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The size of the public service will rise to between 360,000 and 370,000 people over the course of the next 12 to 18 months, the minister told the event organised by TASC, the think-tank for action on social change.
The Government set aside €4bn for health spending in 2021, to be spent partly on recruiting around 16,000 extra people to the health service.
Mr McGrath said €2bn of the health spend represents a non-pandemic-related “step-change decision to increase the capacity of our public health system”.
He said maximising EU funds and boosting economic growth will help to pay for Ireland’s extra spending.
Ireland was the only EU economy to grow in 2020, with gross domestic product (GDP) up 3pc on the back of multinational exports, the European Commission said on Thursday.
However, the minister said he did not discuss the controversial €292,000 salary with Mr Watt. Rather he dealt with an assistant secretary in the department and the secretary general to the Government Martin Fraser.
Mr McGrath said there was discussion about Mr Watt moving from the Department of Public Expenditure to the Department of Health as far back as November last year.
Finance Committee chair John McGuinness there was public concern about the proposed salary and said it was a “pity that transparency didn’t play a deeper role” in process of deciding the pay increase.
Mr McGrath came under fire from Government and Opposition TDs over the course of the two hour committee meeting.
The latest numbers show tax revenues in January were down 9pc compared to the same month last year, including big falls in Vat and excise duty, while social welfare spending was 42pc higher.
January is an important month for Vat collection which is usually boosted by pre-Christmas trading, however, Vat receipts last month were down €340m from last year.
That reflects the hit to trading from the successive lockdowns in November and late December, and suggests CSO retail sales data that showed a rise in December spending has not translated into the tax take.
The Exchequer figures record a total €520m drop in cash terms of tax collected versus the same month last year.
Finance Minister Paschal Donohoe said that Ireland will receive a fair share of the EU's exceptional Covid-19 Recovery and Resilience Facility of €673 billion.