borrowers across the system, the Central Bank announced in October 2015 that it had commenced a broader industry wide examination of tracker mortgage related issues.  This systems wide review was intended to cover, amongst other things, transparency of communications with, and contractual rights of tracker mortgage borrowers.

This examination has turned out to be the largest review ever carried out by the Central Bank on its consumer protection side.  It covered fifteen mortgage lenders who may at any time have sold a tracker mortgage product to a consumer borrower from the time the lender commenced selling tracker mortgages until December 2015.

As such, it covered both banks and other regulated mortgage lenders, and also included lenders who are no longer providing new mortgage credit.  It also covers mortgages which have been redeemed or borrowers whose tracker mortgage has been transferred to another creditor.

The industry wide examination requires all lenders to examine the extent to which they have been meeting their contractual obligations to their tracker mortgage customers or their compliance with their obligations under the Central Bank’s Consumer Protection Code and other consumer protection regulatory requirements.

Under the initial phase of the industry wide examination, the Central Bank required lenders to put in place governance structures and systems to conduct a comprehensive examination.

The second phase of the examination involved an extensive internal review of mortgage books to identify mortgage borrowers which were impacted by banks’ failings.  This phase was due to finalise at the end of September last.

In its latest update on progress on the tracker mortgage examination – as published last month – the Central Bank indicated that 13,000 impacted mortgage borrowers had so far been identified though it was also noted that this number would be expected to increase.  In particular, the Central Bank noted that it was continuing to challenge lenders on the number of impacted customers.

As Senators will now be aware, on 9 November last Bank of Ireland accepted that it had a further 6,000 impacted tracker mortgage accounts.  This is on top of the 4,300 it had earlier accepted arising from the Central Bank examination; and indeed the 2,100 accounts identified earlier before the industry wide examination even started.

These 6,000 additional accounts are groups of customers that the Central Bank had identified as having been impacted but which Bank of Ireland had previously disputed.

KBC is another bank which has recently said that it is continuing to engage with the Central Bank on the identification of impacted customers.

The Central Bank has stated that the number of impacted accounts will now increase on the end September position in light of the recent announcement by Bank of Ireland and that it may increase further as it continues to challenge mortgage lenders.

 

Redress and compensation

The two other phases of the Central Bank examination cover the calculation and the payment of redress and compensation for impacted customers.

When the Central Bank published its update report last month, payments amounting to €120 million had been paid to 3,300 impacted accounts as identified from the recent industry wide examination.  This is additional to €43 million in compensation and redress which was paid for impacted cases identified before the commencement of the Central Bank industry wide examination.

However, when the Minister for Finance met the Chief Executives of the five main banks at the end of October he made it very clear to them that all affected customers are to be identified and that the wrong is to be put right through the payment of appropriate redress and compensation without any further undue delay.

Following on from those meetings, the banks also committed to do the following:-

  • AIB is to pay redress and compensation to over 4,100 of their customers before the end of this year;
  • Bank of Ireland is to pay redress and compensation to the 4,300 of their customers that they accepted had been impacted at that point – as indicated above, since then that bank has accepted that a further 6,000 mortgage accounts have also been impacted and payments in respect of these accounts is now also to start before the end of 2017;
  • PTSB is to pay redress and compensation to almost 2,000 customers before the end of this year and
  • Ulster Bank is to pay redress and compensation to 1,000 customers before the end of this year and to the bulk of their remaining impacted borrowers in early 2018.

 

KBC also said that all its customers identified so far as having been impacted have been or are in the process of being contacted and that redress and compensation payments have commenced.

The payment of redress and compensation to impacted borrowers without any further delay is now a key requirement, as it will be a practical reflection of the regret that banks are now expressing for the harm they have inflicted to their impacted borrowers.

The payment of redress and compensation serve two different functions.  Redress is intended to return the borrower to the position she or he would have been in if the harm had not occurred; in effect, to give back the money that was wrongly taken from the borrower.

Compensation is additional payment on top and is intended to reflect the detriment to the borrower which arose from being put on the incorrect interest rate.

While the Central Bank cannot formally require lenders to implement uniform redress and compensation programmes, the Central Bank nevertheless has repeatedly challenged lenders on their proposals.

The Tracker Examination framework clearly set out the Central Bank’s expectations that appropriate redress and compensation is to be provided to impacted borrowers.

Lenders are also to categorise impacted customers by reference to the type and level of detriment suffered, and that compensation is expected to be proportionate to the level of harm which was incurred.

The types of detriment identified range from overcharging due to the application of incorrect interest rates – which at the lower end of the scale may have only been a small difference and for a short period of time – to the failure to return a borrower to a tracker rate after a period where the interest rate was fixed and up to cases of more significant harm such as a loss of ownership of mortgaged properties.

A higher level of compensation would be expected in cases were a severe level of harm has been inflicted on a customer.

Some people have said that a very uniform redress and compensation approach to the payment of compensation should be put in place by the Central Bank for all banks.  A uniform redress and compensation approach could fail to address an individual’s particular circumstances adequately as many personal circumstances and experiences will be different from each other.  A uniform redress approach could also mean that it would become the de facto maximum level of payment across the system and that it could prevent or inhibit lenders from putting in place a somewhat more generous package for its own impacted borrowers.

Overall the approach to compensation adopted by the Central Bank is the one which is available to it under the existing law, which places the onus on lenders to come up with their own schemes for their own affected customers.  However, the Central Bank also reserves the right to challenge lenders in particular cases if it considers it necessary or appropriate to do so.

The Principles for Redress set out by the Central Bank also provides for the general up-front payment of redress and compensation to all impacted borrowers.  This upfront payment, however, does not preclude or prevent the borrower from appealing the level or any aspect of compensation if he or she does not consider that it is appropriate to the harm that was inflicted in their particular case.  Regardless of the outcome of any appeal, the initial payment cannot be reduced.

Two types of appeals panels are to be set up by each lender as part of the Tracker Framework process.  The first is intended to deal with the more serious cases of harm and the panel membership is fully made up of members independent of the lender.  The second appeals panel is intended to hear cases where the level of harm is not as serious and the majority of the members on this panel are also independent of the lender.

Impacted borrowers also have the further right to appeal their case or circumstances to the statutory independent Financial Services Ombudsman or to the courts.

And it is worth repeating, that a fundamental element of the redress and compensation process is that the upfront payment which is made by a lender cannot be reduced by any subsequent appeal that may be made by the borrower, either to the appeals process under the tracker examination framework or ultimately the Ombudsman or the courts.

The approach to the payment of redress and compensation is designed to deliver the most efficient process in the interests of impacted borrowers.  Upfront compensation frameworks are determined by lenders, though subject to Central Bank challenge, and provide for the making of payments as quickly as possible.

The detailed appeals process then allows borrowers to take the matter further, without risk to them, if they consider that the level of the upfront payment is not appropriate in their particular case.  This appeals process then allows the individual borrower to set out their full individual circumstances and to set out in detail the full harm which was imposed on them by their lender and consequently why a higher level of payment is appropriate in their case.

 

Enforcement

It will also be important to hold the banks to account for their actions.  The existing supervision and enforcement powers of the Central Bank are strong and should be used to punish wrong doing where supported by the evidence.  So far, the Central Bank has imposed a monetary penalty of €4.5 million on Springboard Mortgages Limited for serious failings in its obligations to its tracker mortgage customers.  The Central Bank is also pursuing enforcement investigations in relation to Permanent tsb, Bank of Ireland and Ulster Bank Ireland.

The Central Bank is also liaising with An Garda Síochána and other relevant statutory bodies such as the Competition and Consumer Protection Commission and it has statutory reporting obligations to An Garda Síochána or another relevant statutory agency where information obtained by it at any stage prior to, during, or after an investigation, gives rise to a suspicion that a criminal offence may have been committed.  The Central Bank takes its reporting obligations – as provided for under Section 33AK of the Central Bank Act 1942 – very seriously and complies with them on an on-going basis as appropriate.  The Central Bank has met An Garda Síochána and discussed, at a high level, what it has seen and while it has not made a formal statutory section 33AK report of suspicions to other relevant agencies, it is keeping the matter under constant review.

The Central Bank has also engaged with the Financial Services Ombudsman with regard to the welcome amendments to the time periods for customers to make complaints to the Ombudsman pursuant to the Central Bank and Financial Services Authority of Ireland (Amendment) Act 2017.  This legislation now extends the time limits for long-term financial services beyond six years to permit complaints to the Ombudsman within three years of the customer becoming aware of the cause of complaint.

 

Conclusion

The Government will be monitoring the progress and outcome of this important Central Bank examination very carefully, and it has concluded that follow up actions will be pursued if the main banks do not meet the updated commitments made to the Minister.  I look forward to an update being provided by the Central Bank to the Minister for Finance in mid-December.

However, what is clear at this point is that some tracker mortgage customers have been treated disgracefully by mortgage lenders and that many borrowers have incurred considerable loss; in particular where they have either directly or indirectly lost their homes due to this harmful action by lenders.  I assure the House that the Government is fully aware of the seriousness of this matter and it wishes to have adequate redress and compensation provided to impacted consumers as quickly as possible.  At this point the Government wishes to support and encourage the Central Bank to complete its tracker mortgage examination investigation as quickly as possible.

 

ENDS

22nd November 2017

 

 

 

 

THE CHALLENGE OF BREXIT: IRELAND, THE EU AND THE TRANSATLANTIC RELATIONSHIP

PASCHAL DONOHOE TD, MINISTER FOR FINANCE AND PUBLIC EXPENDITURE & REFORM

THE BROOKINGS INSTITUTE, MONDAY NOVEMBER 13 2017

Excerpts from speech

 

Check against Delivery

 

INTRODUCTION

Ladies and Gentlemen, let me start by thanking you for the invitation to address the Brookings Institute.

I know the Institute is one of the foremost think tanks in the world, tracing its roots back to the first organisation devoted to analyzing public policy issues at the national level in the United States.

The Institute’s capacity to gather such a broad range of expertise over the years is why it has been able to maintain itself as such an important voice in American and global debates since its foundation.

 

THE CHALLENGES OF BREXIT

The overarching challenge for Ireland today is Brexit.

Britain’s exit from the European Union will be a defining moment in our relationship and I would like to speak to you briefly today about what Brexit means for Ireland and the EU and also for Ireland’s relationship with the United States.

In the first instance I want to emphasize the scale of the challenge that Brexit brings.

While Ireland’s trade with Britain has dropped from over 50% in 1973 to 17% today, it is still our single largest trade partner.

Estimates vary somewhat but over 110 million border crossings took place between Ireland and the UK in 2016.

Irish people cross the border for vacations, for university, for work, and even for marriage.

So we share not just trade but language, history and culture.

We also share the hard won peace process in Northern Ireland.

Brexit negotiations between the EU and the UK are ongoing but I can confirm that Ireland’s priorities remain unchanged.

We must protect the peace process.

We must ensure that there is no introduction of a hard border.

We must maintain the Common Travel Area between Ireland and the UK.

And we must ensure there are effective transitional arrangements leading to the closest possible trading relationship between the UK and the EU.

The Government is optimistic that this challenge can be met but we are under no illusions about the complexity and difficulty that must be overcome.

We have already taken important steps to prepare our economy, including significant measures announced last month in my Budget for 2018 and in Ireland’s Trade and Investment Strategy.

Brexit will also be a critical factor in our longer-term economic strategy;

A new 10-year Capital Plan is in preparation;

We’re revising our enterprise policy which sets out our longer term ambition for enterprise growth and job creation;

We are in active discussions with the European Investment Bank for a potential increase in investment in Ireland; and

Our Government’s enterprise agencies continue to work with a wide range of companies, helping them to deal with Brexit – making them more competitive, diversifying their market exposure, and up-skilling their teams.

Stabilising our national finances by reducing our national debt and need to borrow.

 

THE IMPACT OF POPULISM

There are lessons to be learnt from Brexit for all of us.

It represents a choice by a substantial portion of the electorate in a fully developed member of the global community to turn away from an interconnected Europe.

A choice to try and turn back the clock on some of their closest international relationships.

There has been significant analysis since Brexit that suggests that the vote was in part a reaction to increased globalisation.

I’m sure many of you here have read similar analysis that points to the rise in populism being driven in part by a backlash against a perceived economic injustice arising from globalisation and global trade.

This is not just an issue in Britain.

Nor is it confined to the English speaking world.

Right across the globe, in a host of countries with differing economic and political situations, a growing number of voters are asking what is there to hold on to in a world that is moving so quickly?

Many people have examined and rejected the existing political and economic frameworks which many would claim have served us well.

A crucial challenge is that those societies or countries that have either anchored the growth of globalization or are perceived to have benefitted the most from it are now leading the questioning of its benefits.

Many of you may know Dani Rodick from the John F Kennedy School of Government at Harvard University.

He made the point that until recently, it looked as if the world’s economic and political order was set on an established, predictable course.

Advanced democracies would be led by centrist politicians, trying to address inequality and exclusion at home while remaining committed to an open economy.

We have learnt that these conventional assumptions are just that – assumptions.

And they have been upended by a range of elections in Europe and across the world which have challenged what was previously settled economic and political orthodoxy.

 

BILATERAL TRADE

The lesson I think that we must take from Brexit is that it is not enough to assume that we need to communicate better the benefits of trade and globalisation.

The lesson is that it is not enough to believe that globalisation has lifted hundreds of millions out poverty around the world, laid the basis for our economic prosperity and created a safer world.

The lesson is that we need to tell people about how globalisation and an interconnected world has changed their lives for the better.

As a small open economy Ireland is a good example of what globalisation means.

To take our relationship with the United States as an example, every year our trade is worth over $100 billion.

Taking goods and services together, we sell almost as much to the US as America does to Ireland.

There are about one hundred and fifty thousand people in Ireland employed by US companies and about a hundred thousand jobs in the US economy, across every state, employed through Irish companies.

When you factor in the rest of the EU you are looking at two of the most developed markets in the world, over eight hundred million people looking to buy goods and services from each other.

I believe that our trade relationship will only grow stronger.

And while trade talks are currently on hold I very much hope that a transatlantic trade arrangement will be agreed in the future.

This will be particularly exciting for Ireland because I believe we are uniquely positioned to act as a bridge between these two huge economies.

After all, Ireland is not just a member of the European Union but a close friend of the United States.

Our ties go beyond commercial opportunities – we share a language and a history, as well as business.

But however strong our trade relationship is now and no matter how much it grows in the future it won’t persuade people of the benefits of globalization by itself.

 

INTERNATIONAL TAX

International tax issues are often discussed in the context of globalisation.

In this context, there is a lot of interest in Ireland, and worldwide, on potential changes to the US tax code, and the current debate here on the issue.

The recently published legislative proposals give a lot more detail on the intentions of Congress as to what any reforms will look like.

If agreed, these changes would represent a significant change from the current system under which the US taxes the global profits of US multinationals only when those profits are repatriated to the US at the full headline US tax rate.

As with any tax changes, the devil is in the detail.

The substantive detail of any final legislation will be important.

As you know, agreement between the House of Representatives, the Senate and President Trump will be needed before any legislation can ultimately be agreed and any changes can be introduced.

The implications of US tax reform for Ireland, and for the rest of the world, will depend on the exact nature of those changes which are ultimately agreed.

I am aware that sometimes Ireland is mentioned in the debate and discussion on US tax reform.

This is to be expected given the large numbers of US companies that has chosen Ireland as the ideal EU location to invest in, and trade from.

US tax reform however is not about Ireland: it is about modernising US tax rules.

It has been 30 years since the last substantial changes to the US tax code and the world has moved on significantly since then.

Ireland has always been clear that US tax reform will help to address aggressive tax planning by US multinationals.

We have taken action where we could but only US action combined with ongoing global reform at OECD can ultimately ensure international tax rules are up to scratch for the modern world.

This is why Ireland continues to play an important and constructive role in the international tax debate.

We are working closely with some 100 countries at the OECD, including the United States, to find evidence-based answers to the difficult questions posed by the digitalisation of the global economy.

As a small open economy, connected to Europe, the US, and the wider world, we are of course affected by changes in the international environment.

I do believe however, that change also brings opportunities.

The right choice for Ireland is to continue our commitment to a corporation tax system that it competitive, transparent and stable.

One issue that is clear however is that Ireland’s membership of the EU is, and will remain, a key factor in attracting FDI from the US and elsewhere.

Global business, from the US or elsewhere, will always want to have operations in the EU, and Ireland will remain very competitive and attractive as an EU location to invest in and do business from.

Ireland’s corporation tax regime and 12.5% corporation tax rate will continue to be competitive while also offering long-term certainty to international business.

And for the avoidance of any doubt, we have no intention to either increase or reduce the 12.5% rate.

 

CONCLUSION

No matter the issue, be it tax or trade or Brexit, it is vital that we are able to discuss the realities of a situation and can challenge the preconceived notions and assumptions that might be shaping our understanding of them.

For Ireland, Brexit represents a huge challenge.

But we are not facing it alone.

Our EU membership has been central to the success of our small, open, trading and competitive economy.

Membership of the Single Market and Customs Union is a core element of our economic strategy.

Access has allowed our economy to prosper and has greatly assisted in attracting business.

It has given us full access to EU trade agreements with other major markets and a capacity to engage in global free trade that we could not possibly have on our own, such as the recent trade deal between the EU and Japan, which is providing new opportunities for Irish exporters, in particular the farming community.

The EU is a home which we have helped build and while there are many challenges, the Irish Government is confident that we can work together as 27 countries, to deal with all of those challenges.

While Brexit will pose undoubted challenges to the Ireland, there will be opportunities as well and the Government will work to maximise those where possible.

Following Brexit, Ireland will be the only country in the EU that is an English speaking common law jurisdiction.

We have a young, well-educated population and the Government continues to build a business friendly environment, for businesses large and small, foreign and domestic.

It is easy to understand Brexit as a reaction to an ever changing and complex world.

But the world will continue change and our role as Government and leaders is to ensure that whatever the challenges we are ready to meet and overcome them.

Thank you.

ENDS

 

CHECK AGAINST DELIVERY

Speech by Minister of State Michael D’Arcy TD

A&L Goodbody Annual Asset Management & Investment Funds Seminar

A&L Goodbody, North Wall Quay, Dublin 1

26th October 2017

 

Check Against Delivery

Good afternoon ladies and gentlemen, I would like to start by thanking A&L Goodbody for inviting me to address you this afternoon.

In respect of the funds industry, this subsector of financial services has served Ireland very well for many years and I certainly believe there is further scope for the sector’s continued development. Events like today are vital in continuing to promote and facilitate dialogue across the sector.

As Minister of State for Financial Services and Insurance, I lead the Government’s International Financial Services 2020 Strategy. As many of you in the room will be aware, the IFS2020 Strategy was launched by the Government in 2015 to respond to the ever changing and increasingly competitive environment for international financial services. IFS2020 has a vision for Ireland to be recognised as a global location of choice for specialised international financial services. 

The Strategy aims to increase the numbers employed in international financial services by 30% or 10,000 new jobs over the five years of the Strategy. In the first two years we saw a 13% increase in the numbers employed in IFS, placing us on track for achieving our jobs target by 2020.

Of course a key part of our development as a centre for financial services has been the growth of the fund industry.  Ireland is the third largest fund jurisdiction in the world, and the second largest in Europe. At the end of 2016, we had some 6,000 funds domiciled in Ireland, managing over €2 trillion of assets with €4.3 trillion of assets under administration.

8 of the top 10 global fund administrators are operating in Ireland with over 40% of the world’s hedge funds by value serviced from Ireland.

Ireland welcomes the efforts of the Commission to further the goals of the Capital Markets Union. However, in the recent Commission Consultation on the ESAs we made clear, as did a large number of other Member States, that there was no need for significant reform of the European System of Financial Supervision at this stage. A number of the proposals recently put forth by the Commission go beyond what we consider necessary to achieve these aims.

We believe that the use of the powers already available to the ESAs, such as binding mediation, breach of union law, and especially Peer Reviews, can achieve the objective of supervisory convergence. We do not accept the argument that direct supervision of certain activities is required to ensure supervisory convergence.

The Commission’s proposals may increase costs for industry and increase timelines for authorisation and approvals. None of which will help us achieve deeper and more integrated Capital Markets. The ESAs have only been in existence since 2011, which is a short space of time to evaluate their performance.

At the recent meeting on the proposals, officials have made clear our concerns and we will continue working with other Member States to try and ensure we achieve a positive outcome on this file in Council.

As you will be aware, in July the Government approved the legal drafting of the Investment Limited Partnership (Amendment) Bill, 2017. Heads of legislation have been prepared by my Department and submitted to the Office of the Parliamentary Counsel. A draftsperson has been appointed and my officials will continue to engage with the drafting process.

I want to acknowledge the recent engagement between officials and Irish Funds on the Heads of the Bill. This engagement has been helpful in the process of preparing for pre-legislative scrutiny and will also feed into the drafting process. 

The Department is seeking that pre-legislative scrutiny for the legislative proposals be facilitated as quickly as possible and I have written to the Chair of the Committee requesting an early date for pre-legislative scrutiny of the proposals.

In the past year we’ve seen a key development in respect of not only the funds industry but also in increasing trade diversification in respect of financial services.

In December 2016, we were pleased with the announcement from the People’s Bank of China (PBoC) and Central Bank of Ireland that Ireland had been granted a Renminbi Qualified Institutional Investor (RQFII) quota. The quota of 50 billion yuan (around €6.9 billion) allows Irish-domiciled financial institutions to invest in China’s domestic bond and equity markets using China’s own currency. Irish financial service providers will now be able to offer this additional service to European markets.

The granting of a quota for Ireland aligns with the objectives of the Government’s IFS2020 Strategy. The quota improves Ireland’s financial services ecosystem and increases Ireland’s attractiveness for foreign direct investment.

I cannot speak at events such as today without discussing Brexit. It goes without saying that Ireland remains 100% committed to the EU. The EU is a market of 500 million people and in 2016, our goods exports to the rest of the EU were nearly three times what we exported to the UK.

Our overall priorities are clear – protect the peace process, no hard border, maintenance of Common Travel Area, an effective transitional arrangement leading to the closest possible trading relationship with UK, and work for the future of our Union.   

Ireland has developed strong relationships with both the EU and the UK and we’re intent on keeping both following the UK’s exit from the EU.

From a financial services perspective I believe Ireland is perfect location for firms looking for a base in the EU to enable them to passport financial services across the Union. Aside from our commitment to the EU we also have a number of other factors which make Ireland an attractive location for investment.

Ireland will become the EU’s only jurisdiction which is both English speaking and a common law jurisdiction after the UK’s departure. Ireland has a strong pro-business environment with a stable and consistent 12.5% corporation tax rate. For funds Ireland is an established global hub for the industry, and with developments such as RQFII (R-Quiffy) and the upcoming Investment Limited Partnership legislation I believe we will continue to create an attractive environment for the further development of the sector. 

In looking to the future, officials in the Department of Finance have begun engaging with stakeholders on the development of IFS2020’s Action Plan 2018. IFS2020 has always been a flexible and adaptable Strategy, with annual action plans focusing the direction of the Strategy with measureable deliverables.

Before I conclude I’d like to highlight the third annual European Financial Forum which is due to take place 31st January 2018 in Dublin Castle. The EFF is a key deliverable as part of the IFS2020 Strategy. Last year’s Forum was attended by 650 delegates, representing over 400 companies from 20 countries around the world and across the spectrum of international financial services. I can promise you that our speakers next year will worth coming to hear and I am looking forward to making some announcements very shortly. The EFF is becoming a flagship event of the financial services calendar and we want to make sure it stays there.

I’d like to thank you once again for the opportunity to speak at today’s event. I hope I have been able to highlight to you the Irish Government’s commitment to not only international financial services as a whole but also the funds sector. All that remains for me to do is to wish you a productive and informative evening.

Thank You

ENDS

 

Check Against Delivery

Private Members’ Motion on Tracker Mortgages

Paschal Donohoe TD, Minister for Finance and Public Expenditure & Reform

Wednesday October 25th 2017

 

Check Against Delivery

 

INTRODUCTION

Thank you Ceann Comhairle,

I would like to start by apologising for my absence from the House earlier as I was speaking to the media to further clarify this issue for those who have been treated so shabbily by the banks.

I thank my colleague, the Minister of State, for stepping in.

I have, however, been following parts of the debate remotely and I will make myself fully aware of what has been said.

I want to thank everyone who contributed to the debate tonight and I think that this has been very useful in further highlighting the issue.

 

THE BANKS

At this stage, I have met with the chief executives of the five main banks and they are in no doubt as to what I and the Government think of their actions and inactions on this issue and what I expect them to do to rectify matters and in what time frames.

They have committed to working with the Central Bank to fully meet its expectations.  

All of them have made statements unreservedly apologising to their customers adversely and shamefully impacted by the tracker rate scandal.

They have committed to a resolution for affected customers and I, the government and the Central Bank will be keeping a careful eye on them to ensure that there is no slippage.

As the Minister of State said earlier,

  • AIB is now committed to the payment of redress and compensation to over 4,100 of their customers before the end of this year;
  • Bank of Ireland to 4,300 of their customers before the end of this year;
  • PTSB to almost 2,000 customers before the end of this year and
  • Ulster Bank to 1,000 customers before the end of this year.

KBC also expects to pay the majority of its impacted customers this year and all banks have committed to resolving and completing payments to outstanding impacted accounts in 2018.

The banks will now provide the Central Bank with all the information required and do this within the timelines set by the Bank.

 

NEXT STEPS

I have asked the Governor to provide me with a progress report by December on whether banks have made acceptable and sufficient progress in line with the commitments they are announcing today.

If satisfactory progress is being made I have asked for a further report to be provided to me by end March.

However, if the Central Bank deems that the progress made on this issue has not been sufficient or acceptable, there are a range of possible policy measures available to me, including:

  • Introducing new legislative requirements for stricter reporting for all retail banks.
  • Amending tax law in a targeted way, potentially in relation to the bank levy.
  • Activist actions as a shareholder in three of the banks consistent with the protection of franchise value over the medium term.

Let me issue a clear warning to the banks that I will not hesitate to act decisively if the Central Bank tells me that progress is not sufficient.

The banks have behaved is a manner which is completely unacceptable and it is their duty to put this right and to do so quickly.

 

BANK CULTURE

In addition, I have mandated the Central Bank under sections 6A of the Central Bank Act 1942 to prepare a report for me on the current cultures and behaviours and the associated risks in the banks today and the actions that will ensure that banks prioritise customer interests in the future. 

On foot of this report the Government will determine whether any additional legislative and regulatory changes are needed that would enhance accountability in the banks for ensuring customer interests are prioritised.

 

WORK ALREADY DONE

I think that it is important to acknowledge the scale and complexity of the problem which has had a bearing on the amount of time that it takes to be resolved.

This examination has turned out to be the largest review ever carried out by the Central Bank on its consumer protection side.

It covered fifteen mortgage lenders – eleven of which it has transpired have issues to address – who may at any time have sold a tracker mortgage product to a consumer borrower, and required the review of over two million mortgage accounts.

In their personal appearances before the Joint Committee for Finance, Public Expenditure and Reform and Taoiseach, it was clear that these mortgage customers have been treated disgracefully by mortgage lenders and that they have  incurred considerable distress, loss and harm.

This suffering and harm is replicated in multiple other mortgage customers of the banks – in particular those which have either directly or indirectly lost their homes due to this harmful action by lenders.

Sadly some of the harm done to customers at this point is irreparable. 

I believe that all parties in the House are in agreement that the banks behaviour has been completely unacceptable. 

We are now approaching the conclusion of the process for the majority of customers who have suffered as a result of the behaviour of the banks and the process of the payment of compensation will now intensify by all the banks.

We will remain vigilant to ensure that the banks live up to their promises and we will continue to critically examine what more needs to be done to ensure that customers are treated properly in the future.

 

CONCLUSION

I would like to thank Deputy McGrath, the many other Deputies in this House, particularly the members of the Joint Oireachtas Finance, Public Expenditure and Reform and Taoiseach Committee for drawing attention to this issue.

I would also like to echo the Minister of State earlier in paying tribute to many people outside this House who have over a long period sought to bring this scandal to public attention and to ensure that the harm caused to many impacted borrowers would be recognised and as far as possible at this point put right. 

We should be clear that it was the mortgage lenders that caused this harm to their customers and that the primary responsibility to urgently resolve the problem rests with them.

Therefore, all lenders now need to bring the Central Bank examination to a conclusion without any further delay, and to do so to the satisfaction of the Central Bank and more importantly to the satisfaction of their customers which they wronged and to finally act in the best interest of their customers.

Thank you.

 

ENDS

Check Against Delivery

Fianna Fáil Private Members’ Motion on tracker mortgages

Minister of State Michael D’Arcy Opening Speech

25th October 2017

 

Check Against Delivery

 

I wish to move amendment No. [  ].

Cheann Comhairle

I thank Deputy [McGrath] for the raising this very important issue in the House this evening. 

As the Taoiseach recently stated in this chamber, the behaviour of the banks in relation to the tracker mortgage issue has been scandalous.

This scandal should never have happened and the Government is determined to ensure that it should not be repeated.

The Minister for Finance has now met the CEOs of the main banks namely Bank of Ireland, AIB, Ulster Bank, PTSB and KBC.

As Deputies will note, all five banks have now made statements unreservedly apologising to their behaviour.

This, however, is very much a belated development and on its own will be worthless.

The top priority now for Government is to ensure that all affected customers are identified and crucially that the wrong is put right through the payment of appropriate redress and compensation.

Let me be very clear on behalf of the Government, the time has now come for the banks to move urgently on this.

For the record, after meeting the Minister

  • AIB is now committed to the payment of redress and compensation to over 4,100 of their customers before the end of this year;
  • Bank of Ireland to 4,300 of their customers before the end of this year;
  • PTSB to almost 2,000 customers before the end of this year and
  • Ulster Bank to 1,000 customers before the end of this year.

KBC also expects to pay the majority of its impacted customers this year and all banks have committed to resolving and completing payments to outstanding impacted accounts in 2018.

The Government has also determined that a range of follow up actions will be pursued to ensure banks stand by these commitments.  Crucially, they must now actively and constructively engage with the Central Bank and provide all the information required by and within the timelines set by the Central Bank. 

The Minister for Finance has asked the Governor of the Central Bank to provide him a progress report by December – in particular, on whether or not banks have made acceptable and sufficient progress in line with the commitments they are announcing today.  Let me be clear to the House, if banks do not meet their new requirements other issues will be brought to the table.

Turning to the particular motion before the House this evening, I wish to first of all state that the Government very much agrees with the sentiment – and indeed the substance as well – of the motion tabled by Deputy McGrath.

While the Government is tabling an amendment to the motion, it is only seeking to make some very small adjustments to the motion; none of these it is suggested will detract in any substantive way from the initial motion.

In total, the Government is proposing three minor amendments to the original Fianna Fáil motion.

In indent number one, under the heading

“calls on the Central Bank of Ireland to:”

the Government proposes to delete the words “the Government” and replace it with the word “it” – the purpose of this change is to make clear that the reference is to the Central Bank.

It is considered that it would be more appropriate to refer to the Central Bank in this particular context given that the Bank is independent in the performance of its supervisory and regulatory functions in relation to regulated financial service providers.

The Government is also proposing some minor amendments to both the fourth last and second last indents of the motion.

In the fourth last indent, the Government is proposing to replace the current sentence to provide that consideration will be given to strengthening consumer protection laws if necessary.  As Deputies may be aware at this point, the Minister’s recent statement indicates that the has made a formal request under section 6A of the Central Bank Act 1942 as amended asking that the Central Bank prepare a report on the current cultures, behaviours and associated risks in the banks.   On foot of this report, the Government will consider and determine whether any additional legislative and regulatory changes are needed that would enhance accountability in the banks and ensuring customer interests are prioritised.   The Government is of the opinion that this will be a better time and context to consider legislative amendments which may better assist the Central Bank and the Competition and Consumer Protection Commission in fulfilling their roles.

The final amendment being proposed by the Government seeks only to recast the motion to request that the Central Bank of Ireland and the Financial Services Ombudsman consider introducing a helpline to assist bank customers in relation to tracker mortgage issue.  Having regard to their respective independent statutory remits, it is considered that this would be a more appropriate formulation of the understandable desire to help provide more assessable information to impacted, and potentially impacted, tracker mortgage borrowers regarding the status of their complaints.

While it is important that this Houses raises and discusses issues of very significant relevance to the public, and in particular on matters which have wrongly and adversely impacted on some households, it is also important to recognise the work the Central Bank has already done during the course of the tracker investigation. 

Since 2010 the Central Bank has been dealing with mortgage lenders on tracker mortgage related issues. The Bank had identified and pursued issues in relation to transparency with specific lenders regarding their borrowers who opted to switch from a tracker rate or who had a right to revert to a tracker rate after the end of a period where their mortgage rate was fixed.  Individual cases were also presenting to the Financial Services Ombudsman and that Office was making determinations on these cases, some of which were also coming before the Courts.  Also, due in part to these developments, the matter was coming to greater public attention more generally. 

Having regard to such developments, the Central Bank issued a public statement in October 2015 which indicated that it had commenced a systems wide examination of tracker mortgage related issues which covered, amongst other things, transparency of communications with and contractual rights of tracker mortgage borrowers. This examination has turned out to be the largest review ever carried out by the Central Bank on its consumer protection side. It covered fifteen mortgage lenders – eleven of which it has transpired have issues to address – who may at any time have sold a tracker mortgage product to a consumer borrower, and required the review of over two million mortgage accounts. It covers both banks and other regulated lenders and includes lenders who are no longer providing new mortgage credit. It also covers mortgages which have been redeemed or instances of tracker mortgages which have been transferred to another creditor.

The examination has required all lenders to examine the extent to which they have been meeting not only their contractual obligations to their tracker mortgage customers, but also compliance with their obligations under the Central Bank’s Consumer Protection Code and other consumer protection regulatory requirements in their dealings with their customers; in particular in the way material information was or was not provided to their customers to enable them make an informed decision on the options available to them regarding their mortgage.

However, matters are now coming to a head and the process of the payment of compensation will now intensify by all the banks.  Nevertheless, what is clear now for some time is that mortgage customers have been treated disgracefully by mortgage lenders and that many of them have incurred considerable loss or even greater harm – in particular those which have either directly or indirectly lost their homes due to this harmful action by lenders. Sadly some of the harm done to customers at this point is irreparable.  I believe that all parties in the House are in agreement that the banks behaviour has been completely unacceptable. 

To finalise, I would also like to pay tribute to Deputy McGrath, to many other Deputies in this House, to the members of the Joint Oireachtas Finance, Public Expenditure and Reform and Taoiseach Committee and also to many people outside this House who have over a long period sought to bring this scandal to public attention and to ensure that the harm caused to many impacted borrowers would be recognised and as far as possible at this point put right.  This work has demonstrated a high level of public service.     

However, as stated by the Minister in this House yesterday, we should be clear that it was the mortgage lenders that caused this harm to their customers and that the primary responsibility to urgently resolve the problem rests with them. Therefore, all lenders now need to bring the Central Bank examination to a conclusion without any further delay, and to do so to the satisfaction of the Central Bank and more importantly to the satisfaction of their customers which they wronged and to finally act in the best interest of their customers.

ENDS

Check Against Delivery

Speech by Minister for Finance and Public Expenditure & Reform, Paschal Donohoe TD on the Finance Bill 2017

24th October 2017

 

Check Against Delivery

 

INTRODUCTION

 

I move that this Bill be read a second time.   

When I made my Budget statement in this House two weeks ago I said that this was a Budget to safeguard our national finances and to help rebalance our economy.

It was a Budget to promote fairness and provide for modest but sustainable improvements in people’s lives.

Many of the measures to help us achieve those goals are contained in the Finance Bill 2017, which we will begin to discuss today.

This Bill is the means by which we will legislate to ensure these changes happen.

Before I go through its section in detail, I would like to look at some of the overarching themes contained therein.

 

FINANCE BILL THEMES

 

USC and Income Tax

In Budget 2018 I am continuing to fulfil the Government’s commitment to make steady and sustainable progress in reducing the income tax burden, with a particular focus on low and middle income earners.

I have been very clear that my intention is to preserve a broad and stable income tax base.

Therefore, in order to ensure that I do not narrow the tax base, the USC measures to be introduced in this Finance Bill focus on reductions to USC rates, while maintaining the current entry threshold to USC of €13,000.

I am also establishing a working group to plan, over the coming year, the process of amalgamating USC and PRSI over the medium term. 

It is my intention that, throughout this process, the income threshold of €13,000 will be maintained as the general point of entry to the new amalgamated charge.

A key objective of this group, and of mine as Minister for Finance, is that this process does not narrow the tax base but ensures that our personal taxation system is both competitive and resilient in the future.

In this Finance Bill I am reducing the 2.5% USC rate to 2%.

I am also reducing the 5% rate of USC to 4.75%, with the result that the top marginal rate of tax on income up to €70,044 will fall to 48.75%. This is the fourth Budget in succession in which this marginal rate has been reduced.

And I am introducing a small but important increase to the ceiling of the second USC rate band, from €18,772 to €19,372.

This will ensure that the salary of a full-time worker on the increased minimum wage of €9.55 per hour will remain outside the higher rates of USC.

Finally, I have also extended, for a further 2 years, the relief from the higher rates of USC which is available to medical card holders with income up to €60,000.

The point at which an income earner enters into the higher 40% rate of income tax will rise next year by €750 per annum. 

This will increase the entry point for single taxpayers from €33,800 to €34,550, and for married-one-earner families from €42,800 to €43,550.

 

Encouraging small enterprise

I am conscious of the challenges facing small and growing businesses around the country due to the changing international environment. 

I am introducing two measures in this Finance Bill to support this vital and vibrant sector of our economy.

Firstly, building on the progress made in the last two Budgets, I am providing for a €200 increase in the Earned Income Credit, bringing it to €1,150 per year from 2018. 

This increase will be of benefit to over 147,000 self-employed individuals generating economic activity across the country.

Secondly, research has shown that Employee Financial Participation can be effective in increasing competitiveness and helping companies to attract and retain staff in a competitive labour market.

Therefore this Bill provides the details of the new Key Employee Engagement Programme announced in Budget 2018, which will support small to medium enterprises in their efforts to attract and retain key employees in a competitive international labour market.

This scheme will facilitate small to medium enterprises in providing key employees with a financial incentive, in the form of share options, linked to the success of the company.

 

Public Health and the Environment

In support of the climate action strategy set out in Ireland’s National Mitigation Plan, the Bill provides for a 0% rate of benefit-in-kind on electric vehicles.

While this relief is provided for an initial period of one year, it is my intention that the zero rate will remain in place for a period of time, a minimum of three to five years, sufficient to incentivise the uptake of electric vehicles or EVs.

A comprehensive review of benefit-in-kind on vehicles will take place in 2018 and it is expected that this review will set out proposals for longer term benefit-in-kind relief for electric vehicles as well as informing decisions for Budget 2019 more broadly. 

To further support this measure I am exempting electricity used in the workplace for charging vehicles from benefit-in-kind. 

I am also introducing a number of measures in support of public health.

As announced in the Budget I am introducing a tax on sugar-sweetened drinks in April of next year, subject to approval from the European Commission, to coincide with the introduction of a similar tax in the UK. 

The tax will apply to non-alcoholic, water-based and juice-based drinks which have an added sugar content of 5 grams per 100 millilitres and above.

Sugar-sweetened drinks with less than 5 grams of sugar per 100ml will be outside the scope of the tax.

If the sugar content is 5 grams or more but less than 8 grams per 100ml a tax of 20c per litre will apply and for sugar-sweetened drinks with a sugar content of 8 grams or more the rate will be 30c per litre. 

The introduction of a tax on sugar sweetened drinks will contribute to the broader public health strategy to tackle obesity levels in Ireland, particularly among younger people.

Since the announcement of the tax in Budget 2017 there are indications that manufacturers of sugar sweetened drinks are reformulating their products to avoid the tax.

This is to be welcomed and is a sign that this measure is having a positive effect even before its introduction.

I have also increased the VAT rate on sunbed sessions from 13.5% to 23% in line with the Government’s National Cancer Strategy and in recognition of the clear evidence of a link between sunbeds and skin cancer. 

 

Stamp Duty

In 2011, Stamp Duty was reduced on non-residential property to 2 per cent to encourage investment in the non-residential sector.

It was successful and with the commercial property market in particular performing strongly again it was opportune to increase the rate in order to encourage the construction industry to focus resources elsewhere.

For Budget 2018, I announced an increase in the stamp duty rate for all non-residential property transactions, including agricultural land, from 2% to 6%.

To encourage the development of residential homes, a refund scheme will be introduced where certain criteria are met and I will provide full details of this measure at Committee stage.

I am mindful that non-residential property includes agricultural land and how this measure impacts on the farming community, particularly families.

The Bill provides for certain measures the address this. 

Firstly as announced on Budget Day, I am extending consanguinity relief for another 3 years and fixing the stamp duty rate applying under that scheme at 1%.

In addition I have decided the age rule for the consanguinity relief will be removed. The question of an age limit will be revisited when the measure itself comes up for review towards the end of 2020.

This means that it will be possible for all gifts and sales of farmlands to closely related family members, who do not qualify for the 100% exemption available under the Young Trained Farmer scheme, to benefit from consanguinity relief at a stamp duty rate of 1% thereby protecting the position of succession within farm families.

 

FINANCE BILL 2017 – SECTION BY SECTION

I will now take you through the Finance Bill but Deputies will appreciate that in the limited time available to me I cannot describe every single section in as much detail as I might like.

 

Part 1 of the Bill deals with Universal Social Charge, Income Tax, Corporation Tax and Capital Gains Tax.

Sections 2, 3, 4 and 5 provide for the Income Tax and USC changes that I have already outlined, in addition to the €100 increase in the home carer tax credit to €1,200 per annum.

Section 6 provides for the tapered extension of Mortgage Interest Relief for existing recipients for three years. 

Section 7 provides for the introduction of a 0% rate of benefit-in-kind on electric vehicles and also provides for a tax exemption from benefit-in-kind when vehicles are charged in the workplace, as I have already set out.

Section 8 inserts a new section, section 112AA, into the Taxes Consolidation Act 1997 (or TCA as it is usually known).

This section provides that where an employee of a health or dental insurer, or of a tied health insurance agent, receives a health or dental insurance policy in the course of their employment, any discount received on the policy shall be a taxable emolument for the employee.

Section 10 provides for the introduction of a new relief, the Key Employee Engagement Programme (KEEP), which I have already described.

Section 11 relates to the scheme for accelerated capital allowances for energy efficient equipment. 

The Accelerated Capital Allowance scheme is designed to improve energy efficiency among Irish companies and sole-traders and assist Ireland in meeting our national targets and both binding and non-binding EU targets on energy savings.  

On foot of a review performed by my Department, I am extending the end date of the scheme to 31 December 2020. 

Section 12 provides that pre-letting expenses incurred on a residential premises that was vacant for 12 months or more may be allowed as a deduction against rental income from that premises.

This is a time-limited relief and the relief will be clawed back if the property ceases to be let within 4 years. 

Section 14 makes two amendments to the tax treatment of life assurance funds.

The first amendment provides that where the life policy is assigned to a Section 110 company which has acquired the mortgage, it will not trigger an exit tax charge. 

This change mirrors the treatment of the assignment of a life policy as security for a debt to a financial institution.

The second amendment provides that where the life company incurs foreign tax in respect of its policy holder business, the life company may not claim double tax relief for that tax against the Irish tax arising on its non-policy holder business.

Section 15 provides for Investment Undertakings to supply financial statements annually to the Revenue Commissioners. 

It is proposed to require for the financial statements to be in iXBRL, which is a computer language that allows the presentation of financial information in a computer readable format and which allows for more effective risk analysis by Revenue.

This is in line with the format that most companies are required to use. 

The obligation to provide the iXBRL financial statements will be brought in on a phased basis through regulations made by the Revenue Commissioners, with my consent.

Section 16 makes a number of technical amendments to the Irish Real Estate Fund or IREF regime, introduced by Finance Act 2016. 

In line with the treatment to other pension funds, this section provides that IREFs need not operate withholding tax on payments to Approved Retirement Funds, Approved Minimum Retirement Funds and vested Personal Retirement Savings Accounts.  

I would also like to flag to the House that I intend to bring forward amendments at Committee Stage regarding the 5-year CGT exemption for IREFs.

The amendments also clarify that sub-funds may make a declaration in respect of unit-holdings in other sub-funds of the same umbrella scheme and provides for advance clearance procedures to deal with a situation where a full refund of any tax withheld would be made.

The section also provides for Markets in Financial Instruments Directive or MiFID regulated intermediaries to make a declaration on behalf of pension funds, charities and credit unions. 

Section 17 makes a minor amendment to section 110 of the Taxes Consolidation Act 1997 – or TCA-   to include shares that derive their value from Irish land in the definition of specified mortgages.  

The ability of companies which are taxed in accordance with section 110 to deduct interest against their Irish property profits was restricted in Finance Act 2016. 

This section expands the type of Irish property profits to which that restriction applies.

Section 18 is a technical amendment to the loss relief provisions that apply where a company has claimed relief under the Knowledge Development Box, or KDB. 

It ensures that the amount of relief that can be claimed for a loss incurred in the KDB trade cannot be greater than the loss itself. 

At present, the legislation restricts the amount of loss which can be offset against other income, it fails to reduce the amount of the loss which can then be carried forward. 

A technical amendment is required to repair this unintended consequence.

Section 19 makes a number of amendments to section 76A of the TCA relating to the replacement of former Irish GAAP with current Irish GAAP accounting standards.

Section 20 amends section 247 of the TCA to provide for relief for interest on a loan used to acquire, or in certain circumstances lend to, a holding company that indirectly holds ordinary shares in a trading company through one or more intermediate holding companies. 

Section 247 of the TCA currently provides relief for interest where the loan is applied in acquiring or lending to a holding company that holds shares directly in a trading company. 

The changes introduced by this section have been operated administratively by the Revenue Commissioners. 

The changes reflect and clarify the extent to which the administrative practice has been operated.

As a result of the changes to section 247, consequential changes have been made to sections 243 and 249 also.  

The changes to section 249 ensure that an investing company will be deemed to recover capital where, subject to exceptions, an intermediate holding company recovers capital from another company.

Section 21 provides for the Budget Day announcement regarding an 80% limit on the quantum of relevant income against which capital allowances for intangible assets and any related interest expense may be deducted in a tax year. 

This will ensure some smoothing of corporation tax receipts over time.

Sections 22, 23 and 24 provide respectively for amendments to be made to sections 29, 626B and 980 of the TCA.

These sections are being amended to address certain Capital Gains Tax and Corporation Tax avoidance practices that Revenue have identified and which are being addressed in the Bill.

Section 25 proposes an amendment to section 604B of the TCA – “Relief for farm restructuring”.

The European Commission has introduced requirements for the publication on a central website of details of any State aid granted on or after 1 July 2016, if it exceeds certain thresholds.

Currently, Revenue is not in a position to publish this information in the case of the CGT farm restructuring relief, as the existing legislation does not require the necessary information to be collected as part of tax returns in order to have it supplied to the Commission.

This is being corrected by these proposed amendments to 604B.

Section 26 provides for an amendment to extend the availability of capital gains tax group relief to companies in countries with which Ireland has a double tax agreement. 

This amendment puts capital gains tax groups on an equal footing with loss groups and will legislate for existing Revenue practice.

Section 27 provides exemptions from Capital Gains Tax for those availing of compensation under the 2017 Voluntary Homeowner Relocation Scheme administered by the OPW.

The amendment applies to compensation received on or after 19 October 2017.

Section 28 provides for changes to section 604A of the TCA, known as the 7-year CGT relief.

As I announced in Budget 2018, I propose that, subject to this amendment, any eligible asset purchased in the qualifying period, which ran from 7 December 2011 to 31 December 2014, can be sold at any time between the fourth and seventh anniversary of its purchase and enjoy a full relief from CGT.

Sales made before the fourth anniversary will receive no relief, whilst sales made after the seventh anniversary will continue to enjoy the tapering relief previously provided for.

I believe this measure will contribute to a freeing up of development land and residential properties purchased in the qualifying period, the sale of which might otherwise have been delayed until the seventh anniversary of their purchase.

Sections 29 and 64 address my Budget announcement that I intend to allow the leasing of agricultural land for solar panels to be classified as qualifying agricultural activity for the purposes of specific Capital Acquisitions Tax and Capital Gains Tax reliefs with certain conditions.

Agricultural Relief from Capital Acquisitions Tax and Retirement Relief from Capital Gains Tax will be amended to allow solar panels on agricultural land to be considered qualifying assets for these reliefs.

The amount of farmland that could be used for solar panels will be restricted to 50 per cent of the total farm holding.

This condition is to ensure that genuine agricultural activity will continue to be carried out on the farm maintaining the overall objective of agricultural relief in particular.

 

Part 2 of the Bill deals with Excise.

Sections 30 to 42 and Schedule 4 give effect to the Budget Day announcement of the introduction of a tax on sugar sweetened beverages, which I have already described.

Section 44 gives effect to the increase in the rates of Tobacco Products Tax, which came into effect on Budget night.

This measure is expected to raise €64 million in a full year.

Section 46 will make two minor amendments to substitute fuels legislation introduced in the Finance Act 2016 to ensure consistency and protect the revenue base by clarifying that a relevant product is “a substitute fuel or an additive”.

Section 47 amends the Diesel Rebate Scheme to ensure that a qualifying road transport operator, who is regarded as an undertaking in difficulty, is not eligible for the tax refund. 

This measure is to ensure compatibility with State aid guidelines.

Section 48 will amend the definition of a Category A and B vehicle and insert a new bodywork code definition so that the preferential rate intended for commercial vehicles will be restricted to those vehicles that are genuinely used for commercial purposes.

Section 49 will ensure that the amount of VRT repaid under the Export Repayment Scheme cannot exceed the amount of VRT originally paid on the vehicle at import.

 

Part 3 of the Bill deals with Value-Added Tax.

Section 51 increases the VAT rate on sunbed services from 13.5% to 23% from 1 January 2018, in recognition of their link to skin cancer. 

Section 52 updates the VAT exemption on education services to ensure that all bona fide vocational training and retraining continues to be exempt from VAT. 

Part 4 of the Bill deals with Stamp Duties.

Section 55 amends Schedule 1 to the Stamp Duties Consolidation Act 1999 to give effect to a number of measures.

The rate of stamp duty applicable to conveyances and transfers of non-residential property is increased from 2% to 6% as of 11th October 2017. 

Transitional provisions apply for purchasers with binding contracts in place before Budget day 11th October and where the instruments for the transfers are executed before 1 January 2018.

The end date for consanguinity relief is extended for another 3 years to 1 January 2021 while the upper age limit of 67 years for availing of this relief is removed and the rate of stamp duty where consanguinity relief applies is being fixed at 1%.

In relation to residential leases, the threshold above which leases are chargeable to stamp duty is increased from the current €30,000 to €40,000 per annum.

This higher threshold should ensure that the vast majority of renters will not be liable to stamp duty.

Section 56 makes a number of technical amendments to the Stamp Duties Consolidation Act 1999 to align that act with the other tax acts in relation to the delegation of functions to Revenue officials.

Section 57 provides that the Housing Agency will be exempt from stamp duty on land or buildings purchased or leased.

This is important in the context of the Housing Agency’s role under “Rebuilding Ireland” in the delivery of housing and housing services.

Section 58 makes two amendments to stamp duty reliefs for young trained farmers which are designed to take account of EU State Aid requirements.

The first amendment places on a statutory footing the conditions that a young trained farmer must submit a business plan to Teagasc and must come within the EU Commission definition of “micro, small and medium enterprises.”

The second amendment allows Revenue to provide information to the Minister for Agriculture, Food and the Marine in relation to an exemption from stamp duty to leases on farmland.

This information is required for compliance with EU Regulations.

The Companies Act 2014, which came into effect on 1 June 2015, consolidated and amended existing company law statutes. 

The main changes affecting the Taxes Consolidation Act 1997, the Stamp Duty Consolidation Act 1999 and the Capital Acquisitions Tax Consolidation Act 2003 related to company structures and the new streamlined procedures for the merger and division of companies.

The Finance Bill also provides for updating the referencing in the Taxes Acts and the insertion of provisions in the Taxes Acts to ensure that the intended tax consequences of a merger or division in Companies Act 2014 are provided for and do not have an unintended impact.

This is addressed by means of Sections 59, 60, 73, 74 and 75.

 

Part 5 of the Bill deals with Capital Acquisitions Tax, or CAT.

Section 62 provides for an amendment to section 85 of the Capital Acquisitions Tax Consolidation Act 2003.

That section of that Act already provides for a CAT exemption on the inheritance of certain retirement funds to prevent a double tax charge on the same event – i.e. income tax and CAT where the inheritance is taken by a child who is over 21 years of age.

Section 85 now needs to be amended to remove the potential for such a double charge in the case of Personal Retirement Savings Accounts and Retirement Annuity Accounts that were not vested on the death of the disponer after the age of 75.

Section 63 makes a number of minor amendments to the dwelling house exemption from Capital Acquisitions Tax.

The changes clarify that, firstly, a liability to inheritance tax will not be triggered where a donor dies within two years of making a gift to a dependent relative and, secondly, in the case of both gifts and inheritances, in order to qualify for the exemption, a property transferring to a dependent relative does not need to be the principal private residence of the disposer.

This is line with policy changes made to the operation of the dwelling house exemption in last year’s Finance Act.

I have already described Section 64 with Section 29.

Part 6 of the Bill deals with miscellaneous matters.

Section 66 makes a technical amendment to section 122 of the TCA to ensure the provision operates as intended and to prevent certain tax avoidance opportunities in relation to employer-provided loans.

Section 67 and Schedule 3 make minor amendments to a number of appeals-related provisions in the TCA. 

Section 69 provides for a number of largely technical changes relating to the PAYE Modernisation project.

It is the most significant review of the PAYE system since its introduction in the 1960s and will result in a move to a real-time PAYE system from January 2019.

Section 71 introduces two amendments to the domicile levy legislation found in section 531AA of the Taxes Consolidation Act 1997.

The amendments proposed ensure, firstly, that capital allowances and losses are not allowed as a deduction for the purpose of the world-wide income test.

Secondly, there is a technical amendment to delete the term “final decision” from Section 531AA as it conflicts with section 531AC of that Act – “Credit for income tax paid”. 

These amendments will strengthen the legislation, thus reducing the number of domicile levy appeals and improving compliance, as well as serving to protect tax revenue. 

Section 72 is the first step in the legislative procedure required to give effect in Irish law to the OECD BEPS Multilateral Instrument. 

Ireland signed the Multilateral Instrument on 7 June 2017 along with over 60 other countries. 

The Instrument provides a mechanism for countries to transpose recommendations made by the OECD BEPS project into existing bilateral tax treaties. 

Further legal steps will be needed before Ireland’s ratification of the Multilateral Instrument is completed and these steps can begin once this Bill is enacted. 

 

CONCLUSION

There are still a small number of matters under consideration that I may bring forward at Committee Stage.

I will, of course, also give consideration to the suggestions put forward during our debate here over the next few days and in the context of the Finance Bill process and discussions generally.

Thank you. 

ENDS

 

Check Against Delivery

 

Contact: 

Deborah Sweeney, Press Adviser to Minister Donohoe – 086 858 6878

Aidan Murphy [Press Officer, Department of Finance] – 085 886 6667

Press Office, Department of Finance pressoffice@finance.gov.ie – 01 676 0336

Budget 2018: Statement by Minister of State at the Department of Finance, Michael D’Arcy, T.D.

10 October 2017

 

CHECK AGAINST DELIVERY

 

I am particularly pleased, as a former member of this House, to have the opportunity to contribute to the Seanad’s debate on Budget 2018, which the Minister for Finance and for Public Expenditure and Reform presented to Dáil Éireann earlier today.

The overriding objectives of this Budget are to:

  • Safeguard our national finances and help to rebalance our economy;
  • Provide for steady and sustained improvements in people’s lives, and
  • Make sensible and long term investments to benefit us now and into the future.

The budget is framed in the context of a number of existing and forthcoming challenges – but also looks to create opportunities.  

The Budget is also framed to comply with the Confidence and Supply Agreement between the Government and the main opposition party, Fianna Fáil, and it is appropriate to acknowledge their contribution.

As you are familiar with the details of what has been announced by the Minister for Finance and for Public Expenditure and Reform in the Dáil– I will focus on some of the key themes for this budget – rewarding work, supporting housing, improving services particularly in health and education, increasing investment and Brexit.

I will also address recent developments in International Financial Services and also on the cost of insurance.

 

Economic context

The economy continues to perform well – with real growth of 4.3 per cent expected for this year and 3.5 per cent for 2018.    This is perhaps most evident in the labour market. Employment has increased in each of the last 19 quarters and this has been well balanced across both sectors and regions.

Employment, at over 2 million, is at its highest level since 2008.

Unemployment currently stands at 6.1 per cent and is expected to average 5.7 per cent next year – a significant improvement since the peak of over 15 per cent in early 2012.  At these unemployment levels – we are close to what is considered full employment in Ireland.

 

Fiscal policy

This budget delivers the Government’s long standing target of balancing the books in structural terms next year– by reaching the Medium Term Budgetary Objective – better known as the MTO.

Adhering to our budgets and ensuring continued growth will achieve a reduced debt ratio and will build the resilience of both the economy and the public finances.

The Rainy Day Fund, for which further details were announced today, represents a further important element in this strategy.

 

BUDGET 2018 MEASURES

REWARDING WORK

The Government is firmly committed to ensuring that that work is rewarded.

The point at which an income earner attracts the higher rate of income tax is therefore being increased next year by €750 per annum – raising the entry point for single earners to €34,550. This represents further progress towards ensuring that people on average wages do not pay income tax at the higher rate.

Changes have also been announced to the USC, with targeted reductions in the rates but no narrowing of the base. The lowest rate is reduced by a half per cent to 2 per cent and the ceiling raised to ensure that full time employees on the national minimum wage do no pay the upper rate of USC. 

The reduction in the 5 per cent rate to 4.75 per cent will reduce the top marginal tax rate for those on incomes up to €70,444 to 48.75 per cent.

There are also a number of initiatives to assist small and medium enterprises to deal with the international challenges.

The earned income tax credit is being increased by a further €200 to €1,150 per year from 2018. This will benefit over 147,000 self-employed individuals generating economic activity across the country.

In addition, a new Key Employee Engagement Programme, KEEP, has been introduced to help small and medium enterprises to attract and retain key employees in a competitive International labour market, by providing for an advantageous tax treatment on share options.

The home carer credit is being increased by €100 this year to €1,200 per year assisting over 80,000 families where one spouse works primarily in the home to care for children or the other dependants.

A working group is being established to plan, over the coming year, the process of amalgamating USC and PRSI over the medium term.

 

CORPORATION TAX

The area of Corporation tax has seen substantial reforms in recent years, and Ireland has played its full part.  Ireland offers a stable and competitive corporation tax system, which is internationally recognised as one of the most transparent in the world. 

We are very clear that the 12.5 per cent tax rate is, and will remain, a core part of our offering. You will be aware that the Seamus Coffey Report, published by the Minister for Finance last month, set out a road map for a number of reforms.

One of the recommendations of the report – relating to capital and interest allowances for intangible assets – is being introduced with effect from midnight tonight.

The Minister has announced a consultation process as part of updating the international tax strategy.

 

INVESTMENT

The Budget outlines a number of important developments for investment   with the allocation for 2018 being increased by €790 million. 

Total capital expenditure will more than double between 2015 and 2021 – from €3.7 billion to €7.8 billion. This will make Ireland’s public investment levels among the highest in the E.U. and will enable critical bottlenecks to be addressed.

Taking a longer term view, the publication of the National Investment Plan and the National Planning Framework later this year will allow us to identify where we should target resources and capacity to support sustainable growth.

 

HOUSING

The Government’s continued prioritisation of housing is clearly evident in this budget. The allocation of €1.83 million for housing in 2018 will support the continued implementation of the Rebuilding Ireland Action Plan and the new initiatives and targets arising from the review of this plan. 

The increase of €149 million in the allocation for the Housing Assistance payment will enable 17,000 additional households to be supported and accommodated in 2018.  Increased funding for homelessness services will support the provision of emergency accommodation and other supports to those who need them.

Additional funding of €500 million is being provided for direct building of an additional 3,000 social housing units to bring the Rebuilding Ireland target of 50,000 units by 2021. It is expected that 3,800 new social housing units will be delivered by local authorities and approved housing bodies next year.

 

HOUSING FINANCE AND THE PROPERTY MARKET

Further measures have been announced to support an increase in the supply of housing in the coming years.  These include making up to €750 million of the Ireland Strategic Investment Fund available for commercial investment in housing finance, changes in relation to stamp duty on commercial property, the vacant site levy and the new deduction for pre letting expenses.  

 

PREPARING FOR BREXIT

It is clear that Brexit is one of the most significant challenges we face. It will bring with it permanent changes in our trade patterns.

As it represents a structural change – it is important that we respond appropriately. The Minister for Finance has announced a Brexit loan scheme to assist has Small and medium businesses to undertake the innovation and sourcing of new European and international markets that will be needed in response to Brexit.

This loan scheme, developed in conjunction with the Tánaiste and Minister for Business, Enterprise and Innovation, and the Minister for Agriculture, Food and the Marine, will provide up to €300 million at a competitive rate to SMEs, including food businesses which are uniquely exposed to the UK market, to help them with their short term working capital needs.  

In addition, the budget for the Department of Business, Enterprise and Innovation will enable the recruitment of a further 40 staff across the Department and enterprise agencies to bolster our ability to proactively respond to the challenges and opportunities arising from Brexit.

The retention of the 9 per cent VAT rate for the hospitality will help mitigate the Brexit impact on the tourism and hospitality sector, particularly outside Dublin.

 

HEALTH

An effective health service is essential to our wellbeing.  This budget provides additional funding of €685 million for the sector, an increase of 5 per cent. Health funding is now at record levels.  This will support the recruitment of some 1,800 additional front line staff.

It will also provide for an increased allocation to the Access Plan which will ensure that patients can avail of the medical care they need in the most appropriate setting for them.

As part of the Access Plan funding for the National Treatment Purchase Fund has almost trebled. Prescription charges for medical card holders will be reduced. 

Additional funding is provided for primary care.  An increased capital allocation will permit investment in critical health infrastructure including the National Children’s Hospital, and a range of primary and community care schemes.   With the level of resources now being provided – a focus on value for money in the health sector is essential.

Health policy is being supported by increased taxes on tobacco and sun beds, and the introduction of the sugar tax. 

 

EDUCATION

Education is an important foundation for our society and for the economy.

The increased allocation in this year’s budget will provide for additional teaching posts, reduce the primary pupil teacher ratio and increase the number of Special Needs Assistants.  In addition, the National Training fund levy is being increased provide additional funding to the further education sectors next year. Additional capital will address the infrastructure needs of higher and further education sectors.

 

TACKLING CRIME

The Government’s commitment to dealing with crime is evident in the provision of additional resources for the recruitment of an additional 800 Gardaí and 500 civilians during 2018.  

However, this increased spending is contingent upon a commitment to drive reform throughout the organisation. 

 

SOCIAL PROTECTION

Fairness is important at all times particularly for the more vulnerable members of society.   All weekly social welfare payments, including disability allowance,  carers allowance, jobseekers allowance and benefit and the State pension, are being increased by €5 per week from the last week in March. 

Measures have also been announced to facilitate working families in receipt of One Parent Family payment, Jobseekers transitional benefit, the Family Income Supplement and the qualifying Child payment.

 

OTHER INITIATIVES:

This budget has introduced a broad range of measures – I have touched on some of them.  And, at the request of the Seanad Leader’s Office, to facilitate more time for debate in the Chamber I will not elaborate on their detail.

However, significant increases were announced for the Child Care, Child protection, and tackling crime along with measures for the Arts, Climate Change, and Agriculture and Food and Rural Development, all of which will bring about real progress. 

 

INTERNATIONAL FINANCIAL SERVICES

Ireland has a strong track record in winning Foreign Direct Investment and one of the key pillars of this success is the growth of International Financial Services (IFS) over the past three decades.

 

IFS2020

This Government is fully aware of how competitive the global financial services environment is, and launched the International Financial Services Strategy 2020 or ‘IFS2020’ in March 2015 in response. 

IFS2020 aims to grow the numbers employed in the sector by 30% to 45,000 over the five-year period to 2020.  I am pleased to say we are well on track. By end-2016, there was a 13% growth in employment since 2015 with around 40,000 now employed across 400 indigenous and multinational firms.

 

IFS in Regions

The industry is nationwide with 30% of jobs outside Dublin in locations such as Donegal, Galway, Limerick, Cork, Kerry, Louth, Kilkenny and Wexford.

As part of my role as Minister of State for Financial Services and Insurance, I have undertaken a number of regional outreach visits and witnessed first-hand the attractiveness of Ireland’s regions for International Financial Services.

 

Opportunities

Ireland will continue to compete for investments in the International Financial Services sector.  A number of firms have already announced the creation or expansion of operations here.

Ireland is a fully committed member of the European Union and we will be the only English-speaking common law jurisdiction in the EU after the UK withdrawal from the EU.

 

INSURANCE

The recent surge in non-life premiums particularly on the motor side has had a significant impact on society as a whole as many people struggle to afford what is, after all, an essential requirement for day-to-day living.

While average motor insurance premiums have begun to stabilise this year, prices increased by almost 70% from 2011 to their peak in July 2016.

It is against this backdrop that the Cost of Insurance Working Group was established by the Minister of Finance last year.

This resulted in the publication of the Report on the Cost of Insurance.   The recommendations include the establishment of a national claims information database and the establishment of a Personal Injuries Commission.

Since the publication of the Report, the responsible bodies have been implementing the actions assigned to them in the detailed Action Plan.

 

Second phase of the Working Group: Employer and Public Liability

The second phase of the Working Group, which I chair, is considering the impact of the cost of Employers Liability and Public Liability insurance on the competitiveness of particular business sectors.

Given the complexity of issues in this area, it is expected that a final report will be published during the autumn/winter term, rather than the end of September as originally indicated. 

 

CONCLUSION

In conclusion, while the overall fiscal and economic backdrop is positive, we nevertheless face challenges both domestically and internationally.

The government is addressing these challenges within the available resources available– domestically in relation to housing, continued improvements in services notably in Health and Education, rewarding work and making the investment necessary to support a growing economy.

On the international challenges –additional resources are provided to address Brexit and to increase our footprint in the broader global stage. We are also addressing our infrastructure requirements through the capital programme. 

We must also look to opportunities and I have outlined our approach in relation to financial services. I have also outlined the continuing progress in reducing insurance costs – which affect both households and businesses.

This budget has increased the amount of resources available and has continued the pattern of making steady incremental progress on a broad range of issues.  It will bring about improvements in our services, and in opportunities in our country. I commend the Budget to the House.

ENDS

 

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Minister Donohoe’s Budget 2018 Speech

Opening Address by Mr Paschal Donohoe, T.D.

Minister for Finance and Public Expenditure & Reform

to the Budget Oversight Committee

27th September 2017

 

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Chairman,

At the outset, I wish to thank the Committee for the invitation to appear here today as part of your ex-ante scrutiny of Budget 2018 and I look forward to a fruitful and positive exchange.

During the course of the summer, two main elements of the pre-budgetary process took place with the National Economic Dialogue being held in June and the publication of the Summer Economic Statement the following month.  The NED allowed for a positive, open and inclusive exchange to take place between a wide range of stakeholders on the differing economic perspectives in advance of this year’s Budget.  In line with last year’s arrangements, the Department of Public Expenditure and Reform also published its Mid-Year Expenditure Report in July and the Department of Finance circulated the Tax Strategy Group papers.  These elements all form an important part of the pre-budget cycle which has led to a more open, transparent and collaborative approach to the annual budgetary process.

Last year, my predecessor published the Finance Bill shortly after Budget Day and it is also my intention to publish the Finance Bill as soon as possible after Budget day again this year and not later than two weeks after the Budget. 

The economy continues to perform strongly, as evidenced by developments in the labour market and highlighted in the Summer Economic Statement.  Our GDP growth last year was 5.2 per cent, the highest rate in the European Union with the European Commission forecasting that the Irish economy will be among the fastest growing economies in the EU over this year and next. 

Unemployment has fallen from a peak of over 15 per cent to 6.1 per cent in August, and is on track to fall below 6 per cent by the end of this year.  Employment has also increased by over 230,000 from its lowest point – which translates into a 13 per cent increase.  Domestic demand is likewise growing strongly, with private consumption up 10 per cent over the last three years.  It now exceeds its pre-crisis peak.

Turning to the public finances, tax revenues at end-August are just 0.7 per cent or €209 million below profile.  This equates to a solid year-on-year increase of 4.9 per cent and we are still targeting an overall annual tax take of €50.6 billion for 2017. 

Ireland’s debt levels are still high and we are committed to continuing to reduce this debt burden further as part of our budgetary strategy.  As such, we must be cognisant of the potential risks to the economic outlook, in particular from the external environment and to plan accordingly.

In this context, the Government is maintaining its commitment to establishing a rainy day annual fund with an annual contribution of €500 million per annum, beginning in 2019.  I will be circulating a consultation paper to the Oireachtas shortly to seek views on a range of issues.  These issues include the nature or purpose of the fund, how to provision the fund, accessing the fund, the maximum size of the fund and so on. 

In terms of the fiscal position, I have stated on previous occasions that our fiscal objective for next year is to achieve a balanced budget in structural terms.  This will mean ensuring that Ireland reaches its Medium Term Budgetary Objective in 2017 by achieving a structural deficit of 0.5 per cent of GDP.  As set out in the Summer Economic Statement, fiscal space available for Budget 2018 will be in the order of €1.2 billion, which will still enable us to reach our MTO and achieve a balanced budget next year.  As you are all aware, only €350 million of this remains to be allocated to specific measures with the rest already spoken for, due to demographics, carryovers from Budget 2017, the Action Plan for Housing and the Lansdowne Road Agreement. 

Turning to expenditure, the Mid-Year Expenditure Report outlines an increase of €2 billion in gross voted expenditure for 2018. This increase of 3½ per cent continues the approach of implementing moderate sustainable increases in public expenditure to facilitate targeted improvements in key public services and infrastructure.

This approach has seen increases for key priority areas. In 2017, the allocation for the Housing programme in the Department of Housing was increased by over €400 million or 50 per cent.

The Health allocation increased by almost €500 million or 3.5 per cent. The allocation for the Department of Children increased by over 15 per cent this year.

One key issue that must be addressed each year is demographic pressures which include additional numbers qualifying for the State Pension and the hiring of additional teachers to address the incremental increase in pupil enrolments. This can often be characterised as the cost of merely standing still. Given the need to meet these costs, and also to enhance public services to meet new priorities, there is a clear need for focus on value for money and policy effectiveness.

This is the context within which this year’s Spending Review was carried out. Unlike previous review processes, where the focus was on identifying spending reductions, the aim of this Spending Review process was to systematically examine existing spending programmes to assess their effectiveness in meeting policy objectives. The spending review operates as a complementary process to the Budget Estimates process. The Spending Review was undertaken over the first half of the year in order to enable the output of the review in each area to feed into the consideration of expenditure proposals for Estimates 2018. 

Investment in public infrastructure is essential to increase the long-run capacity of the economy and to support growth across all regions.The significant progress made in restoring the public finances has enabled Government to increase capital expenditure by a further €4.1 billion over the remaining period of the Capital Plan out to 2021. 

This is in addition to the €2.2 billion already committed to support the delivery of the Action Plan for Housing along with other commitments made in Estimates 2017.

On Budget day I will be announcing the allocation of this approximately €4.1 billion in additional capital expenditure over the period 2018-2021. This reflects a significant planned increase in public capital investment, with public capital expenditure in Ireland more than doubling between 2014 and 2021. As confirmed by the Irish Fiscal Advisory Council in their pre-budget submission, this will result in public investment in Ireland moving to among the highest in the EU.

It is crucial that we don’t repeat the mistakes of the past when capital expenditure was ramped up too quickly leading to inflation and poor value for money. That is why the Government has set out a planned and sustainable increase in expenditure which is based on robust evidence and analysis. 

The Mid-Term Review of the Capital Plan, which was published on 14th September, provides that detailed evidence base. The review includes:

  • detailed submissions by Departments and Offices;
  • an extensive public consultation; and,
  • an Infrastructure Capacity and Demand Analysis completed by the Irish Government Economic and Evaluation Service (IGEES) in the Department of Public Expenditure and Reform.

All of this analysis will be used to inform the allocations at Budget and subsequently for the new 10 year National Investment Plan, in light of the infrastructural deficits identified in the review.  A key priority for the ten year plan will be to ensure the coherence of long-term and strategic sectoral objectives with the planned new spatial configuration in the National Planning Framework. That plan will be announced before the end of the year.

I would like to thank the Committee again for the opportunity to speak here today and I am happy to address any questions you may have. 

ENDS

 

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Perspectives on the Irish banking sector, the economy and the international risks facing Ireland

Speech to MergerMarket Deal Drivers Ireland Conference by

Patrick O’Donovan, Minister of State with special responsibility for Public Procurement, Open Government, and eGovernment at the Department of Public Expenditure and Reform

Wednesday 27th September, 2017

 

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Introduction

Good morning everyone. I would like to thank MergerMarket for inviting the Minister for Finance to speak at this prestigious event and send on his apologies as due to diary constraints he is unable to be here today. I am here and am delighted to address several topics which I hope will be of interest.

Today’s event is entitled “Deal Drivers Ireland” and I know you will hear from speakers later this afternoon in relation to the Irish M&A market, technical aspects of executing transactions, IPOs and financing transactions – whether by debt or equity. I will touch on some of these topics from the Government’s perspective. I will also comment on Budget 2018 which is less than two weeks away and our thoughts on corporation tax policy.

 

The Economy

Let me first try to set the scene from a macro perspective by commenting on the state of the Irish economy. The economy and its outlook will have a significant bearing on M&A activity in Ireland and also for Irish companies seeking to expand abroad.

The strong growth in the economy last year, of 5.1 per cent, has continued into this year with annual GDP growth of 5.8 per cent recorded in the second quarter of this year. 

Growth is now increasingly driven by domestic factors, following an initially export-led recovery, as both consumer and business confidence continue to recover.

We are predicting continued growth next year, which will be spread across the economy rather than be concentrated in a small number of sectors as during the Celtic Tiger years.

A good indicator of the health of the economy can be measured in terms of jobs and job creation. In business it is often commented that “cash is king” and I think the equivalent in assessing the strength of the economy is the labour market. This is a rich source of high frequency economic data which can be used to assess, at a point in time and on a trend basis, the underlying performance of the economy.

The latest data, published by the Central Statistics Office last Friday, shows that total employment rose by 2.4 per cent on an annual basis in the second quarter of the year.

What is even more encouraging is the shift from part-time to full-time work, with the number of those now in full-time positions increasing by 77,800 or 5 per cent, year on year.

To put this in context, the number of people in employment is now at its highest level since 2008 and the seasonally-adjusted unemployment rate of 6.1 per cent in August is the lowest rate since the second quarter of 2008 and compares with a high of over 15% in early 2012.  

Importantly, employment growth remains broad based with gains reported in 11 out of 14 sectors.

More broadly speaking, for every 10 jobs lost during the deep recession, 7 have now been replaced.

And in what would be considered an extraordinary thing to say just a couple of years ago, the economy could once again move towards full employment next year.

 

The Banking Sector

There is a symbiotic relationship between banks and the economy as we need our banks to support the growth in the economy and we need our economy to grow to ensure the continued viability of our banks.

We should take a moment to remember the lessons from the past. Prior to the global financial crisis, there is little doubt that with the benefit of hindsight our market, which is small in European terms, was overbanked.

The easy availability of wholesale funding from around the world enabled many banks to sacrifice lending standards and pursue unsustainable lending growth in a race for market share and profits.

Over-confidence and a lack of oversight and challenge both internally and externally also contributed to the boom and subsequent bust.

It is obviously more complicated than that but broadly speaking this is what happened.

The financial crash, when it happened here, unfortunately broke international records and not in a good way.

Ireland was forced to take decisive action to address our banking collapse through the bank guarantee, the cumulative investment of €64 billion into the sector; the establishment of NAMA to deal with problem land and development loans; the merging and downsizing of banks; and the liquidation of IBRC.

The banks themselves also took action with significant deleveraging, staff cuts, branch closures and, in many cases, the forced sale of foreign businesses which provided diversification.

Banks cut headcount and branches as they sought to realign costs with significantly reduced income and in recognition of changing consumer behaviour.

Frontline staff were redeployed to deal with mortgage arrears and problem loans.

Boards and executive management teams were significantly changed over a period of several years. A new fitness and probity regime was introduced which, if you talk to any bank chairman in Ireland, is a very onerous process. Rightly so.  

A new European regulator, the SSM, commenced operations in late 2004. But the regulatory changes in Ireland started even prior to that with significant changes in the Irish Central Bank in terms of intrusive regulation by higher calibre people who could more effectively challenge the banks.

The result of this collective effort is that our banking system is now smaller, simpler and stronger with both Bank of Ireland and AIB profitable since 2014.

I welcome the fact that AIB is back paying dividends and that Bank of Ireland recently signalled that it intends to resume payment of dividends.

The sector has come a long way from the days when it was reliant on Central Bank funding and State support for its survival.

However, I recognise that we have not solved every problem.

For instance, there are still many customers who struggle with excessive debts and those that find it challenging to access the credit that they need at a price they believe makes sense. I would encourage such customers in the first category to engage with their lender if they have not already done so. For those seeking credit, shop around. Ultimately banks exist to lend but it is important that underwriting standards are maintained. 

 

The recent IPO of AIB

Since there will be a session on Irish IPOs later this afternoon, I thought it would be of interest to provide the government’s perspective on the recent IPO of AIB.

Taxpayers invested €20.8 billion in AIB and government policy is to recover this investment in full over time.

The IPO was two years in the planning and as it turned out is currently the second largest IPO in the world, and the largest in Europe, this year.

It was also the largest IPO on the London Stock Exchange since 2011.

The bank obtained premium listings on both the London and Irish Stock Exchanges and many of you present will recognise the importance of this. 

Therefore in global equity capital market terms this was a very significant transaction which showcased Ireland and the remarkable recovery of the Irish banking sector to a global audience of sophisticated institutional investors.

Our advisers were a mixture of local and international firms who worked well together under the direction of the Minister and his officials to deliver a positive outcome for the State.

Our sale of shares raised €3.4 billion for the State and was used for debt reduction as we borrowed most of the money we invested in the banks in the first place.

Therefore we have €3.4 billion less debt which, using our average debt funding cost of 3%, implies an annual interest saving of about €100 million.

As I mentioned this IPO was almost two years in the making and was only possible due to the progress made by the economy and the bank itself along with market conditions as these factors all contribute to valuation.

The bank, my officials and our selling syndicate carried out over 1,400 investor meetings globally. 

The quality of the order book was very high and allocations were made to approximately 350 global institutional investors with the Top 15 investors all categorised as either “long-only” investors or sovereign wealth funds.

As you may recall, we also provided for a retail offer.

This was important to the Government as we felt it only fair and equitable that taxpayers were afforded the opportunity to buy stock at the same price as the institutional investors.

One of the many lessons from the financial crisis is that share prices can go down as well as up so the retail offer was conducted through several stockbroking firms so that professional advice was available if required.

The size and quality of the institutional order book enabled us to secure an excellent valuation for the State and a successful start and top class share register positions us well for future sell-downs of AIB in the coming years.

Taking our three investments in AIB, Bank of Ireland and PTSB in aggregate, I am confident that we will recover in full the taxpayer investment of €29 billion over time.

 

Challenges facing the Economy

Having commented on the economy, the banking system and the recent AIB IPO in a positive light I should assure you that we are by no means complacent. There are challenges ahead which we have to plan for to the extent we can.

In particular the UK’s decision to leave the EU and the ongoing changes in US policy may significantly impact the Irish economy.    

The recent appreciation of the euro-sterling bilateral rate will, if sustained, pose significant challenges, particularly for agri-food, tourism and areas of our economy that are sensitive to cross-border trade.

As the depreciation in sterling most likely reflects a structural change in the UK economy, it is essential that the policy response is also structural in nature and, it goes without saying, in line with EU State aid rules. 

Continued market diversification must be part of the policy response, so that dependence on and exposure to the UK market is reduced.

The Government’s trade strategy – Ireland Connected – published earlier this year, sets out a number of measures specifically addressing Brexit related issues, including diversification of markets for indigenous exporters.

In addition to the potential challenges posed by external factors, we must also remain conscious of domestic challenges.

The ongoing issues in the housing market have imposed not just a hugely significant social cost on society but may begin to inhibit the competiveness of the Irish economy, by restricting the mobility of labour and potentially discouraging companies from moving here.  

Given these challenges it is vital that;

  • the public finances remain on a sustainable path;
  • we maintain our focus on competitiveness, and;
  • we address the lack of housing supply along with other infrastructural bottlenecks.

As we approach full employment, it is important that we learn from the mistakes of the past and ensure that budgetary policy does not contribute to the overheating of the Irish economy.

The Government is acutely aware of this.  

 

Budget 2018

We are now less than two weeks away from Budget 2018 and as you can imagine there is a considerable amount of work taking place in Merrion Street within both the Department of Finance and the Department of Public Expenditure and Reform.

It has to be acknowledged that the turnaround in our economic fortunes would not have been possible without the difficult choices and sacrifices made by the Irish people.

Minister Donohoe commented on Saturday at the Dublin Economic Workshop that he will do nothing in next month’s Budget to endanger the hard won gains of the last few years.

Sustainable public finances are a pre-requisite for improvements in living standards and for those considering investing in Ireland. 

Our first priority was to correct the excessive deficit – that is to bring the deficit below 3 per cent of GDP – which was achieved in 2015.

The next requirement is to eliminate the structural deficit and broadly balance our books. We will achieve that next year for the first time in 10 years.

Our debt remains high but is reducing as a percentage of our economy and it was very encouraging to see Moody’s upgrade the Irish sovereign last week.

However, an issue of some concern is the fact that actual public indebtedness continues to increase.

Moreover, other metrics such as the ratio of debt-to-GNI-star show a much less rapid reduction in the public debt to income ratio.

For these reasons, the Government will continue to place a premium on debt reduction.

A second priority is to invest taxpayers’ money carefully and with continued reform to deliver the best capital projects, services and targeted income supports.

To deliver more for vital infrastructure like roads, energy and communications.

Or to deliver better health services, faster broadband and a more efficient public transport system.

And to deliver on our promise of more housing, both public and private.

Budget 2018 will see an additional €4.1 billion for capital investment across the next four years.

This will see public capital expenditure increase by over 80% by 2021 to €7.8 billion and will position Ireland above the long-term EU15 average of 3% of GDP by 2021.

Our third objective in Budget 2018 is to make steady and affordable progress in reducing high rates of tax for low- and middle-income earners.

We need to affordably and sustainably move away from a system of personal taxation where those on average incomes pay the top rate of income tax.

My colleague, the Minister for Finance, will in the coming weeks speak to our colleagues in the Government and in the wider Oireachtas about how we can move, in the spirit of consensus, towards progress in this area, while also ensuring our other commitments in terms of tax and spending, as set out in the Programme for Government and the Confidence and Supply Agreement, are met.

The fourth objective we have in Budget 2018 is to support businesses and families to plan for the future.

This means having a long-term vision for this country, not just one that focusses on the short-term.

For that reason, the Government will be publishing a ten year capital plan for our country not long after the Budget which will seek to address the investment, housing and spatial planning issues that we must address if we are to be fighting fit for the future in the decade to come.

 

Corporate Tax

Corporate tax is a topic which often comes up as a topic of interest. Let me be very clear – Ireland remains committed to global tax reform and believes that global solutions are needed to ensure tax is paid by companies where value is created.

That is why Ireland has been a committed participant in, and strong supporter of, tax reform efforts led by the OECD through the BEPS process.

The OECD is already carrying out important research into the digital economy, with the publication of its interim report expected in Spring 2018.

This will provide important input into the ongoing consideration of where value is created in digital business.

Ireland’s position is that it would be best to take action having considered that OECD analysis as a consistent global approach is needed.

Any solution must build on a shared understanding of where value is actually created by digital business.

Because we can no longer speak of “the digital economy”.

Instead, we can speak of an entire economy that is “digitised”.

Applying different rules within the EU to what is being applied globally is likely to result in double taxation and greater uncertainty.

It is also important to note, I hasten to add, that there is no official proposal currently for a change on the way tax policy decisions are taken in the EU.

Under the EU Treaties, for the European Council to move a policy area such as taxation from unanimity to qualified majority voting, it would require a unanimous decision to do so.

The support of the European Parliament would also be required and the Irish Government will not support any change to existing EU voting rights on corporation tax.

 

Conclusion

In conclusion let me finish by assuring you that Ireland is well on the road to recovery as the recovery in the economy and our banking system clearly demonstrate. We are, however, by no means complacent and we recognise the challenges on the horizon. Budget 2018 will be framed with these challenges in mind.

Thank you for your attention and I hope that dealmaking activity in Ireland and by Irish companies abroad continues to increase and that you enjoy the rest of the sessions this afternoon.

ENDS

 

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