I ask everyone to turn off their phones and devices or put them on silent. Before we begin, I wish to explain some limitations to parliamentary privilege and the practice of the House as regards references witnesses may make to other persons in their evidence. Witnesses are protected by absolute privilege in respect of the presentations they make to the committee. This means witnesses have an absolute defence against any defamation actions regarding anything they say at this meeting. However, they are expected not to abuse the privilege and it is my duty as Chair to ensure it is not abused. Therefore, if their statements are potentially defamatory in relation to an identified person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.

I remind members of the constitutional requirement that in order to participate in public meetings they must be physically present within the confines of the Leinster House complex. In this regard, I ask that any member participating via Microsoft Teams confirm, prior to making a contribution to the meeting, that they are on the grounds of the Leinster House campus. Members are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of a person or entity. Therefore, if their statements are potentially defamatory in relation to any identifiable persons or entity, I will direct them to discontinue their remarks. It is imperative that they comply with any such direction.

This afternoon's engagement, with the Irish Fiscal Advisory Council, IFAC, forms part of our post-budget-2026 scrutiny and engagement. I welcome Mr. Seamus Coffey, chair of IFAC and lecturer at the department of economics, University College Cork, and Mr. Niall Conroy, acting chief economist and head of secretariat, IFAC. The committee welcomes the opportunity to engage with them. I thank them for being here today. I now invite Mr. Coffey to make his opening statement.

The council is grateful to the Chair and members of the committee for inviting us to appear before them once again. We value our engagements with the Oireachtas highly and consider these opportunities an integral part of our work.

As an official independent body established under the Fiscal Responsibility Act 2012, the council's mandate revolves around five elements: endorsing and assessing the official macroeconomic forecasts; assessing official budgetary projections; monitoring compliance with fiscal rules; assessing the Government's overall fiscal stance; and assessing if economic conditions have deteriorated. The latter assessment informs our recommendations to the Government as to whether contributions to the two savings funds should be reduced or paused. Our mandate may be expanded in line with a 2024 EU directive that assigns additional tasks to independent fiscal institutions, such as IFAC. This directive must be transposed into Irish law by the end of the year. The focus of the council is on the broader fiscal and macro perspective rather than any individual tax or spending measures.

After each budget, we produce a report that assesses the Irish economy and the public finances. We published our report last month, and this is what we will speak to today.

Ireland's economy continues to perform well. More people are in work than ever before and employment continues to grow. On average, wages are growing faster than prices. As the Irish economy is performing well, it does not require support from budgetary policy. Monetary policy is already providing support that the economy does not need. Interest rates have been halved over the past 18 months.

Ireland's population is going to age significantly in the coming decades. This is partly due to increased life expectancy, which is a major sign of progress in Ireland. An ageing population will have a significant impact on the public finances. It will mean more spending on pensions and healthcare. Climate change will also impact on the public finances. These factors could increase spending by about 6% of national income, or €20 billion in today's money, by 2050. The Department of Finance recently published valuable work on the impact of changing demographics and climate change on the public finances. With a strong economy and known future costs owing to an ageing population and climate change, the Government must now start to prepare seriously for these future costs.

Against this backdrop, budgetary policy is adding money into the economy when it is not needed. The Government is planning on spending most of its corporation tax receipts. This is risky as these receipts are largely unrelated to economic activity in Ireland. While we do not anticipate a sudden fall in corporation tax, it is a volatile revenue source to be basing day-to-day spending on. Only 15% of corporation tax receipts will be saved next year, down from 32% this year. In other words, the Government plans to save just €1 out of every €7 in corporation tax next year. This is a marked shift in policy. It means the public finances are less well prepared for the next economic downturn and predictable budgetary pressures. The Government is budgeting like there is no tomorrow. In budget 2026, there were no budgetary plans beyond next year. Proper planning requires forecasts that go at least five years ahead. Budgeting should be a multi-annual process. Ireland is still budgeting in a year-to-year fashion. Moving to multi-annual budgeting would give Government agencies more certainty over their future funding. The Government is yet to submit a revised medium-term fiscal plan to the European Commission. The programme for Government gave a commitment for this to be published during the summer, but it has yet to happen. Also, the Government has yet to publish any domestic guide or rule for budgetary policy.

Let me highlight five key recommendations the council makes. First, the Government needs to ensure budgetary policy reduces the ups and downs of the economic cycle. This means supporting the economy when it is weak, but it also means showing restraint when the economy is strong. Second, the Government should be running bigger surpluses today and setting more aside into savings funds. Given the strong economy, the Government has an opportunity to prepare for predictable future costs. Third, the Government needs to move away from year-to-year budgeting. Moving to multi-annual budgeting would give Government agencies more certainty over their future funding. This would aid better planning and delivery of public services. Fourth, the Government should set a rule or guide for budgetary policy. At present, there is no effective guide for future budgetary policy. The Government should set out some limits on spending growth net of tax changes. Fifth, the Government should improve how it produces forecasts. The focus should be on general Government measures, which give the most complete view of the public finances. Forecasts in budget 2026 only went 15 months ahead. To aid planning, forecasts should be at least five years ahead.

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

I thank Mr. Coffey.

Before we proceed to questions, I formally thank Roisin Deery for the work she has done here for this committee. She is going on to a new part of her career. On behalf of all the members of the committee, I thank her for the assistance and guidance she has given us. We wish her the very best in her new career. We will have her phone number, so she should not worry about us.

I will now open the discussion to members, beginning with Deputy Farrell.

I thank Roisin. I am sure she is only thrilled that we are doing this.

I thank the witnesses for appearing before the committee, as always. It was interesting to hear their insights. Some of us are under pressure because there is a Bill going through the Dáil at the same time as this meeting. Unfortunately, therefore, we probably will not have as much time to engage as usual.

I want to tease out some of the points in the opening statement to understand IFAC's view. Mr. Coffey said specifically that the economy is performing well and does not require any support from budgetary policy. I want to tease this out because it would be interesting to hear his views on it. We are aware that there are challenges within our economy, because an economy is not just about statistics but also about the people who live within it. Last year, the CSO identified that in-work poverty is 5.9%, equating to approximately 145,000 people who, although in employment, are living below the poverty line. This number increases if you include housing costs. One in five children is living in poverty and 15% of the population is living in poverty. If IFAC is saying the economy is performing well, and if it is accounting for the people who live within it, what is its view on how the economy is working for those in employment but who cannot make ends meet and are back living in poverty?

In overall terms, the assessment is based on where we find the economy in aggregate, looking at things like the unemployment rate, the growth rate and the overall rate of wages growth relative to inflation. Our issue with budgetary policy in recent years is that it has been stimulatory. If we look at the rate of increases in Government spending, they would be beyond what we might term the sustainable growth rate of the economy. This is in the sense that budgetary policy is providing stimulus to the economy when in overall terms the economy does not need it and we have the unemployment rate at 4.5% and wages growing faster than inflation. In overall terms, this means the economy does not need the additional demand that the changes we have seen in Government spending we have seen in recent years has been providing for the economy.

That is not to say that there are not pressures out there at individual household, firm or sectoral level. The Government can seek to address those. When we are looking at the impact of Government budgetary policy on the economy, it is a net measure. If the Government sees areas where it feels additional spending is warranted, it could take demand out of the economy with tax increases to fund it and to put that change in overall impact on the Government finances on the economy on a more sustainable footing. At current rates, we have seen spending growth getting close to double digits. That is not necessarily being funded by additional tax increases. Tax revenue is performing strongly, but in large part, at least in the income tax and VAT side, this is linked to the performance of the economy.

When it comes then to individual measures of where people lie - the Deputy is referring to those at risk of poverty - in Ireland we do not necessarily use a poverty line. This is defined as a household living with a disposable income less than 60% of the national median. What we have seen in recent years is that, thankfully, the national median income has been rising. This means those poverty thresholds are rising. Should we be targeting an at risk of poverty rate of 0%? Well, if we look at European countries, pretty much none have ever recorded a rate below 10%. It is a relative measure. It is important and does give an indication of gaps and differences between different households. If the Government wants to identify areas where additional supports are to be provided, it can absolutely do that. Our concern would be with whether this is being done in a sustainable fashion. In Ireland, we know all too well the pain, particularly on those types of households the Deputy is referring to, in instances where those income supports are withdrawn or reduced. We are all necessarily in favour of the important work these Government services provide, but we want to do it all the time and not just in times of strength. If the Government identifies some of these areas the Deputy highlighted where additional resources should be used, it absolutely has the choice to do that. The concern is to do so on a sustainable footing and not to be in a position in future where they have to be withdrawn.

Some of that clarification is particularly important because he will know as well as I do that if any of us go on a TV show or on the radio what he says in front of this committee, and what he said in his opening statement, is put to us as simple fact. It can be very difficult to actually have a discussion then on issues. I take on board what he is saying and where he is coming from in this regard. Obviously, if we have 15% of our population at risk of poverty, then that is a serious issue. Mr. Coffey said the economy is performing well and does not require any support from budgetary policy, but if we do not tease this out with him, the next thing that will be seen as fact and the actual impact this situation has on people will not be looked at. It is crucially important.

For people at risk of poverty, and for children, and we can look at the number of people looking for vouchers from the Capuchin centre as a prime example of it, these people obviously need impactful budgetary policy. We could not say anything any different.

I am conscious of time and that I do need to be in the Chamber, so I want to ask another question. It concerns the opening statement again. Corporation tax was referred to as "a volatile revenue source to be basing day-to-day spending on". Further detail was gone into in relation to the Government planning to save just €1 out of every €7 of corporation tax next year. Given current spending levels, could Mr. Coffey outline his view on how the tax portfolio could be diversified or strengthened? Has IFAC seen this come from the Government? I know IFAC does not give exact policy measures for the Government to follow, but has this been seen? Has the introduction of a third, higher income tax band to reduce our fiscal exposure been teased out?

On corporation tax, we do see a change for next year. The Government is forecasting corporation tax revenue next year of €34 billion and is planning on running a surplus of around €5 billion. Over 85%, or close to it, of those corporation tax receipts are going into ongoing spending for 2026. There is limited or no one-off spending for 2026, so this is ongoing expenditure, whether on the current or capital side. It is spending the Government intends to continue in future. When it comes to the narrowness of the tax base, this would be a concern. We know the top ten companies pay close to 60% of corporation tax. Work by IFAC colleagues indicated the top three companies within that statistic account for about a third of these huge corporation tax receipts, so this is a very narrow tax base.

When it comes to individual measures, this is not necessarily something the council has a view of. In general terms, we would be in favour of broadening the tax base. It would be a political choice regarding how that is achieved. Would a government look to collect additional income tax on a further higher rate of tax? Ireland does have what would be considered internationally a very progressive income tax system, at least, where a large share of the revenue - I do not have a number to hand - would be collected from what we might term higher earners. That would itself be a narrower base relative to other countries. The Government recently had the Commission on Taxation make a number of recommendations on how the tax base could be broadened across a range of other taxes. These could include income taxes, consumption taxes, property taxes or other areas, and there is scope there to increase tax revenue and to use those sustainable finances and that sustainable funding for expanding Government services. It is, therefore, something that could be done. In broad terms, the council would be in favour of broadening the tax base. If that leads to additional revenue, that would be available for spending and it would not have an impact on the stimulatory or fiscal stance effect of the budgets because money would be taken out of the economy on side to put it back in, with the choice of the Government being where to spend it.

Go raibh maith agat. My time is up. I thank Mr. Coffey.

I thank the witnesses very much for being here. We are still waiting for the publication of the medium-term economic framework. Reports I read in the media this morning suggest this draft framework was going to the Cabinet today, so we can assume it has been adopted by the Cabinet. Has IFAC seen it or was it asked for its advice? If its advice was sought, has the council told the Government in no uncertain terms that it ought to include a net spending rule in it?

We have not seen it either.

That makes several of us.

Indeed, yes. The members are in good company. In truth, regarding what we would like to see in it, one thing we have been calling for consistently is some sort of domestic fiscal rule that has buy-in from people in Ireland and is not simply something there to fulfil European requirements. A number of different aspects could be considered concerning what a desirable rule like that would look like. The previous rule the previous Government had around net spending growth of say 5% seems like a pretty reasonable one. It is something quite easy for people to understand, but it is necessary to design it well in terms of potential escape clauses if there are exceptional circumstances, like very high inflation or other things that could be outside the Government's control. I suppose those would be the key aspects we would be looking for from any domestic fiscal rule that could come into play alongside this medium-term plan that has to be submitted to the European Union.

It is obviously routine that Ministers of Finance meet with the IFAC. The new Minister, Deputy Simon Harris, made great play out of the fact that he met the council early on in his term. In fact, he issued a statement to say, to paraphrase Roy Keane, he was just doing his job. I ant to ask a specific question regarding the meeting that was held. The council says all the time, and it has said it here today, that it is not always necessarily prescriptive, and nor should it be, with the Government in terms of the policy choices it makes. That being said, the council did rip through the Government on its decision to introduce a reduced VAT rate for the hospitality sector. That was for good reason because it was fiscally irresponsible. There was no argument for it. It is absolutely unwarranted and is bananas economics, quite frankly, and a misuse of public funds that are finite given the challenges we have. This happened at the expense of, for example, indexation for working people. They are going to get a surprise when they open their pay packets and read their pay slips at the end of January to find that if they are on €50,000 a year and get a small pay increase, it will be gone and they are actually down money on last year. While the council, then, says it is not prescriptive on specific measures, it did not stop it before the budget from ripping into the Government on that particular choice. When did the council say then to the Tánaiste at that meeting?

The VAT reduction for the hospitality sector was something that did not arise. Yes, it is something we clearly looked at. It is a large measure and one that does have an impact on the economy as a whole and it would be something that we would look at.

We look at particular areas. We do an awful lot of work on corporation tax, given the size of it. The VAT change in the hospitality sector was important. Some of the narrative at the time was it would have an impact on macroeconomic indicators, such as inflation. We took it as a natural experiment. Colleagues did work and looked at changes, both in Ireland and internationally, where these rates had changed. Particularly when the rates are reduced, we do not see a knock-on effect on prices and inflation. It gets baked into the margins of the hospitality firms themselves. It was a large measure. We wondered whether it would have that impact on inflation that some had flagged; our evidence was that it would not.

The meeting with the Minister for Finance was at a time we were finalising the report. We went through some of the key messages we would have gone through here. Some were on the budgeting itself. One criticism we have had over the past number of years is that the Department and the Government have published budgets every October and failed to stick to them as we go through the following year. That may be due to in-year policy changes, which may have merit, but a lot of it has been overruns and inappropriate starting positions. Indeed, for 2025, we are looking at Exchequer spending being about €4 billion higher than was set out in the budget last year. This is not to say we are critical of that level of spending, but if we are going to have spending that is €4 billion higher, it should be in the figures at the start of the year, so that we would have been here last year talking about them. This spending has happened and a lot of it will be baked into 2026. Those were the issues that arose.

There was also the broader economic position, and the strong position the new Minister for Finance finds himself in, in terms of the performance of the economy and of the public finances. Within that, if you have a very strong economy with these bumper corporation tax receipts and are planning on running a surplus of €5 billion for 2026, that suggests there is vulnerability there. Even with the Government's own figures within the budget, if we take out what it defines as the excess corporation tax receipts and make an adjustment for a more normal or typical unemployment rate, that deteriorates the budgetary position by €20 billion. At a headline level, it is looking very strong but using the Government's and Department of Finance's own figures underlines vulnerability there.

On corporation tax, we discussed its concentration, the impact of it and the fact that it is an unusual tax. We spoke with a previous contributor about maybe raising income tax. That comes from the domestic economy. Ireland's corporation tax is almost unique, particularly unique for Ireland, in that it comes from the activities of foreign companies that are selling in international markets. It is corporate taxes collected from export sales. Foreign companies are generating exports and large profits and paying huge sums to the Government. If the Government is spending it, and it intends to spend 85% of it next year, that is providing a stimulus to the economy and additional demand at a time the economy does not necessarily need it. We know what is coming down the track in terms of ageing, demographics, healthcare and climate change. We have pressures now but we should be able to accommodate them within the resources we are generating now, not these exceptional corporation tax, CT, receipts.

I have not read IFAC's foundational Act in quite a while. There is usually a three-yearly review of the operation of agencies and so on. I assume that is in place in the Act. We are clear on what are effectively IFAC's five mandates, which were rehearsed earlier. The council was established at a very different time. Organisations and needs evolve. The Government's position on what IFAC might be doing and what it should be doing into the future might evolve. Has a discussion ever taken place, and what is Mr. Coffey's view, on giving IFAC similar powers to those of the Office for Budget Responsibility, OBR, in the UK? Should there be legislation ensuring IFAC has to sign off more formally on particular plans pre-budget and approve them? Has Mr. Coffey a view on that? Has this been discussed internally at all?

On the reviews, I am not quite sure whether it is set out formally in legislation but we try to undertake a review every four years with an international agency that has expertise in the area. Typically, the OECD has been used. We are planning on doing a review again in 2026 through the OECD.

On the role of the OBR and its involvement in budgetary processes, much of our analysis is after the budget. We have to wait for the budget to be published. As my colleague Mr. Conroy, said, we wait for the medium-term plan to be published because we do not see it in advance. In the UK, the OBR has a very different role. It is a much larger organisation and is more directly involved in the pre-budget construction. It is a very different role; historical and institutional factors have given rise to that. It is not necessarily something that would have been discussed at our level. One reason is our size. We are a part-time council of five with a full-time staff of six. The level of analysis required in advance of the budget would be quite significant. We also see what the implications of having such responsibility mean. It presents huge risks for an organisation. The OBR has suffered a lot of damage over the past number of months, including the early publication of documents, changes to its figures that impacted on budgetary projections and the consequence of that. The OBR has lost a lot in terms of reputation and credibility over the past while. When you are directly involved in a budgetary process such as that, and things go wrong, it is natural for a political system, or even an administrative system in terms of the public sector, to look for where the blame can lay. A lot of blame was pushed in the direction of the OBR, whether it was fair or not, and its chair subsequently resigned.

From an Irish perspective, we do not view the fiscal council going in that direction. At present, we are way too small. We would like to see better production of figures that we can actually assess in terms of the spending and forecast we have looked at. When it comes to the impact on the figures that the OBR produces, we produce somewhat similar figures but, in the main, they are used for our own work. We endorse the macroeconomic forecasts of the Government and we have to have our own figures to do that. It could be said we are producing them, but it is the ones the Government and the Department of Finance publishes that are there.

When it comes to the UK, and we previously had a discussion on fiscal rules, a lot of the kind of push-back the OBR got in recent weeks was because of adherence to the fiscal rules that the current budget should be balanced by the end of the parliamentary cycle. Both the previous Tory government and the current Labour Party government seemed to have a strong adherence to that. Any changes the OBR makes to its growth forecast over a four- or five-year period have a big impact on tax receipts, spending and on whether that hole is closed in four or five years. We see a very strong OBR, which might not necessarily sit with where we see the fiscal council going, and we seem to see very strong adherence to the fiscal rules. In the case of Ireland, if the fiscal council had the same role in forming the budget but governments were not strictly adhering to the fiscal rules, the outcome would not be as strong. The UK seems to have both. It has a very strong OBR that inputs figures into the budget and it also has political acceptance of trying to adhere to fiscal rules. I am not sure whether we would be able to manage that over here.

I thank the witnesses for attending. I will ask about the medium-term fiscal plan. From the forecasting analysis IFAC has done, does it have a view on what range that should be within, in terms of a lower or higher threshold?

We are looking for it to be linked to the sustainable growth rate of the economy. If we look, in real terms, at what we expect the average or sustainable growth rate of the economy to be, we might get a range of 2.5% to 3.5%. That would all be at the upper end. The ESRI put out its medium-term review recently. It put a growth rate of around 2% out to 2035. You could look at that range of 2% to 3%, or maybe 3.5%, for the sustainable growth rate of the economy, for the underlying economy. On top of that, you have to make an adjustment for prices. We know where inflation is at present and that the ECB target is around 2%, so we could maybe put 2% on top of that again. We are probably looking at a range of 4.5% to 5.5% and, at the upper end, 6% is what we would be looking at. That is essentially the range of it. In European terms, even if we were to put in figures such as that, it would put us right up towards the top, in terms of the figures that other governments have put in.

We submitted the medium-term plan last year, but because it was before the election it was accepted it was just a technical document to abide by the EU requirements to submit one. Within the EU framework, there is the capability for governments to revise that plan following a change of government. We had an election and a change of government. The informal suggestion was that it would be done within 12 months. We are now beyond 12 months after the election. We were told we would have this medium-term plan in the summer, we were told we would have it by the budget and we were told we would have it at the start of December. We are now told we will have it before the end of the week, possibly, if it has gone through Cabinet today, but as of yet we do not have it. If we are looking for a range of where figures might lie, that range of 4.5% to 5.5% is where it could sit.

The previous Government had a rule of around 5%. We can see the underlying basis for that - a 3% growth rate and 2% inflation. Things can change and there might have to be an escape clause if inflation is higher; so be it. The rules accommodate that.

We will see what figures are in the medium-term plan. I note that would be one of the highest figures across the entire EU, based on the plans that other governments have submitted.

On an escape clause being constructed well, what do the witnesses think is necessary? We do not want escape clauses that are too easy to exercise if, say, there is an election coming up. A government could say it has concerns about inflation even though there have been no changes. How can escape clauses be well designed? How are they designed in other countries? Are there roles in other countries for fiscal councils or advisory bodies?

The Deputy is right that this is a very important issue. We need escape clauses for truly exceptional circumstances because otherwise, you will have governments breaking the rule and becoming less committed to the rule if they think adhering to it is unrealistic. That was partly what we saw during the previous Oireachtas.

You want to try to ensure the circumstances of the escape clauses are defined in advance. As it was being designed and legislated for, you would like to have a good sense of what circumstances are allowed for. Naturally, you are not going to be able to think of everything in advance. A lot of the things that happen that would cause you to require funding in exceptional circumstances are, naturally, unforeseen. It is difficult to spell out the exact circumstances under which you would use it. It is more about there being some facility to do so and some established process for explaining why you think you are in exceptional circumstances.

Are the witnesses aware of any safeguards that were introduced in other countries to make sure that the escape clauses are used appropriately?

In a European context-----

There is a general escape clause.

In a lot of cases, it is reasonably ad hoc.

That flexibility is there.

There can be flexibility. It tends to be taken on a case-by-case basis. It is a matter of the Government making the case for why it thinks exceptional circumstances should apply and that being assessed on an individual basis.

One of the issues is that we cannot be too prescriptive.

Sure.

How would you design an escape clause to taking something like the Covid-19 pandemic into account? You must have that flexibility.

At EU level, we see some specific escape clauses being introduced, particularly in relation to defence spending. We can argue the merits or otherwise of that. Because of the unpredictable nature of the broader economic scenario and the impact on the public finances, you can be specific and say that inflation must be above a particular rate, but you cannot limit it to that. Unpredictable events mean that Government spending and responses are merited and should not be hindered by fiscal rules. The Covid pandemic is an example.

We have a €4 billion budget overrun. On a European level, is that out of sync with the practice in other countries?

It is something we intend to look at using the figures that are in these medium-term plans. From an Irish perspective, Exchequer spending in the budget last year, depending on whether you use a net or gross measure, was somewhere around €100 billion. The net figure would be a bit lower and the gross figure a bit higher. The overrun, using either measure, would be approximately €4 billion. Some of that is policy, where the Government has announced additional spending areas. A lot of it is overruns, particularly on the current side. There seems to have been a very large overrun for 2025 in education. It is a matter we will look at and perhaps come back to in a subsequent report to see do we stand out in European terms.

The growth rates in our medium-term plans are likely to stand towards the upper end, whether that figure is 5% or 6%. If it is going to be higher, it might be the highest in the EU. Are we exceptional whereby we can have growth rates for government spending that are the highest across the EU? It is our intention to look at these overruns and see whether other governments are managing their annual budgeting on a better basis. Clearly, in the case of Ireland, this has been a repeated issue over the past number of years. It seems somewhat exceptional this year. Spending for the year, as set out in the budget, is going to be €4 billion. Budget 2025 set out an amount of increases but what has happened since has been much greater. We have had greater increases in spending outside of the budgetary process than was announced last October.

Do the witnesses have any suggestions as to how that can be controlled? From what I can see, some of those budget overruns are baked into the system and are part of the budgeting process, in that some Departments and certain sections make a conscious decision not to put things in the budget, knowing they will get them in Supplementary Estimates or through budget overrun. They know that the area that requires it cannot be refused funding later or they simply do not do the budgeting exercise in full.

For the Estimates that were before the finance committee, representatives of the OPW said during a debate on Supplementary Estimates and the budgetary overrun that a whole load of works were required for Dublin Castle because of the European Presidency next year. We all asked if they did not know that the European Presidency was happening and was happening in Dublin Castle. We asked whether they failed to envisage that works might have to be done. They just said they were coming for the funding at that point. I have singled them out, but there were many similar instances. I am not saying the entirety of that €4 billion can be accounted for in that way. That is certainly not the case. However, a certain amount of that absolutely appears to be baked into the system from the start. Other Departments have told me at times that they knew they would get certain funding by way of a Supplementary Estimate because it was for an important area so they did not include it initially. Do the witnesses have any suggestions in that regard? Is that an area at which they are looking?

It is absolutely an area at which we look.

How is that controlled?

One way to address overruns would be to have more realistic figures to begin with. These things, in large part, are predictable across many areas. When the budget is forecast, the work of the staff behind me can tell us pretty well straight away some areas where spending pressures are such that overruns are expected. Even when we do our analysis of the budget for the following year or the current year, 2025, we have to take the budgetary figures and add expected overruns on top. We have no great insight into the figures. We just look at the monthly Exchequer returns and the profiles based on the previous year. This year, there was a significant reluctance to publish monthly profiles. We were, in a sense, flying blind when it came to the monthly changes. In terms of the annual levels, we could see there were likely to be overruns. One way to address the overruns we see every year is to have more realistic figures to begin with. If we know these things are going to happen, we should put them in the figures at the start of the year. Departments should be not be coming before the Oireachtas in late November or early December to get spending for 2025 when they should be voting on budget 2026.

Some of the Departments are looking for increases to their overall budget in areas where they otherwise will not get the increase. They are then putting in a low figure for an area where they know they will not be refused a Supplementary Estimate. That is clear, because every year you can see the original Estimates not even matching the expenditure from the previous year in areas where there has been no drop-off in activity. It is a deliberate practice that is baked in.

Going back to our discussion of rules and escape clauses, you do not want things that are too tight. Departments can have one-off or unexpected issues that arise. Supplementary Estimates were devised for circumstances where you had issues that affected you during the year, just for that year, and needed additional spending. The issue we have is that if you look at a lot of the Supplementary Estimates, they are for ongoing and repeated spending and get carried forward into the next year. That is why they are predictable. You know, for example in education, that teachers have to be paid. In health, particular health services have to be provided. Even if Departments get Supplementary Estimates in late November or early December for one year, they have to be paid for the entirety of the following year. We can look at the figures and say that there will be another overrun in 2026, but if we had more realistic figures to start with, it would put our budgeting at a better starting point and we would not have these ongoing debates.

I thank the witnesses. I am getting to know them well at this stage.

This committee met representatives of the Parliamentary Budget Office a couple of weeks back to set out proposals for what we should do in the coming year. At our previous meeting a week ago, we identified five or six proposals, two or three of which I proposed. They were along the lines of what the witnesses are saying. Long-term budgeting is massively important. We need a focus on overruns. We need international comparisons, which was covered in the discussion the witnesses just had.

There is also the culture of the Department of Finance. Things are done in a set way. There are then overruns or the go-ahead and Departments come back for more money. It is that culture of budgeting. Budgeting a government is obviously different from budgeting companies, with which I would be very familiar. I am familiar with the whole psychology. I would like an understanding of the culture to see can it be changed.

It also came to the attention of the committee that budget figures which are produced in December and I do not know if they are available for this year yet, are much more accurate than those given in October. That was a bit of an eye-opener for me. That is a matter we are interested in digging into. I agree that the starting point is the current year, as is the case in any budget situation. The most accurate starting point you have is the actions in the current year. It appears that is not always the case.

I welcome Mr. Coffey's opening statement, which I read earlier, and especially the emphasis on long-term budgeting. It is a huge issue.

No recognition or cognisance was given to the political realities for demands on extra services, particularly in infrastructure, education and health. Many people have told the Government, including the main Opposition party, that not enough money is being spent on this, that and the other so it is a balancing act, political choices must be made and it is not purely an accounting exercise, although accounting is the basis for everything.

I wish to refer to particular points mentioned in the opening statement, and this is an issue that I have raised at the committee several times. We should be looking at plugging in increase in spending on pensions and healthcare now for five, ten and 20 years. Mr. Coffey said that factors could "increase spending by about 6% of national income ... by 2050." On what has IFAC based that? Obviously it has demographic projections, life expectancy, etc? Has the council done much work on that?

Yes, we have done some work in that area. We did what we call a long-term sustainability report in 2020 where we looked at the age structure of our population and how that is likely to evolve over the next 50 years or so. Looking at that, we can see how rapidly the population is going to age over the next while. We will have a big increase in the number of people aged 65 and over. Typically, those people are a big part of the demand for both healthcare and pensions. If we just assume that demand for those services increased in line with people of those ages, we anticipate there will be a big increase in demand for our services and that will be a big spending pressure that Ireland will face. In today's money the amount would be equivalent to €20 billion. Next year, the Government is planning on running a surplus of €5 billion. If nothing else was to change but we have an ageing population, that €5 billion surplus would turn into a €15 billion deficit when accounting for an ageing population, which we know we will face in the next 25 years or so.

Similarly, Mr. Coffey said: "Only 15% of corporation tax receipts will be saved next year, down from 32% this year." Is that 32% of the €6 billion in the rainy day fund or 32% of the €17 billion windfall? How did IFAC reach this figure?

Looking at the overall surplus that the Government is intending to run, for 2025 we are looking at a surplus of around €10 billion and corporation tax receipts of around €30 billion. The surplus is around one-third or 32% of the total amount of CT receipts we collected. Some of that will be used.

That is a surplus then. I took it that the money was being saved as in put aside.

Some of that surplus has been put aside into the two funds.

Obviously not the full amount. There is €6 billion this year.

Some of it is being put into the funds but the surplus is a bit larger so the Government's cash reserves are going. Regardless of whether the Government puts it into the funds or it goes on to the cash deposits------

What did Mr. Coffey mean when he said "will be saved"?

-----it is not spent.

A surplus.

So it is surplus.

Yes.

Not spent.

It is not being put in a savings account.

Yes. Whereas for next year the planned surplus is €5 billion and expected CT receipts are €34 billion. Now the percentage is down to 17%.

Sorry, I misunderstood that. The surplus is a percentage of the corporation tax receipts.

Yes.

I get it now. This is one countercyclical issue. We discussed the budget when the Minister was in front of us. What is IFAC's view on the lack of indexation of tax credits and bands? It is obviously taking heat out of the economy in one respect but what is FAC's view on it? I have expressed my view that there should be some percentage increase whether it matches the 4% wage inflation or 2% actual inflation in the economy. What is the council's view on the fact that was not done? Does it have a view on the matter?

We do not necessarily have a view on whether the Government went to index tax credits and tax bands but our view would be that it would be a tax increase. Average effective tax rates will rise as more and more people's income is pushed-----

That is a fact. It has increased from 22.6% to 23.1%.

Yes, it is pushed into higher tax rates and then we would account for that. When we look at net spending increases, we would call that a tax raising measure. We would call it a "discretionary revenue measure" that would cause income tax to be higher in 2026 relative to what it would have been if the average effective tax rates stayed the same.

I understand the impact.

It does take demand out of the economy.

Does Mr. Coffey have a view on it?

Does the Deputy mean on whether the Government should do it nor not? No.

Mr. Coffey does not have a view.

It is not like that there were no tax changes and tax did not change. No, we would consider that-----

A tax increase. It is a stealth tax with inflation. Am I right that if you do not index for inflation then it is stealth tax?

We are all very aware of what it was. Given what we saw with splitting tax measures on the other side, such as the VAT cut for hospitality, given what we see on the spending side, both planned and unplanned, if on top of that it was to also index that income tax system, the growth rate of Government net spending would have been well beyond double digits and would have even had more alarm bells clashing. That pushed down the net growth rate slightly because it was considered a revenue raising measure and that is what it was. Our view is that it was a revenue raising measure, whether it was politically right or wrong or economically right or wrong is a matter for somebody else.

It was effectively increasing tax. Whereas if it was put through and it was indexed in line with inflation or wages or somewhere in between-----

That can be done.

Effectively, it is the same. The income tax collected by the State still goes up.

Yes, but if that was done along with everything that was in the budget, the impact of the budget would have been much larger. The income tax system can be indexed. What was chosen this year was that the income tax system would not be indexed and that allowed spending to grow by the amount of that additional tax revenue. If spending is growing by the same amount and the tax system is indexed, then the Government, in a sense, providing even more stimulus to the economy, which does not necessarily need it. It was a choice. We would not necessarily have a view on whether it was the right or wrong choice but it will certainly increase average effective tax rates in 2026.

Does IFAC have a view on the fact that capital gains tax has not been indexed for over 20 years? That is definitely another stealth tax.

No, we looked at income tax, because it happens every year, and whether the indexation happens there. The European Commission has done likewise and it equally considers it on a similar basis to ourselves. We have not considered the indexation of capital gains tax.

We are all looking at numbers as in euro. Does IFAC look at all the outputs as in 100 km of roads or number of houses? Outputs are more important numbers. They are closely linked. Does IFAC look at outputs at all?

We try to but there tends to be more work involved because a lot of the information that we get is about what is being spent on an area as opposed to what we are getting for the spending. We did conduct a piece of analysis earlier this year where we tried to compare Ireland's tax and spending levels to other high income European countries. One thing that we tried to do as part of that was look at what are our outcomes like as well as the spending levels that we had. One example is we spend about average, or slightly less than average, on education, yet we seem to have better test scores than most European country and a higher proportion of our population do third level education. We seem to be getting quite good outcomes despite spending average, or slightly below average, levels compared with other European countries. In other areas such as health we spend a lot more than other European countries but we do seem to get reasonably good outcomes in terms of life expectancy and people's general health and well-being. It is important to look at the outcomes as well but it does tend to take a little more work and it is hard to that every year but it something that we do try and monitor.

I thank Mr. Conroy for that because we can get a bit obsessed with money and forget about the impacts.

There was a brief discussion about the hospitality sector getting a VAT decrease. I was one of the people looking for that decrease. I am in business myself. I am self-employed. When I looked at the basis of whether it would create an inflation cost, I reckoned that it would not because hospitality and other sectors that were also impacted by the same VAT decrease had seen three increases, and on 1 January, will have experienced four increases in the minimum wage. That then has a knock-on effect on everything that the hospitality sector does ranging from the price of a cup of coffee to a plate of food and on everything. That creates an inflation cost because it drives up the price of everything and businesses are trying to hold it within the sector. The decrease in the VAT rate to still does not compare to the cost of auto-enrolment. There will have been four wage increases, and auto-enrolment, which is actually a cost for the employer and the employee. What has not been taken into account is the fact that some of the employees will not want to pay this and they have an add-in for the first six months and then they can pull out of it after that. A lot of employees will just decide to go somewhere else because they believe they will get better money and then will jump so will work in different sector. What will happen is that in a lot of cases, this will come back to the employer who, if he or she does not want to lose a certain person then he or she will have to pay 1.5% on one side and 1.5% on the other side but that will increase to 6% by 2030, which means now we have got another problem. There will have been four wage increases and auto-enrolment.

We know there is an ageing population and people are living longer. Then we look at sectors and ask: what is going to happen? I have no issue with a wage increase - none whatsoever - but when I see that it does not go any further and people get less for their money with a wage increase, that is my concern. We can give all the wage increases people want but if they are not getting value for money, what is the purpose of giving a wage increase? A wage increase is supposed to mean people have more money in their pockets. That is not happening; they actually have less. If we look at the basic wage increase at the moment from €13.50 to €14.15, that gives a person an increase of €26 per week based on a 40-hour week. The USC charge dropped but the tax base stayed the same, so that means a person is actually paying more tax because when the tax base did not change, people are paying more tax. For the USC to change, the Government should have changed tax bands to allow people to have more money in their pockets but it did not do that, so you have tax based changes.

Another fund brought in under PAYE and PRSI is the National Training Fund, which could never be touched for training until recently. Now the Government wants that to go into part of infrastructure, so it is not actually going into what it was first intended for, namely, the training and upskilling of people. My concern is the big picture. People will be living longer and we are looking at auto-enrolment and everything. The people who are on big salaries and paying big taxes still can afford to live well. The people who are on minimum wage or even above the minimum wage at the moment cannot live well. Look at the number of people who are in employment in this country, the lack of infrastructure we have and the cost of housing. I am a building contractor and all of my children are living at home with me with their partners. They are trying to get onto the housing ladder. When they save so much, they say they are going to get on the ladder but the ladder has moved. I build houses. With what they are saving, when they get to the end of 12 months, they are behind. They are not even catching up.

My concern is that Ireland is overpopulated based on the infrastructure we have. We do not have the infrastructure here for the number of people who are in this country at the moment and for the number of people who want to come to this country. Is that a concern for IFAC? We are looking at budgets and forecasting. I am in business and I cannot forecast. I am giving prices and saying that they are for a maximum of three months. I am forecasting into a market that I do not know where it will fluctuate. I am forecasting into a market where there has been a 38% increase in the price concrete products in three years. We are going up 8%. The Government's move was to give an extra 10% for houses with pyrite and the next thing the concrete companies have moved their percentage up by 8%, so there is no catching up. Whatever the Government moves, the other sectors move with it. Where will it stop? If it does stop, does IFAC see us ending up having a bang? Where does IFAC see we need to put a cushion in place now to try to prevent that bang?

There will always be lots of moving parts with the economy. Maybe in some of the matters the Chair has raised, unlike the characterisation of members earlier, IFAC did not necessarily come out against the VAT changes the Government introduced for the hospitality sector. Our approach was to actually analyse what impact it would have on key indicators like inflation. As the Chair suggested, when the VAT rate comes down it does not have that impact on inflation. There are other factors moving in the opposite direction, such as the pay increases, etc. On the broader volatility we find ourselves in, in the case of Ireland we are driven by global prices for lots of things. The Chair would have more experience with things like concrete but there are other areas of the economy that are benefitting from global prices. If we look at the meat and beef sectors, they have moved to a stage where they are actually making a profit from their activities and not dependent on the subsidies to provide an income.

That will depend on Mercosur now. Do not speak too soon.

In terms of where things stop, there will always be change and fluctuations within an economy and it is all a matter of balancing those different needs. The Chair referred to a bang. There is no suggestion from our side or from anyone on the forecasting side that the Irish economy has risks built up that would lead to that. Yes, there are risks in the public finances like the huge amount of corporation tax being paid by a very small number of companies. That, in itself, presents a risk. If we look at where we were in maybe 2008 when we had the reliance on property market activity, we were building houses and buying and selling houses, we had 300,000 people employed in the sector, in terms of the public finances almost a third of tax revenue was dependent on construction, they were clear risks that were linked. When the bang came, it impacted employment, the Government and the banks. If we look at the economy now, there is no forecast out there that there can be something of that magnitude building up.

It is undoubtedly true that across various sectors, whether it is the hospitality sector, the construction sector and other sectors, there are concerns and there are pressures. One of the pressures is cost. Some of that is driven externally. Domestically, if we try to do too much - the Chair is talking about trying to hold on to staff - if there is demand in lots of sectors and the demand for staff and employment remains high, we will push up costs and prices ourselves.

The issue we face is that we need to have priorities. What is the priority? Is it building new houses? Is it retrofitting existing houses? Is it providing a lower VAT rate for hospitality in a sector where employment numbers have been maintained at pretty strong levels? In recent reports from the CSO, the sector itself talks about various pressures but the overall level of employment in the sector has been holding up pretty strongly.

In terms of the answer, there is no clear key answer. These are things the political system, the Government and ourselves have to constantly deal with and they change. Sometimes there is the argument that we are saying the same thing over and over again. It is in different circumstances. We face different problems now from what we faced ten years ago in 2015 and 2016 when we still had very high Government debt. The Government was running deficits. We are now in a position where, remarkably, we have very low unemployment, the Government is running surpluses and those debt ratios are declining. We are in a good position but that does not mean it is universal across the economy.

I reckon Dublin is over populated. You cannot get into Dublin and you cannot get out of Dublin. For me as a business person, if you want the country to survive as a whole, you start to push out into the country and put in infrastructure from the perspective of power, sewerage and water and allow international companies to develop in other parts of the country. You then put in a transport network that supports that. There is an old saying about putting all your eggs into one basket, and we only have the one basket. If you spread the baskets around the country, it takes all the pressures off Dublin, where people see extensions of the airport but people cannot even get there. There will be a massive increase in Dublin. If people can move out of Dublin to the likes of Kildare, we create commuters. You then go down to Limerick and Cork. If you look at other countries, they have looked at developing the whole country rather than one particular place. What other countries have done is that they have put in a fast transport network to get people from A to B. Someone living Limerick could be in Dublin within an hour if there was a proper network. Someone could live in any part of the country and get to where they need to be. If I leave here at half past three any day and try to get home, it will take me an hour and a half to get to the Red Cow roundabout. It will take me less than two hours to get home from there by car.

For the whole country to prosper, we need to move out and put infrastructure into areas which allow the development of the country. That then gives you a business case for transport networks to transport people from different places. It takes away the congestion and the build up of having everything in the one basket. The country, as a whole, gets to support the country and the network of the country. It would also help people in the housing market where people are all trying to move to a certain area because they need to be there. If it is spread out, the price of housing would drop automatically because it is cheaper to build housing in areas outside of Dublin. That is what I am trying to do from the point of view of the next generation and the generation here today.

They are settling down in later years. They are all leaving the country and trying to come back with money. From my experience, with my business hat on, if we put them all in one basket we are going nowhere. If we spread it out and create a prosperous country that can have developments in different areas, with big company names in different areas and a transport network, one could live anywhere in the country and get to work if need be.

We have outlined that there is a big deficit in infrastructure and transport is definitely one of those areas. Even taking something like the percentage of rail transport that is electric rather than through fossil fuels, we are at the bottom of European league tables there. One thing that does make public transport more attractive and viable to do on a large scale is if we have density. Even if we have people living outside of the city centre, if they are living in a relatively dense way around that transport hub, that makes it a lot more viable to have that train or DART station or whatever it is there. That is another key consideration.

We are all acutely aware of the lack of infrastructure Ireland has, but Ireland has always a relatively low level of infrastructure. When we did a study on this last year we found that in the mid-1990s Ireland would have been about 50% below the infrastructure we would see in other high income European countries. We actually have closed some of that gap. It is about 25% now, so we have made some progress over the last 30 years.

Even with the increase of 1 million people over the past number of years.

Exactly, even with a vastly increased population the infrastructure has managed to close that gap. It is partly due to the fact Ireland is a more wealthy country now and we can afford to actually invest in the infrastructure that we would not have been able to afford to do in the 1970s and 1980s, whereas other European countries would have been much more high income countries during those periods and would have had the capacity to invest in some of those public services that people need. It will take many years to address the lack of infrastructure we have. That is why we need a long-term plan to do that. The national development plan is some of the way there. We also need to make sure the private sector can play its role, both in housing and in other aspects, because the public sector will not be able to do everything.

Does Deputy Timmins want to come back in?

No, thank you. I have thrashed out everything I need.

The witnesses got away lucky today, as a lot of the members wanted to speak on the parliamentary business that is on at the moment. I want to thank the witnesses for coming to the meeting. I wish everyone a healthy and happy Christmas and a prosperous new year. We will take this up again early in the new year. Even though we will have a new clerk to the committee, as Roisin is leaving us, we will continue in the new year. I thank everyone for their experience and time.