Official Report: Minutes of Evidence

The Chairperson (Dr Aiken): From the Irish Fiscal Advisory Council (IFAC), I welcome, via StarLeaf, Sebastian Barnes, the chairperson, and Dr Eddie Casey, the chief economist and head of secretariat. The session will be reported by Hansard. Sebastian, are you going to speak first?

Mr Sebastian Barnes (Irish Fiscal Advisory Council): Yes.

The Chairperson (Dr Aiken): First, apologies. I have just been to the dentist, so, if I sound a bit slurred or burbled, it is not because I have been indulging in County Antrim's finest Bushmills. That is just in case you wonder why I am sounding less loquacious than usual. My questions might be briefer than usual as well. I can already feel that that is beginning to happen with my tooth. Please, Sebastian, it is over to you.

Mr Barnes: Thank you. I have no excuse if I am unclear. Good afternoon, and thank you for the opportunity to share with you some of our experience on the Irish Fiscal Advisory Council. As you said, Chair, I am the chairperson of the council, and I am joined by Dr Eddie Casey, the council's chief economist and head of secretariat.

The council was set up almost 10 years ago. Our mandate has four parts: to assess and endorse the Government's macroeconomic forecasts; to assess the budgetary projections; to assess compliance with the fiscal rules; and to assess the overall fiscal stance. We publish two main reports covering those issues each year, together with a wide range of contributions to the public debate and a report on long-term sustainability. Our policy environment is very different from that of the powers devolved to the Assembly and the Executive Committee. Nonetheless, our experience is relevant. A recent in-depth review of the council by the OECD found that:

The OECD focused on two main achievements. First, the council has helped to push the frontier of fiscal analysis, developing new analysis, methods, data and tools, which help to provide better information to make decisions. Secondly, the council's reports and outreach activities improve the awareness of fiscal issues more generally in Ireland among the wider the public, policymakers and stakeholders, including, of course, parliamentarians. Those achievements rest on a clear mandate, the availability of adequate resources and staff and the independence of our council. The OECD principles provide useful guidance, and it is encouraging that they contribute to your thinking in Northern Ireland.

Let me finish my opening statement by sharing two lessons that I draw from our experience. First, it is very important to have a clear sense of what problems you expect the council to help to resolve. In the context of the Irish Republic, the risk of accentuating a boom and bust cycle, and a volatile economy means that improving macroeconomic analysis of performance has been a key part of our work. At the same time, improving medium-term planning and encouraging more public saving in good times is a central objective for economic policy in Ireland and something to which we have contributed by providing strong analysis and a voice for those longer-term fiscal concerns. The council is working towards thsy objective.

The second lesson is that the effectiveness of the council depends critically on other people. On a day-to-day level, information from the Government is essential to our work and is absolutely critical to what we do. However, ultimately, the council's advice is effective only if it is listened to. The media and politicians have generally been receptive to the council's work, but the record on following the council's advice is, to be honest, mixed.

I hope that this experience is helpful to you, and we stand ready to answer your questions.

The Chairperson (Dr Aiken): Thank you. Eddie, are you going to say a couple of words?

Dr Eddie Casey (Irish Fiscal Advisory Council): No. I think that the opening statement is just for Sebastian.

The Chairperson (Dr Aiken): Thanks very much indeed. I will start off with a couple of questions. Bearing in mind that, when Ireland was under the troika, it had to have its homework marked twice a year, did the necessity of having that discipline process help in the council' work? When people realised that they had to present data in a way that was easily understood by the ECB and the IMF, did that help you, or did you have to encourage Departments and the rest of it to get properly involved?

Mr Barnes: One way to look at it is that we are involved in two processes. There is the European Commission process that was going on back in the troika days in a very intensive way and that continues today, and there is the council process. On the whole, those are mutually reinforcing as processes. Once the troika monitoring was scaled down, we saw that fiscal policy loosened up a little at that point. It shows that having those two processes can be complementary. In the more recent period since that has happened, it has become more balanced. Obviously, the troika has a lot of leverage because it decides whether to disburse the loans. That part of those two tracks is relatively important.

As the troika ended, we switched back the other way. On the whole, the domestic Irish Fiscal Advisory Council view has generally been more stringent than the view of the European Commission. Which of those views is listened to more is subject to debate. The external view is helpful, but, together, the domestic and external view are very complementary. The two things that we bring as a fiscal council are that we have a much better understanding of what is going on in Ireland than the troika or the Commission, as they are looking from the outside. We also have a much bigger impact on the debate in Ireland. The troika and the Commission are viewed as outside bodies that are imposing a view. We can really engage with stakeholders. We can talk in the media and have a presence that those other institutions cannot.

The Chairperson (Dr Aiken): We have already heard evidence, and we were particularly struck by the evidence that we heard from the Scots last week about the modelling that they created being used across government. If we all model in the same way, it is easier to see trends, to have checks and balances and controls and to have a detailed understanding so that the likes of legislators understand the process. Do you use the same models that government uses, or is there a reluctance to use similar modelling? Do you think, because of Ireland's economy definitely being larger than Northern Ireland's and on a similar scale to Scotland, that you want, to a degree, to use similar modelling, or did you have to do that from scratch?

Mr Barnes: That is an excellent question. There is an element of both. On the one hand, one of the reasons that we are here is to create challenge. We are careful not to use exactly the same assumptions as the Department of Finance and coming to exactly the same results as it does. That would be pretty pointless, so we are careful about that. For example, when we do our forecasts, we deliberately do not look at what the Department of Finance has done, so that we keep taking an independent look at it and do not get caught up in groupthink. Part of the mandate with a council like ours, the role of which is to assess someone else's projections, is to challenge and to look at them and say, "What could be wrong with this? What are the weaknesses? What bits could come unstuck?".

That independence is important, but you are right that, in an economy that is not huge and in which there are not a huge number of economists looking at those things, people naturally tend to use the same models a bit. I do not know whether this is the same as the Scottish experience, but our experience is that a lot of the modelling work that we have done has really pushed the frontiers of how the Irish economy is modelled. For example, a concept that is used a lot in fiscal policy is the notion of an output gap, which is the difference between what the economy produces and what it can potentially produce: "Are we in a recession or are we booming?". Basically, the council laid out a new approach. We thought that it was important to do that, because we thought that what was being done was not very good. That approach is now used by the Department of Finance. There is a lot of modelling about the multinational sector in which we have really pushed the boundaries of what is done. It is a bit of a mixture of the two, but it comes from the fact that we do not slavishly follow the same models and that we come from a somewhat critical perspective. That is what you would expect from a body like a council.

The Chairperson (Dr Aiken): My final question is on criticality and the importance of independence. I know, from living and working in Dublin and moving in business circles for some time, that you have managed to annoy a few Departments, so obviously you are doing the right thing at the right time. How important is that degree of independence? Do you feel that you are sufficiently far away from the — I will use the word very carefully — golden circle of Dublin to have that degree of independence?

Mr Barnes: Yes. Our independence is one of our achievements. I do not think that anyone has seriously questioned whether we are independent. That reflects a couple of things. There are two big pillars. The first is the appointments process. There is now an official appointments process, but there were also very clear criteria in the legislation that, to be appointed to the council, people had to have relevant qualifications and a strong background in these kinds of issues. There has also always been a strong international component to the council, which has been very helpful. As you can tell, I am not Irish. We always had a strong international contingent that breaks that link a bit. That is the appointment part. The second part is the budget. Our budget is independent of the Government. It is not on the main budget round. There is a special budget account that is used for the diplomatic service and the judiciary. We were added to that; the council insisted on it. That has drawbacks in other respects, but it means that the Government cannot come to us and say, "We do not like what you said, so we are going to cut your budget". That gives us a high degree of protection, which is very important. If you look around the world, you see that quite a lot of fiscal councils have been threatened in various ways by Governments when they have said things that they did not like. What that does is to put us in a position where we really speak truth to power. When the Government have done things well, we are happy to welcome that, and when we think that they have made mistakes, we are prepared to say that publicly, while anticipating that they may not necessarily be happy with what we say about them.

The Chairperson (Dr Aiken): I have just one final question, because I know that other people are looking in. Has the OECD come back to do an audit of what you have been doing and how you managed it? Who has been marking your homework? How have you been able to ensure that you are still following best practice?

Mr Barnes: That is a good question. Maybe Eddie will want to answer that.

Dr Casey: Yes. We had exactly that homework correction exercise last year. It was a fairly intense audit — we call it a "review" — by the OECD. It looks through everything, really: how we are set up, what our staffing and resources are, what our output looks like, and the impact that we have had in the media and on public debate. Therefore, it went through a broad range of terms of reference. Its conclusions are publicly available, along with the full review. Sebastian referred to them in the opening statement. Broadly, they were very positive, in that the OECD felt that we have had a strong impact on public discourse and advancing how those things are looked at in the Department and more generally.

Mr McHugh: Tá fáilte romhaibh uilig. You are very welcome. The Irish Fiscal Advisory Council was established 10 years ago, at the time of the banks' collapse. Do you believe that, if the council had been in place prior to that, you might have been in a position to sound the alarm or, at an earlier stage, help the Government to avoid that crisis?

Mr Barnes: I hope so. If we had been around and had not done that, it would have been a failure of our institution. What we could have done to help to signal that would have been, partly, to develop the analysis. There were issues. I worked as an economist on Ireland at the time. The Department of Finance in Ireland did not know things like how much VAT was coming from the new build of houses. It turned out that it was a huge amount. When housing sales stopped, that was a major squeeze and loss of revenue. I think that the council, at that point, would definitely have said, "You need to do the work to find out how much that is and understand the risks". I think that we would have done that. I cannot guarantee that it would have worked, because, as I said, it depends a lot on the willingness of the political system to hear that message. However, I think that it definitely would have helped. Back before the COVID crisis, there was some risk of overheating in the Irish economy. One comment that we have seen lately was that at least people had been warned that there were problems this time around, whether or not they took action.

Mr McHugh: Yes. You mentioned some of the issues in your introduction, one of which was that it depends very much on the information that you get from government. What is your process for acquiring data from government? Do you always get the data that you ask for? Is legislation required in order for government to release to you the information that you need to ensure the accuracy of your predictions?

Mr Barnes: That is a good point, and it was brought up in the OECD review. Of course, the council gets all sorts of information from the Government. Often, it is very detailed. We do not have a legal right to that information. Fortunately, cooperation has been quite good. We have a memorandum of understanding that covers some aspects of information around forecasting. That is, obviously, voluntary and non-binding on the two parties. Most of the time, we get the information that we want. The two limits are that, first, it often takes us a huge amount of effort and time — it would be much nicer if we got information faster — and, secondly, sometimes the Government simply do not have the information that we ask for, which is a different problem.

The OECD review asked that the Government consider giving us a right to information. We looked at the UK legislation for the Office for Budget Responsibility (OBR), and our view was that it would be perfect for us. It would probably be perfect for almost anyone. I suggest that, in setting up arrangements in Northern Ireland, you look at the OBR legislation because I am sure that that would perfectly cover the needs of Northern Ireland.

Mr McHugh: That sounds like good advice. Go raibh míle maith agat. Thank you.

Mr Allister: A couple of points, if I may. When we look at the need for a fiscal council in the Irish Republic and in Northern Ireland, we are largely comparing apples with oranges because the Republic, insofar as you can be a sovereign country in the EU, is a sovereign jurisdiction. You raise your own taxes and have to balance that with your spending and borrowing, so there is an obvious role for a fiscal council. In our situation, we, as a devolved region, depend on a block grant, and there is not the same balancing exercise to be performed. In your view, what could a fiscal council in Northern Ireland usefully do?

Mr Barnes: I go back to the point that I made at the beginning. It is important to think about what problem the council can overcome. The council can bring independence, analytical power and a commitment to transparency. By comparison with government officials, we are often able to articulate things in public in a much clearer way than the Government decide to do.

You are right that the situations are very different. We are not in a particularly good position to know the exact context of Northern Ireland. If you look around the world, you will see fiscal councils or bodies that do many different things. Some are much more active on the expenditure side, looking at how government spending is costed and its efficiency and that kind of thing. Those areas may be more relevant. In the Irish context, it is not a big issue, but it may be for you.

Mr Allister: One is aware that there is something of a looming controversy about corporate taxation. Has the fiscal council in the South been involved in that, or is it likely to be?

Mr Barnes: Our council was set up to deal with the macroeconomic instability that has plagued the Republic for a long time, and, hopefully, we are contributing to reducing that. We have looked at corporation tax in the context of our budgetary and economic forecast. We have done a lot to raise people's understanding of the risks associated with reliance on corporation tax.

Last year, almost 20% — Eddie can correct me — of revenue came from corporation tax.

Dr Casey: That is right.

Mr Barnes: Most of that is paid by a small number of multinational firms. That leaves public finances very vulnerable because, against that, it is being used to finance hospitals and schools and other things that, on the other side, need permanent funding. We have been very vocal in advocating for that. We suggested that public funding needs to be weaned off that source and that another source of revenue needs to be found to replace it. In the meantime, that funding should be put into something like a rainy day fund because it is unlikely to be there forever.

We have been very active on that side. We take the tax rates and the tax regime as given. That is a political choice for the Government. Conditional on their choices, we have been active in explaining to people what the consequences are. We realise that the consequences are probably bigger, in terms of the economic side effects, than most people thought. That is where a fiscal council can provide analysis. It is for politicians to choose, but we can help people to understand what is at stake.

Mr Allister: In your 10 years of existence, what has been your biggest achievement and your biggest failure?

Mr Barnes: The question on failure is probably easier to answer. The Government have taken a lot of our advice, but they have not taken our advice on some things. In our view, fiscal policy should have been a bit tighter in the last few years than it has been. There was a big run-up in health spending that was essentially financed by corporation tax. That was not a good idea. The failure is that we did as much as we felt that we could, but we were ultimately not as strong as the political pressures that were pushing the other way for the spend.

We have two successes. One is on the technical side. For example, there was the massive change of bringing in a proper measure of where the economy stands and whether or not it is overheating. That was a big change, and it gives policymakers a clear road map of where things are going. The other success relates to debate. When I hear politicians or journalists talking about things, I can hear that they are talking about them in the language and using the ideas that we have developed. There is much greater awareness of the challenges. Unfortunately, that does not always feed through into decisions, but there is an awareness of those things that did not exist before. It is much harder for Ministers to make bad choices when they know that a lot of people are watching them who understand what the weaknesses are and understand what they are saying.

Mr Allister: This is my final question. Is there any relationship between the work of what is now called the Shared Island unit and the fiscal council?

Mr Barnes: No.

Mr Allister: You have not been asked to do any work on that.

Mr Barnes: No.

Mr Allister: Thank you.

Mr Catney: I thank Sebastian, the chairperson, and Dr Casey for giving their time to us today. I have one simple question. Northern Ireland's Executive Budget process often runs late, owing to delays and disputes with the Westminster Government, or owing to the occasional political dispute here in the North. Thus, fixing key dates for the publication of Budget reports from an independent fiscal council may be problematic. How does the Irish Fiscal Advisory Council get around that problem?

Mr Barnes: To be honest, that is a weakness in our set-up, and it is very hard to do anything about it. Let me explain. The Budget has to be made before 15 October. Various processes of parliamentary debate take place in the following weeks. In parallel to that, we work on a report that looks at the Budget. Unfortunately, it takes a lot of time to produce that report, because we need to get a lot of information from the Department of Finance. The budgetary documentation does not tell us enough to assess properly what the Budget says, so essentially the politicians have more or less debated and voted on the Budget before our report comes out. That is a long-standing problem, which we partly addressed by putting out a flash release a few days after the Budget, giving our preliminary, high-level assessment of things, in which we have to say, "A lot of these figures are preliminary, because we have not got the information from the Government". In this case, you probably do not want to follow our practice but to learn the opposite lesson. The UK does this much better with the OBR. It is important that the fiscal council be provided with confidential information ahead of the Budget and during the process. That is the first thing.

The second thing is that the quality of Budget documentation should be much higher. It should be possible for experts such as us to read the Budget and find almost everything that we need there. Instead, we go through a process with the Department of Finance in Dublin in which we have to keep asking it to explain how it has calculated things and from where it got the numbers.

If you have those two things, your fiscal council could play a much more active role in the Budget process than we can. We feel that we come in a bit afterwards and say: "This is what was wrong with it", and, in some ways, it is a little bit late by then, and we are really looking forward to the next year. The fiscal council should not be part of the process but it should be able to get information in real time so that it has the information that it needs when the Budget comes out. The Budget documentation should also be much more transparent. That is what I suggest that you do.

Mr Catney: OK. That seems like quite a lot. What do you see as the easiest way for us to get that? That could be held back from us. It could be stopped. It looks like that information is held back from you. Is there a way of writing that in?

Mr Barnes: You would have to look at how the legislation is written to write that into the process. An agreement, maybe not in legislation but made at the beginning, about exact timings and what is to be shared would also help.

The OECD suggested that the Irish Fiscal Advisory Council draw up a list of the standard things that it needs, and we will follow that up. We do not have that at the moment, so we always make ad hoc requests. One of the things that makes the fiscal council exciting is that there is always something that you did not anticipate, which would probably not fall within the scope of that suggestion, but perhaps you will at least get 90% of what you need.

We have always applied the principle that we do not want to get information in private. We want what we get to be on the record and usable. We do not want to be in a position where there is some kind of special side room where the fiscal council talks to the Government. That is sometimes necessary, for example, as in the proposal, where the fiscal council would have to keep information confidential ahead of Budget day or ahead of decisions, but, basically, things should be in the public domain for the council and anyone else to assess.

Mr Catney: Thank you.

Mr McGuigan: Thank you. This has been very interesting. In a previous answer, you said that one Department was not aware of the levels of VAT in relation to the housing market. Maolíosa asked whether you could have steered away the

VAT in the South had you been in place. Are the policies of previous Irish Governments that, for example, led to the creation of an unsustainable housing bubble something that you can comment on, or could do if that were to happen again? Can you publish reports at your own discretion? Can you pick and choose a topic that you deem appropriate to commission research and report on?

Mr Barnes: We can publish whatever we like. We have a mandate. That is really important because it gives us credibility. In public debate, lots of people have an opinion about public finances, but having the mandate and the resources to back up what we say means that our voice has a lot of authority. We realise, obviously, that we should not overuse that and that it should be used only in the area of our mandate. We have the freedom to do that. For example, we see the long-term report on an ageing population that we did last year as coming under our assessment of the fiscal stance, because we think that we cannot do that without understanding the long term, but we do not have a specific mandate to do that.

In general, we have taken the view, which is the only sensible view that you can take, that we focus on the issues that are most closely related to our mandate. There are other areas that we are reluctant to, but occasionally will, get into. We view anything that relates to choices about how the Government spend their money or how they raise taxation as being outside the scope of the council. Our thing is to make sure that the public finances add up and that economic management is sound.

We have, however, raised issues on specific things in some cases. For example, a couple years ago, public investment in Ireland was very weak. Normally, we would not take a view on the right level of public investment, but we said, "Look, this is really, really weak, and, if you do this, it is hard to see how public services can continue to be delivered and how the economy will grow". We took a view on an issue about fiscal choices beyond the Budget.

There are also issues on taxation, and, for example, we have not said what we think should be done about the housing market. It is still a live issue in Ireland. We have said that there is a problem. If housing costs rise a lot, it makes Ireland much less competitive, and that needs to be addressed in some way. We did not take a view on how to address that, because it is beyond our expertise to do so, but we sometimes get into those more detailed policy choices.

Mr McGuigan: OK. Thank you. The composition of the fiscal council is part-time. Are the current staff arrangements sufficient to carry out your functions?

Mr Barnes: That came up in the OECD review. We have a secretariat of six staff — very good young economists — and we have a part-time council with five members, and, as chair, I am part-time as well. The OECD recommendation was to reinforce the chair's position, because, to be honest, it is a stretch to do the chair's job in the allocated time. We have asked for more resources in order to cover the chair's position being full-time.

We also asked for, essentially, one extra economist position because we struggle to do the long-term report, again, with the resources that we have. To be honest, it is a little bit tight.

It is quite a good model. One of the things the OECD said is that, relative to other countries, we have a budget that is probably fairly typical but that our output is much higher. That is because the hybrid model of having the benefits of council members who are doing other things and who bring all sorts of experience mixing with the economists is a really good one. At the moment, that is being done on a bit of a tight budget. It is not really sustainable. The concern was that it would be very difficult to find a replacement chair, for example, because it is a very hard responsibility to take on given the fees that are paid to the council member and the amount of time that they can take. It is not too far off and is a good model, but it is a concern that the OECD highlighted and one that we are raising with the Department of Finance.

Mr Frew: Thanks very much, Sebastian. This has been a very interesting session. My questions will teeter around independence, and you explained that, rightly, so far. Explain to me again in a bit more detail how your budget is fixed. You talked about the judiciary too, so I take it that it is lumped in with that type of thing. Explain to me how that actually works so that I understand how there is no government interference either way in your budget.

Mr Barnes: Our budget is in a thing called the central fund, which is the special fund that also covers the judiciary and the foreign service. That means that it is not part of the annual Budget round. When politicians sit down and vote on the Budget, they are not voting on our budget because it is already factored in through the central fund. Our funding had an initial amount, and then it was indexed to inflation, so, every year, it rises a bit. After 10 years, we have noticed that our staff costs rise quite a lot more than inflation, so, essentially, in real terms, our budget has shrunk by quite a bit.

The OECD report mentioned that. We have proposed to the Department of Finance that it implement the OECD recommendations, which would basically mean indexing our budget to a mix of 60% public-sector wages in Ireland and 40% inflation. That would more accurately reflect our cost mix. The recommendations also suggest having a review process, which would probably be linked to our review process. The OECD review that we did this year was part of the cycle that we have of reviewing our performance every five years, because we need someone independent to do that. At that time, the review group should always be asked whether the budget is still fit for purpose. At that point, it might be necessary to adjust it as well.

Mr Frew: I have the OECD report in front of me, and you are quite right about your detail on it and what it asks. I have an issue with this because I am very much for transparency, openness and independence for a body like yours. That is what appeals to me about the matter. However, I also know that, up here in Northern Ireland, we have several examples that I could give you, and I will pick one. The Consumer Council does a lot of good work on behalf of consumers in Northern Ireland, but its budgets are still determined by the Department. You could argue that it is not independent and that, if the Department took a pick, it could really turn the screw on the Consumer Council or other bodies to really, if you like, cajole, scare or silence them. I am not saying that that is happening, but it could happen because of the way that the budget is set up.

I read the report that you are referring to. Is it not fair to say that you guys in the Fiscal Council down there have hit your budget ceiling? That is implied in the report. That means that you, as a body, are looking to your Ministers to do something, and that could imply that, with that reliance, you lose independence. The part of the executive summary on staffing talks about the fact that you need the prior consent of the Minister for Finance for finance for the grading structures. Do you see how you could very quickly lose independence or at least have a reliance on the Minister for Finance? How do you combat that?

Mr Barnes: That is a very good point. It is right that there is a recommendation in the OECD review to remove that restriction on the grading. In practice, we have never had any problems with that; it is a bureaucratic thing. You are right that it would be good if one of the recommendations of your review was to remove that, precisely for the reasons that you said.

I think that the arrangement of us being on the central fund for the budget is basically the right approach. Unfortunately, it was badly implemented by just being linked to price inflation and not to something that more accurately reflected our cost mix. The combination of wage and price inflation that was recommended by the review process, which was essentially initiated by the independent review, is as good as it gets. That would give us a lot of freedom. Right now, it puts us in a slightly delicate position. We are asking Finance to raise the ceiling, and we need that to happen, but I assure you that that has no impact on the analysis that we are presenting at the moment.

That is basically the best that you can do. Of course, there is always a worry. Legislation is what it is. The Government are the Government, and they can always come along and pass a piece of legislation that will close down the Fiscal Council tomorrow. You are never completely free from that risk, but if you make it difficult to do that, you raise the bar, which makes that much less likely to happen. Ultimately, the real protection is in the political system as a whole. We have a report coming out next week. If the Minister for Finance were to not like that and to say that he will close down the council, that would cause an almighty amount of trouble politically. The ultimate protection is the support of all stakeholders, so that is parliamentarians across the political spectrum, the public and key stakeholders. Setting the bar to have it in the special fund and in this indexation makes it difficult for them to close it down. It is a very good arrangement, if it is implemented properly.

Mr Frew: I will ask about your point about the fiscal cycle of the Government down in the Republic. It seems to be, and these are my words, that you are always marking the Government's homework because of the delay in getting the information that you require. It strikes me that a better position would be one whereby you would actually be informing the Budget at an earlier stage if you obtained the information sooner. Does it feel like you are always marking the Government's homework?

Mr Barnes: It feels a little bit like that, for the reasons that I said. For example, the Budget comes out in mid-October and is debated over the following number of weeks. Usually, our report is ready by the time that debate is more or less over. We work very hard during that period and reduce the delays, but we rely on other information, and it takes time to do stuff. You are right that, in a way, that feels a little bit unsatisfactory.

It is more of an ongoing cycle, however. We also produce a report in the spring. That is about to come out. That is partly a review of the stability programme, which is produced in April, but it also looks ahead to the Budget. We also produce a pre-Budget statement, which is usually a much shorter piece, three weeks before the Budget. We then produce that flash release on the day of the Budget. People have a pretty good idea of what we think at all times. We did not originally have the pre-Budget statement, but we realised that May or June was too far back for people to remember, and, of course, things change over the summer. The flash release is a new thing as well.

It is a little bit of a problem, but we are contributing to the debate in an ongoing way. For example, last March, as COVID was hitting, I wrote an op-ed in the 'Irish Times' that set out the council's view on the reaction to COVID. It basically said that it was OK for the Government to borrow a lot of money to support the economy. That shows that there are other ways of informing the debate. A better arrangement to get more out of your fiscal council in Northern Ireland would be to allow the council access to information before it is published, which will give it a bit of a head start, and to generally improve the transparency of the information that is available, which will speed up that assessment.

Dr Casey: You raised a good point. A lot of the issues tend to recur. If you think of the big Budget mistakes that could be made or that have been made in the past you find that they are things that tend to come up over a process of several years. For example, a certain policy stance might be introduced in year 1, but it starts to have an impact only in year 2, 3, 4 or 5, after they change income tax rates, tax bands or whatever spending policy they embark on.

While we do backward-looking assessments, they tend to inform the next Budget and the discourse coming into it and even more if it is coming up in a second year.

Mr Frew: What about your relationship with the scrutiny Committees of the Irish Government? I know that the OBR has memorandums of understanding with Revenue and Customs, Work and Pensions, and Treasury. How do you guys go along with the scrutiny Committee for the Department of Finance down there? Are you a bit like a tag team? Is that how it works?

Mr Barnes: We mainly engage with it twice a year, when our big reports come out. We have a big discussion, where we present our views. That dialogue has been very good. I have been on the council since it was founded. In the early days, people were not quite sure what to do with us, but we now have a very good relationship. We learn a lot from the parliamentarians about what they are interested in and how they think about the world. You can see that the way that they think about the world has been shaped by analyses that we have done. So, it is a very good relationship. As Eddie said, it is more about long-term themes than specific things. One big issue that we have had is that the way that the Department of Finance does its Budget projections does not typically take into account the cost of providing existing public services. That is an issue in the UK as well. We have been pushing on that for a long time. The Parliament and members of that Committee now understand that. When they see projections from the Department of Finance, I think that they naturally ask, "Are you taking this into account?" They know that it is probably not. That is an example of how it works. We are not more closely integrated into the process, and that is partly to do with the delay between the Budget coming out and our reports coming out.

There is now a Parliamentary Budget Office (PBO). That is able to fill that gap to an extent. Its analysis, by and large, does not go as deep as ours; its mandate is much more to support the parliamentary process. It is helpful to parliamentarians. It perhaps fills the gap a little bit by bridging to our heavy reports, which come a bit later.

Mr O'Toole: Thank you both for your evidence today and for the really helpful background brief that you supplied. I have a few questions. Your economists may have the capacity to do independent forecasting, but do own a proprietary model or anything like that for either economic or fiscal forecasts?

Mr Barnes: We do. The set-up is that the Department of Finance does macroeconomic and budgetary projections. We are required to assess both of those and to endorse the macroeconomic projections that the Department of Finance sends to the EU as part of its official documentation. We have always taken the view that the only way that we could do that is by, essentially, doing the same exercise ourselves and developing the tools to do it. Sometimes we use similar tools to Finance, but we have also developed our own tools, either on top of or separate to them. Some fiscal councils around the world do not do that; they just look at other people's projections and assesses whether their Department of Finance is being very optimistic compared with what everyone else thinks, but we felt that we needed to get our hands into the engine and understand how it works. We have those projections. We call our macroeconomic projections our benchmark projections, and we publish them in the back of our reports. We do not draw a huge amount of attention to them, mostly because the differences with the Department of Finance projections are often quite small, and people can easily get caught up with the fact that there is a decimal point of a difference somewhere. Our forecasts are designed to help us to think about it. If we were really pushing those forecasts, we would maybe polish them a bit more. Basically, we do both. We do not have a full macromodel; we are not big enough to do that, and, to be honest, it might not be very helpful, but we have a very rich suite of models. We have an awful lot of tools that we have developed over time.

It is the same on the Budget side. We have also collected data that did not exist before. For example, a key thing about public finances is the amount of revenue that will be raised as the economy grows. We collected new data for that and estimated new models. We have developed the best estimates that there are in Ireland for that.

Mr O'Toole: Your forecasting, unlike, for example, that of the OBR, is not a core part of your public role but something that you feel has to be done in order to give ballast to your scrutiny role. Is that required in the legislation, or is it just something that you have done because you think you need to do it in order to fulfil your statutory obligations?

Mr Barnes: I think it is the second. We are not required to produce a projection of any sort, although, as I said, it is crucial for us to go through the same exercise. Otherwise, when we see things from the Department of Finance, we have no idea whether it has done a good job because we do not understand what the issues are and how it is doing it.

It would not be particularly helpful to have two sets of slightly different numbers from different people in circulation. We publish what we have. In some of our reports, if we think that there is a big difference with the Government, we produce alternative scenarios or some adjustment to the numbers that the Department of Finance has made if we think those are a better guide to understanding the public finances. However, we do not have a full forecast exercise. A lot of the time, the differences are not huge, so having two slightly different sets of numbers will not add very much.

Dr Casey: There is a second benefit to doing all that work, which is that you have a much better understanding of what is actually happening in the economy on the ground in that you can think through every single sector and see the pattern that is developing. You can really spot very clearly whether there are imbalances or strange things that would affect how taxes are being raised and what might happen with the sustainability of those tax receipts in the long term. It is a very valuable exercise, but whether you want to put it in as something that is essential for a fiscal council to do is another question.

Mr O'Toole: You say that it is very useful, but the question we are debating is how essential it is to have independent or free-standing fiscal and economic forecasting.

When the legislation that created the Irish Fiscal Advisory Council came about, it was at a moment when the troika was heavily involved in debates with Finance and all that. Are there particular things about your role and the legislation underpinning your organisation that you think are products of that particular moment and are not necessarily useful to your ongoing work but were put in place at a very particular moment when other factors were at play on fiscal sustainability and financial stability etc?

Mr Barnes: The simple answer is no.

Mr O'Toole: OK.

Mr Barnes: Our mandate is very good. It covers looking at the macro forecasts, which is where most of the errors have been made in the public finances in Ireland. It involves looking at the budgetary part, where there are also errors and issues. For example, systematic overruns in the health budget have been a big issue, as has over-reliance on corporation tax. We monitor the fiscal rules, which is an important thing to do because they are an important part of the framework.

The mandate to assess the fiscal stance is very unusual. My sense is that only a handful of other fiscal councils have that mandate, and I think that they are mostly those that copied the Irish arrangements. It is actually very good. Basically, the bottom line is that people want to know whether the public finances are on track. Are they sustainable, are there issues and are they contributing to the good functioning of the economy?

It is very good to ask that very general question. It also opens up the potential to deal with a wide range of other issues, including long-term sustainability, which is a big one. Demographics in the Republic are such that ageing is going to happen pretty fast in the years ahead, and people need to know that. It is a really good mandate. If you were doing it again today, it is exactly what I would do.

Mr O'Toole: You touched on debt sustainability. We are in a very particular moment with huge growth in sovereign debt because of the pandemic and the response to it. How far are you mandated to look in a dynamic way at sovereign debt sustainability more generally? Are you looking at it at the minute? Obviously, the IMF in particular and the OECD will look at it too. Are you looking at a kind of static picture on debt sustainability? Views on it have changed in a decade.

Mr Barnes: That is true. We look at that a lot. That is where the fiscal stance mandate is very good, because it really falls under that. You might find that it would fall a little bit if you were just doing assessment of the budgetary projections, but then you are just doing a positive assessment and maybe some risk analysis around that.

However, as you say, it raises much deeper questions. We have the mandate to look at the fiscal stance. The fiscal stance is most of what gets the media attention and the public interest. People are not particularly bothered about how you get there through the forecasts and things. Those are very important to a technical audience but not to a general one. People basically want to know whether the public finances are on track, and they want an independent and expert reading of that. That is basically what we are doing on the council.

As to the sovereign debt situation, in the early days of the council, obviously, the Government did not have access to the markets, so we were thinking a lot about that and about meeting targets and things like that. Fortunately, we are not in that environment any more. As the situation has changed, that has become a very big part of what we do, and we do a lot of modelling on it. We have always had projections of debt, and we have always looked at the uncertainty around it. We have used fan charts, which basically show the likelihood of different outcomes of it.

More recently, we have developed — in fact, Eddie has developed — an excellent model that allows us to do a more complicated model-based version of that, which is called stochastic debt sustainability allowances. We find that very useful. We have also done a lot of work this year on the big-picture questions about the level of debt. Eddie and I, along with Elliott on the council, wrote a paper about the implications of very high debt and low interest rates. In Ireland, there is a huge difference between the interest rates, which are very low, and the growth rate, which is, essentially, quite high. We wrote a lot about that and basically came to the conclusion that the debt dynamics are really favourable at the moment but the risks are very high. The higher the debt, the higher the risks.

In February, we organised a major international conference with some of the top experts in the field like Olivier Blanchard, Charles Wyplosz and Philip Lane to talk about those questions. We have really tried to have as lively a debate as possible in the wider economics community in international terms and in Ireland about those kinds of question as well as in the council. We want to deliver the best advice on the matter. Those are the big new questions that are facing us. So, yes, we really have tackled those questions under that stance and mandate.

Mr O'Toole: I have two very brief questions.

The Chairperson (Dr Aiken): Ask the one about the central bank, and then I will give you a third.

Mr O'Toole: About the European Central Bank or the Irish one?

The Chairperson (Dr Aiken): No, about the Irish Central bank. What is the relationship with the Central Bank of Ireland? I was going to ask that, but you can have another one.

Mr O'Toole: You can ask that one; it is a good question. Now you have distracted me, Chair, because it goes on to another question. [Laughter.]

On corporation tax, you mentioned your concern about the ongoing revenue. However, with the over-reliance on corporation tax revenues, there is clearly a big fiscal, political and international debate about corporation tax rates. What is your next move on that, as it were? Do you decide, at a forthcoming fiscal event, to say something about it, if you feel that it is worth it? If there is a live political debate, for example, inside the EU or involving the Biden Administration about corporation tax rates, that will obviously include the Irish rate. How do you make a judgement on whether to say something, and do you have to calibrate that with the political context?

Mr Barnes: We intervene on different issues as they come up. If there is a debate on a particular subject that we have done work on and we have views on it, we will try to get it out there in some form, either through social or traditional media.

On corporation tax, our job is to assess the state of the public finances; it is not to advise on tax policy, so we would take no part in that decision on tax policy.

We were looking at the consequences conditional on tax policies that are chosen, either internationally or in Ireland.

Mr O'Toole: OK. My final question will lead into what the Chair wants to ask. Within the last hour, the European Central Bank (ECB) has put out a warning — it has been reported as a warning — about sovereign debt and the potential for volatility because of roughly 100% debt to GDP ratios in eurozone counties. Do you have to triangulate with that? Obviously, you do not have to echo what the ECB says, but is there an obligation for your fiscal analysis not to completely contradict what is being said by, for example, the ECB?

Mr Barnes: Our analysis is totally independent. We look at the situations in Ireland, subject to our mandate, and make an assessment on them. We also look at what happens in the world. Perhaps more relevant for us is the fiscal debate at the European level. There may be times when the overall European fiscal stance impacts everyone. There is a question of how much Ireland is often an outlier in these things on how much it contributes to wider efforts. Mostly, those are pretty second-order issues for us. We are actually independent and so will not take our direction from Finance, ECB or anyone else. We just try and make the best analysis we can as economists and experts of the situation.

Mr O'Toole: I was not in any way suggesting that you take direction from the ECB or another European institution. I was just asking about how you place yourself in that debate.

The Chairperson (Dr Aiken): I have two very short questions. First, what is your relationship with the central bank? The second question is about the red-flag function. I saw how economists were castigated if they dared to say that the Irish economic model was flawed, coming off the rails, and was all going to collapse in a big snottery heap. I saw, fairly close to, the vitriol directed at the messenger, even though everyone could see that it was happening and particularly that housing was overheating.

You mentioned housing again and the red-flag position. How closely should your red-flag message be listened to? Is there a mechanism to make sure that it gets through loud and clear? I have seen what happened in the past. You know, as well as I, that many economists around Dublin still bear the scars of having to say "The emperor has no clothes."

Mr Barnes: We have a relationship with the central bank on different things. Essentially, however, our roles are fairly independent and different. We work together on some issues and have worked together a little bit on modelling. We talk to each other, but we are different institutions doing different things.

With regard to the red-flag function, there is no doubt in our minds that we will say the truth — and say it very publicly — whichever way it goes. It might be a message that people want to hear or it might be a message that people do not want to hear. We are an independent body not a political one, but we do think a lot about communication and how we impact the debate.

The mandate is a very powerful thing. If we say something, it is not just the opinion of someone who has looked at it or has an opinion; it is based on a lot of work. We are the body officially mandated by Parliament to say these things. We use our mandate carefully. It would be easy for us to get headlines any day of the week by coming out with things, but that is not what we are about, and it would not work. We are very careful to measure our communication so that when we genuinely think that there is a problem, it should be clear to people that there is a problem. We see that in the public debate and the media, and parliamentarians realise that. Sometimes, we criticise small things where there is room for improvement, in a sense. Not every report that we do has these kinds of messages. Sometimes, we are not in that position. However, when we say that there is a problem, people take it seriously. Of course, then it comes into a political debate where other forces are at work. The force to spend more money and not really fund it properly is very powerful.

That is one of the reasons why fiscal councils have been set up. Recent evidence is that our mandate is not so powerful that, when we say something, bad things will not happen. It is, however, one of the forces that exists. We do our best, and we are in a good position. Other people are supportive of that. We have to see how it plays out. Certainly, there is a sense that we have warned about some things and that we have been listened to. Ministers have said, explicitly, that they have done something because the council said that they should. That is also a sign that we have some traction. There are, of course, many forces. Public finances are difficult. Everyone has loads of ideas about how to spend money, but they tend to find it harder to find things on which to cut back or areas in which to raise taxation. It is a difficult challenge to address, but we do our best.

The Chairperson (Dr Aiken): Sebastian and Eddie, thank you very much for a very informative evidence session. As we progress on our route towards, hopefully, getting our independent fiscal council up and running and legislated for, may we keep in contact? We would be delighted if, when we are up and running, you would look north of the border to mark our homework.

Mr Barnes: We would be happy to do that.

Dr Casey: Thank you very much.