Wednesday, 26 November 2008
Dáil Eireann Debate
Deputy Caoimhghín Ó Caoláin: The Taoiseach tried this morning to imply a lack of support by Sinn Féin for the construction sector, because we pointed out the serious dependence the Government has had on this sector for the economic activity of the State in the past decade. I described this as codology and stated that it was an indication that the Taoiseach had no contribution to make when he was resorting to such nonsense.
For the Taoiseach’s benefit and for the benefit of others, let me spell it out again. The basis for sustainable growth was laid by Irish workers in the 1990s. Fianna Fáil-led Governments from 1997 had the resources to invest in sound infrastructure, to develop public services that were both equitable and efficient, to foster industry that provided employment and raised revenue through exports, and to create an enhanced society as well as a prosperous economy. Instead, these Governments saw a growing economy and they decided with their friends, the developers, the speculators and the bankers, to reap the rewards through ruthlessly exploiting the increased demand for housing and commercial property. They created a massive property bubble and a perilous over-dependence on construction for employment. Now the bubble has burst.
Construction employment has collapsed and so has Government revenue. Families are mortgaged beyond their means and many are losing their homes. Negative equity is rife and the full consequences for individuals, families, companies and financial institutions have yet to be seen. All of this was predictable. We in Sinn Féin were among those constantly highlighting the folly and the injustice of Government economic policy. We identified clearly how the economy was allowed to become grossly over-dependent on the construction sector, accounting for over 20% of the State’s GDP and employing one in every eight workers at its peak. An over-inflated construction sector masked a steady flow of job losses, particularly in provincial towns.
The Government failed to accept that the over-reliance on the construction sector was not sustainable and could not continue indefinitely. Consequently, it failed to put in place a strategy to deal with the anticipated contraction of the construction sector or the needs of those dependent on that sector for their employment. An estimated 30,000 construction workers have lost their jobs to date in 2008, and I believe the real figure is significantly greater. The lack of alternative employment is resulting in workers who lost their jobs emigrating in search of work. The Government still has not brought forward a strategy to get these workers back in employment or in training. It has allowed the social security entitlements of many construction workers to be undermined by failing to take action as unscrupulous employers coerced workers into registering as self-employed. There is ample evidence that this was the case. Of those who lost their jobs in the construction sector in the year to the end of June, 50.3% were under the age of 25, while 23% of those under 25 still employed in the construction sector at the end of June did not have a leaving certificate qualification.
The collapse in construction is a critical factor in the current recession which has spawned this regressive Bill. Rather than simply criticise the Bill and the budget, Sinn Féin has put forward progressive proposals for recovery. These proposals are based on the need to make sure that a controlled reduction in dependency on the construction sector includes measures to ensure continued employment opportunities in construction, as well as measures to enable workers from this sector to access alternative employment. To increase our competitiveness and to aid economic recovery, the Government should front-load infrastructure projects that can employ workers from the construction sector, in areas such as transport, schools, crèches, hospitals and primary care development. There is much to be done in those areas.
In particular, we want to see a State housing infrastructure plan, designed to address both housing need and unemployment in the construction sector. This would include the following: the construction of the required social housing by local authorities on a targeted basis over five years; the completion of currently stalled regeneration projects in local authority housing estates and complexes; a programme of upgrading of local authority dwellings, with special emphasis on housing for older people; a social housing maintenance programme, equipping local authorities to ensure that their housing stock is kept in good repair; a home heating programme to ensure that local authority tenants, especially older people, have sufficient and energy efficient heating in their homes; a home insulation programme to conserve energy and reduce energy costs for householders; and a home adaptation programme to carry out essential works to adapt homes for the use of people with disabilities, in tandem with reform of the disabled person’s housing grant.
Specific training and upskilling courses for alternative industries to construction should be made available through FÁS and the State’s universities and institutes of technology. We need to see special retraining for construction workers so they can work in the energy saving and renewable energy sectors. The Government should introduce a specific back-to-education scheme for construction sector workers under the age of 25 who did not complete second-level education.
Measures to allow apprentices to complete apprenticeships that were curtailed due to the recession in the construction sector should also be introduced. The Government should use either this Finance Bill or the social welfare Bill to address the predicament of construction sector workers who were pushed into becoming self-employed by their employers and who consequently do not have adequate social insurance contributions to allow them to access social welfare entitlements. Their contributions for the past five years should be considered, rather than the normal governing contribution period of two years.
The debate on the banks has not focused on the situation faced by hard pressed mortgage holders who have lost their jobs. There should be a mortgage support package for such families. The Minister still has time to address their needs on Committee Stage of this Finance Bill and I urge that he do so.
These are just some measures that could help regress growing unemployment and begin to revive the economy. We placed them in the form of a motion in the name of Sinn Féin Deputies on the Order Paper yesterday. The Finance Bill before us, in contrast, is devoid of any strategy to get our economy out of recession. There is also an air of unreality about the Bill, in that the near-collapse of the banking system is not addressed. The Government guarantee scheme for the banks is fundamentally flawed and provides scant protection for taxpayers. Are we soon to see the international corporate vultures allowed in to feast on the Irish banks or are they to be recapitalised by the State at the expense of more cutbacks in vital public services? There are other choices and we have outlined some of them.
This is a regressive Bill. There is nothing in it to help struggling small and medium businesses which are starved of capital. In contrast, the Bill retains tax breaks for the burgeoning private health industry which is profiting at the expense of the public health system. I urge Deputies to reject the Finance Bill at every stage, including here tonight when the Second Stage guillotine is applied by the Government parties. I must indicate, with some regret, that we do not have a Finance Bill before us that truly measures up to the challenges of today’s times and Sinn Féin will be rejecting this Bill accordingly.
We live in a time when citizens are greeted each morning by a barrage of bad news stories relating to the global economic climate. Daily we hear about the US Government being asked to bail out more failing banks, the US motor industry and so forth. Sadly, this bad news is unavoidable. However, this Finance Bill was crafted primarily with the aim of resolving the crisis as soon as possible. I echo the Minister’s call for Ireland to be prepared to take advantage of the economic upswing when it occurs. The Minister for Finance, through this Bill, will help us to prepare for that event.
We are being hit from all sides, as the Minister for Finance pointed out yesterday. This open economy of ours has benefited in the past from its position in the global economy but it is now suffering because of that position. However, the Government is addressing this crisis. Already the public service task force report has recommended the employment of greater economies of scale in the purchasing of common materials across the public sector. This illustrates the Government’s commitment to cost curbing and cost cutting.
The Government could not have done anything differently to prevent our economy reaching this point, despite what those in Opposition claim. The term “difficult choices” has been bandied about so much before and since the budget that it almost seems like a cliché to repeat it. However, the Opposition seems disinclined to accept that regardless of which party was in power during these past few months, cuts had to be made and the Government did not make its choices willy nilly.
The Minister and his officials have resolved to balance the budget in such a way that the necessary cuts are made while spending is still continued in the vital areas of infrastructure, social welfare, health and education. Underlying this balance is the aim to further strengthen the economy, which is facing a contraction both this year and next. The budget and the resulting Finance Bill represents a proactive approach to solving this country’s economic problems.
The Bill encourages new business and development, protects the elderly and most vulnerable in our society, adds enormously to the current health and education budgets and increases the income of the Government by targeting those who can afford to contribute that bit more to society. In addition to these achievements, the Government has demonstrated its willingness to listen to all stakeholders with a vested interest in the economic future of this country and made the necessary changes.
As mentioned, the Minister has used the Bill to amend certain elements of the budget. In the area of income tax, the Finance Bill makes changes to the proposed income levy. I am relieved that those under 65 years of age earning less than €18,304 will be exempt from the levy. The same exemption has been granted to those over the age of 65, with the income threshold increased to €20,000 per person and €40,000 for married couples. As we all know, there is now a three-tier system of levies, where the levy paid is dependent on one’s income, with the highest paid earners in our society paying the most. This is an equitable system, with the higher earners paying 2% or 3% of their incomes to the State in order to pay for the exemptions of low earners. Equally, the new levy does not apply, nor should it, to any social welfare income. The pain of paying the levy for those on middle incomes will be offset by a widening of the tax bands.
The figure of €18,304 per annum is also used as the new point of entry to the income tax system and all those earning below this will also be exempt from PAYE and PRSI deductions and will take home 100% of what they earn. This represents approximately 36% of income earners. The threshold for entry into the tax system has increased by 259% since 1997, which is a commendable record for any Government. The message of these reforms is this that those on the highest earnings should pay the lion’s share of the tax income due to the State.
We remain a low tax economy and despite the fall in employment, there are still significantly more people in the workforce than when Fianna Fáil came to power. It is because of this tax system that Ireland remains attractive to international corporations, which, along with building, agriculture and tourism, have formed the backbone of this economy.
One of the most advantageous elements of this year’s budget is the change to the area of research and development, where the existing tax credit has been increased to 25%. This will increase the attractiveness of Ireland to foreign investors and domestic businesses alike. A range of options is also being made available, providing flexibility in the use of tax credits. There is also a three-year exemption from corporation tax on trading profits for new companies who operate for the next year. The exemption on tax liabilities not exceeding €40,000 will last for up to three years and is yet another strategy to encourage entrepreneurship.
As a Deputy representing north Dublin, incorporating the Swords area, I particularly welcome the focus on research and development in the Bill. My area is one of the largest economic centres outside the city centre and certainly one of the biggest in the north Leinster region. While the issue of tax exemptions for research and development is complex, I intend to convey the importance of this element of the Bill to my constituents at every opportunity.
While on the subject of businesses, I wish to take this opportunity to mention the banking bail out scheme and the current squeeze being experienced by businesses. It is important for the Government in its negotiations with the banks for any re-capitalisation scheme to make it conditional on the banks freeing up credit for small and medium businesses and individual citizens. I am confident the Minister for Finance will achieve the best result for the country.
I welcome the increase in mortgage interest relief. In this time of property market uncertainty, it must be a relief for first-time buyers that the Government is willing to take into consideration the burden of a person’s first mortgage and provide a large proportion of relief. The rebalancing of the mortgage relief system in favour of first-time buyers is thankfully revenue-neutral and at the same time provides the most assistance to those who in turn are affected most by the paying of a mortgage, the young people starting on the property ladder.
One area which thankfully remained unchanged in the budget was residential stamp duty. I welcome the Minister’s decision to steer clear of intervening in the residential sector. Conversely, I welcome the reduction in the rate of stamp duty on the sale of commercial property and this should go some way to reducing the strain on commercial buyers. Hopefully, once commercial markets begin to move again, the demand for development will take off and bring some refreshment to the construction industry. The income from stamp duty to the Government from the anticipated increase in commercial property sales is also significant.
Much has been said about the Cinderella rule and how a person’s residency and therefore his or her tax liability, in particular wealthy people involved in sports and the arts, is determined by the number of days he or she resides in the State. I am happy that this has been changed. The Minister has now brought in the provision that a person in the country at any stage during the day will be counted as residing that day in the country. I welcome the fact that under the Finance Bill, regardless of when a person leaves the State, his or her presence here at any time, on any day, will count as a day towards determining their residency. This will not affect cross-Border workers who are employed here in the South. In the call for patriotic duty perhaps these wealthy Irish people who have been paying their taxes elsewhere should reconsider their occasional residency and instead look towards these shores as a permanent home and tax base.
As a Member representing the area where Dublin Airport is located, I welcome the lowering of the new airport tax for shorter journeys and believe the new lower tax will benefit people in the west of Ireland in particular. I will be making strong recommendations to the Minister for Finance to amend the Bill in such a way that Irish airlines are compelled to establish a special air tax client bank account and return the air tax on cancelled or no-show flights back to the Government as currently it is pocketed by the airlines on the basis that their administration fee of €20 is in excess of the airport tax. Insurance brokers in the insurance industry must set up a special designated account for clients and this rule should also apply to airlines. It is ridiculous that airlines can pocket money which was designed to be given to the Government. I will ask the Minister to consider this as it is a simple accounting procedure and it will not cause any difficulty for the airlines. If the airlines do not refund the customer, the money should be given to the Government who can put it to good use. I have written to the Minister for Finance outlining this suggestion and I hope he will consider my comments and suggestion.
As a representative of an area which is highly multicultural — I do not mean this in any offensive way — I welcome moves to tackle VRT evasion. The proposal to introduce pre-registration of imported vehicles, estimated excise assessments and the establishment of a temporary registration system for cars brought into the State for more than 42 days, should go a long way to resolving a particular problem. I refer to the meeting which the Taoiseach held today on the OECD report. I commend the establishment of a new group to examine the question of costs in the public service and to consider setting up redeployment schemes so that personnel can be transferred from one section to another and equally where there would be targeted redundancy packages. In the past, redundancy packages have resulted in the good people leaving employment. We need to get rid of the people who are not contributing as much as they could and we need to hold on to the good people who do a good job. By and large, the public service does a good job even though it is often criticised unfairly. No more than any other group in society, there are the bad apples in the barrel and we need to weed them out. The taxpayer expects to get value for money.
I welcome the fact that the Taoiseach has set up his own Cabinet committee on driving this programme. The Taoiseach has the determination to bring this about and I look forward to the packages coming on stream as early as possible, perhaps by early next summer. We all subscribe to his view that we need a lean, motivated, high-performing, responsive and effective public service and the general public is calling for this, particularly in the context of our economic downturn. We cannot afford to have any people in the system who are not giving 100%. I wish the Minister for Finance well. We need to see results and I am confident there is a determination in Government to bring this about.
I note comments from the other side of the House that this is just an Irish problem. There are reports in magazines and newspapers every day of the week. I refer to some headlines in today’s newspaper which give an idea of the global nature of the problem, for example: “Germany predicting its biggest economic decline since the war”. This headline should make the point that Ireland is part of the global economy. If Germany, one of the strongest economic units in all of Europe and indeed the world, is suffering, it is ridiculous to propose that the state of affairs here has been caused by the Government. There are references to moves to help free up credit in the United States. A number of banks have been bailed out or have been allowed to fail and the US Government is under pressure to bail out the motor industry. A comment in today’s newspaper refers to the number of jobless in OECD member states as being 42 million, across 30 states. To suggest that our problems are brought about by our Government is quite ridiculous.
I must stress to those who do not believe we are in an economic downturn that a report from the OECD has stated the economy will remain in one until 2010. We have a major economic problem and need to take decisive action. One group of our colleagues on the other side of the House wants to increase taxes while the other wants to slash spending. They have no common approach in their commitment to being part of a future government. They cannot even agree on their tax or economic policies.
Deputy Michael Kennedy: The media has commented on the Opposition leaders’ failure to agree on economic policies. One headline over an eminent journalist’s article stated, “Kenny’s call for pay freeze attacked by Labour”. I am not passing any personal judgment on this.
Deputy Michael Kennedy: The British Labour Government’s budget has led to headlines such as, “Labour bets all on UK stimulus packages”. Betting all is like going into the bookies and putting one’s shirt on a horse.
Deputy Michael Kennedy: I believe the Taoiseach, the Minister for Finance and the Government have the right approach to these economic problems. They have taken decisive action with the banks and have the right methods to take advantage of the upturn in a few years’ time.
Deputy Jimmy Deenihan: It would be an understatement to claim we are facing one of the most economic challenging times ever. Solutions are not easy to come by. The problems we are experiencing have been festering away over the past ten years when wrong decisions were made because of expediency and to win political favour. We have stored up problems with which we must now deal. It will not be easy, which the Minister for Finance has accepted on several occasions.
When economic times were good with an abundance of moneys there was much to say during the Finance Bills. There were, however, many reasons for the economic boom. Between 1994 to 1999, Structural Funds gave a major boost of €9 billion to the economy. At the same time, the building boom began. In 2006 alone, some 90,000 houses were built which each brought in €100,000 in tax revenues, which amounts to €9 billion. It follows that if only 26,000 housing units will be built this year, there will be a major shortfall for the Exchequer.
Another factor of the economic boom that is often overlooked is the investment by American technology firms. It began with Intel in the late 1980s and continued into the 1990s when Silicon Valley technology firms invested in Ireland. They are still pushing our export boom.
Another aspect of the economic boom which will not continue is borrowing. From 1977 to 1981 a Fianna Fáil Government trebled the national debt from £4 billion to £12 billion. We are always reminded of the then incoming Fine Gael Government doubling it but rarely reminded of who trebled it. Eventually when various Governments decided they had enough of State borrowing, it was replaced by individuals borrowing. Today, Irish borrowers owe the banks an alarming €400 billion, a figure given by the Minister for Finance to the Labour spokesperson, Deputy Joan Burton. That borrowing is not sustainable. The likelihood of that rate of borrowing continuing will not happen. As a result consumers will not be spending as much on the high street as they used to, with the result there will be less revenue from taxation.
The UK Government has cut its VAT rate from 17.5% to 15% which will have a major impact on areas such as our tourism industry. In a way, we are already competing with Northern Ireland. While Tourism Ireland is responsible for promoting the island of Ireland, there is an emphasis to promote the North more than the South to prove to all political parties in the North that all-Ireland arrangements work. People attending international holiday fairs have realised this is the case. The Ceann Comhairle, who was Minister for Arts, Sport and Tourism, will understand this too. With the reduction in the UK VAT rate, there is a greater reason to visit Northern Ireland. Meanwhile the Minister for Finance has raised our VAT rate from 21% to 21.5%. Prices in the North will be competitive. Several people who went on shopping trips recently to Newry and Belfast that I spoke to could not believe the difference in prices. The Minister will have to examine this issue because it will lead to another outflow of funds.
I thank the Minister for reviewing the betting tax proposals. There has been a proliferation of betting shops in many towns. I do not understand how a town of 4,000 people like Listowel can sustain five betting shops. However, the original proposal on betting tax would have closed some of them. I also welcome the review of the airport tax. Kerry Airport would have been severely disadvantaged, as Knock would have been too, if the original charge had not been reviewed. I am glad the Minister listened to our concerns about this and has amended the proposal.
Deputy Ulick Burke: I am glad to have the opportunity to say a few words on the Finance Bill. In Ireland, there are not many sections of society that would have confidence in this Government and Deputy Brian Lenihan as Minister for Finance to take this country out of the state of crisis in terms of finance, employment or otherwise. I refer to the cuts brought in by the budget last month and the instant angry reaction that so many sections of society have shown on the streets of this city and throughout the country. I do not know if the Government realises the anger that exists in the population at large because of the waste we have had from this Government over the past ten years. The poor, the elderly and the infirm must bear the consequences of the lack of action in the past.
Many Members on the Government side have built up the idea of the wonderful support the Government has given to new start-up businesses. If they went outside the door of this House they would realise the difficulties small businesses have in this country. How can people in government reconcile that fact with what is happening in agriculture? The Minister for Agriculture, Fisheries and Food has introduced cuts, particularly in the area of young, start-up farmers. I refer to the installation aid scheme, which was cut and abandoned. Will the Minister examine the effect this is having? There are 400-500 young farmers in this country who have some degree of involvement in the installation aid scheme. Some have a major investment in the scheme, others to a lesser extent. I hope the Minister for Finance or the Minister for Agriculture, Fisheries and Food will withdraw the savage cuts in that area and allow the young farmers who want to get involved in agriculture and who want a livelihood in this country to go ahead, particularly those who have had an involvement to date. It is a costly process but they believe it is important to them to do so.
The loss to the farming community as a result of cutting the suckler cow scheme by €40 per head and the disadvantaged area scheme will be €1,200 to any farmer and family community in County Galway. That is the statistic for everyone to see. On top of the 1% levy, other cuts and the increase in bus fares for children there is a realisation that what the Minister is doing is cutting and hurting the opportunity for people to make a livelihood in the west, particularly in County Galway. The Minister must re-examine those schemes again.
What has been done in education? I do not believe the Minister for Education and Science understands the consequences of the cutbacks he has introduced. In the instance of substitution, he blames teachers and queries the legitimacy of many of those who are out for whatever reason. That is an indicator that he is not familiar with the everyday working of a school situation. There will be chaos on 1 January and a demand from school management to withdraw all involvement in all extracurricular activity in school life, whether at second level or where principals will be forced to send children home to their parents at primary level. When that happens, the Minister for Finance and the Minister for Education and Science will have to take responsibility for it. The Minister for Finance will not do so, he has walked away from everything and shaking his head is the negative response he has.
I refer to what the Minister for Social and Family Affairs has introduced. She has cut back on the back to education scheme. In that instance, the folly and inequity of the Minister’s action is such that a person on low pay will have the difference of €1.21 between social welfare, whether jobseeker’s allowance or otherwise, and income. The difference between the person on low income going back to education and the person on social welfare will be €63,000 over three years, the average time to get a third level degree or certification. There is a disincentive to those who want to work because they are penalised if they are 21 years before they can benefit. They receive €6,400 whereas the person on jobseeker’s allowance or social welfare payments of one kind or another will get €25,000 per year to fulfil that. That is inequitable and must be changed if we are talking about reasonableness and balance.
Deputy Pat Breen: I am delighted to have the Minister for Finance and the next Minister for Finance in the Chamber. Former President Harry Truman once said “It’s a recession when your neighbour loses his job; it’s a depression when you lose yours.” As the current economic crisis rages throughout the world, many analysts are describing the situation as the worst financial crisis to hit the global economy since the 1920s.
I was at a Council of Europe meeting this morning where we had a hearing on the world financial crisis. We met people from the IMF, the OECD, a top banker from Société Générale and President Sarkozy’s economic adviser. What the OECD had to say was interesting. The representative said we could expect the recession to be deep and long, worse than the recession of the 1980s, and that it will be at least 2010 before things get better and return to pre-turmoil levels. In the meantime, unemployment will rise sharply, the housing market has some way to go before it hits a low and the only positive news is that oil prices are down and this will help things along the way.
The representative said we are entering a new period of globalisation. G7 has become G20 and it met last week in Washington and identified the problems. One of the interesting comments was that only 18 of 27 EU countries have bank liquidity rules. We have an extraordinary crisis and a major challenge. The OECD representative said that countries like Ireland would feel the pinch much more and get more pain because of our dependance on the housing sector.
We were talking about recession; unfortunately, this Government has turned it into a depression. One of the greatest tests of leadership is the ability to recognise a problem before it becomes an emergency. The Government has shown little leadership and as a result Irish people have lost trust in the Government and in the Minister. The budget targeted the most marginalised and vulnerable people in our society. It was full of half-baked proposals. As a result it was forced to do many U-turns.
No sector of society has escaped the crisis. The inability to access credit is crippling many of our small and medium sized businesses. The recapitalisation of our banks is necessary to ensure those businesses can get access to much needed credit.
Previous speakers referred to what happened in the United Kingdom this week when the Chancellor, Alistair Darling, reduced the VAT rates and announced a series of other measures to stimulate the economy. As Deputy Deenihan said, we have already witnessed a mass exodus of people travelling across the Border where they are getting more favourable rates for the euro because of its strength against sterling.
That reduction in VAT rates is set to compound the problem here. In recent days I received a number of calls from business people in County Clare who wanted to know what the Government was doing about the problem. Many of them will be out of business by Christmas if something is not done about it but rather than introducing strong measures in the Finance Bill to assist those retailers, the Government has done the opposite. It has introduced an income levy and increased the rate of VAT, which will make many Irish goods much more expensive.
I welcome the strides in the Bill regarding research and development and the credit regime but I am extremely disappointed that regional development took a major hit in the budget, particularly the shortfall of €1.3 million in funding for Shannon Development, which could see grant aid to industries reduced at a time when those industries need extra support.
Today we witnessed the effects of the open skies agreement, with Delta Airline’s announcement that it was ending its Shannon-Atlanta service from next summer. The recent announcement of the US customs and border protection facility at the airport is welcome but passenger figures are on a downward spiral in Shannon.
The air travel tax was unwise, particularly with the downward trend. The Belgian Government had to cancel its plans to introduce that tax. I appeal to the Minister to re-examine this travel tax and the damage it will do to regional tourism.
The cutbacks in the farm installation aid and the farm retirement scheme will have an impact on young farmers. Many elderly farmers will be forced to continue working while, unfortunately, younger farmers may choose the emigration route.
The EU President, José Manuel Barroso, announced today that the European Commission has proposed a €200 billion plan to revive EU economies. However, it appears the Irish Government is to opt out of this proposal. The Minister might comment on that when replying because it is an important issue. I am aware it will be discussed at the EU Heads of State meeting on 11 and 12 December. I ask the Minister to clearly outline the reason he will not sign up to those proposals.
Does the Government have a strategy? How does it intend to restore confidence in the economy? The Minister said this Finance Bill contains a mix of measures which have struck an appropriate balance between the need to protect low incomes and restore stability to the public finances. I believe it does neither. There is no plan or strategy. There are no ideas coming from the Minister’s side of the House. The country needs a clear strategy. Ordinary men and women throughout the length and breadth of this country are very worried at a time when we need someone to lead this country out of the recession and not into a depression. People need reassurances. That is very important to them. Sadly, they will have to continue to battle their way through the crisis without any leadership from this Government.
Minister for Finance (Deputy Brian Lenihan): In my reply I will respond as far as possible to the points raised by the Deputies in their remarks on the Bill. I assure Deputy Breen that there will be leadership, we will stabilise the public finances, we will weather the storm and come through the difficult times. If we take corrective action now we will ensure that Ireland benefits from the upswing when it happens.
As the House is aware, budget 2009 and the Finance Bill were prepared taking account of the difficult economic position prevailing both internationally and domestically. The budget set out a medium-term strategy to stabilise balance in the public finances as soon as possible. That required and obliged us to reduce public expenditure and adjust tax levels to reflect the changed realities of lower economic growth. Restoring order and stability to the public finances will underscore Ireland’s well-earned international reputation as a good place to do business. The Finance Bill continues this process and sets out targeted support to enterprise to assist economic recovery.
There has been much discussion in recent weeks about the use of fiscal stimulus packages. In particular, Deputies Bruton, Breen and several others referred to the proposed European Union Commission communication. We welcome this communication as an important signal to EU consumers and business that member states, including Ireland and the Commission, are taking action to boost demand and support business in these difficult times. The Government is already taking corrective action in line with what the Commission is seeking from the member states. For example, the budget provided growth in current spending of 3.6% and capital investment of €8.2 billion in 2009, over 5% of GNP. Viewed by any international standard there is a substantial stimulus package in this budget, as substantial as can take place having regard to the overall need to restore stability to the public finances. Our relatively low tax rates for the employed are broadly consistent with the measures proposed by the Commission recovery plan but we do not have room for manoeuvre in terms of an additional fiscal stimulus beyond that envisaged in the budget.
Current budget projections indicate that at least €45 billion will have to be borrowed between 2008 and 2011 to sustain the current level of public services, of which over €9 billion will be used to fund day to day expenditure. This is not sustainable. Debt servicing costs have a first call on resources and an increasing debt interest burden will reduce our productive capacity, increase unemployment, over-burden the taxpayer and undo past efforts to help the vulnerable.
It is acknowledged by the Commission that not all member states have the same capacity for giving a fiscal boost and the impact on member states’ ability to borrow on the markets must be taken into account. The priority for small, open economies like Ireland with relatively high general Government deficits is to get our public finances back in order, otherwise the long-term competitiveness and international reputation of the economy will suffer.
Throughout the debate Deputies raised various issues relating to banking and the challenges faced by small businesses. The Government took swift and decisive action at the end of September to safeguard the Irish banking system to ensure that our financial system continued to meet the needs of the economy and in particular the needs of the small and medium-sized enterprises. Over 250,000 small businesses operate in our economy and employ approximately 800,000 persons. Access to credit and finance, including short-term credit, is the engine of the SME sector. The Government is very conscious of the need to ensure that credit lines continue to be extended to viable businesses. To support this objective and, more generally, to secure the stability of the major domestic credit institutions, this House introduced and approved the credit institutions (financial support) scheme. The focus has been to promote confidence in the economy and ensure that the Irish banking system continues to be in a position to access liquidity and funding to meet the credit needs of the economy.
In my recent discussions with the six guaranteed institutions, I pointed out to the institutions that the fundamental object of Government policy is to ensure that the banks continue to play a crucial part as motors of the economy and in the giving of credit.
As regards the income levy, I welcome Deputy Bruton’s contribution to the debate. I am pleased that he has recognised the increased fairness of the income levy as constructed for the Finance Bill. I believe the levy is a progressive and fair measure. The exemption thresholds for those on low incomes and those over 65 years of age protect the vulnerable and the elderly. Middle income earners will pay at 1%. Income in excess of €100,100 will be levied at 2% up to a ceiling of €250,000. Only income above this amount will be levied at 3%. This is a very progressive levy. As introduced in 1993 it was not nearly as progressive. As I said yesterday, those who can best afford to pay pay the most. In fact, the top 1% of income earners will contribute 20% of the levy yield.
Deputy Burton asked for marginal relief at the exemption thresholds. I presume this is the Deputy’s remedy to alleviate the position known as the “step effect”. As I stated during my introductory speech, where the age-related or general thresholds are exceeded, the levy will be payable on all income. To introduce a marginal rate system on top of the exemption limits would be both very costly and add an undue level of complexity into the system for businesses and payroll operators.
It should be noted that there are step effects in our tax system which have been in place for a number of years. For example, there is a step in the health levy and in the PRSI system. There is no compelling evidence that these step effects have discouraged workers from accepting increases in pay, as Deputy Burton suggested. As the Minister of State, Deputy Mansergh, and Deputy Michael Ahern said during the debate, there is a precedent for the income levy. The income levy introduced by the Fianna Fáil-Labour Government in 1993 had a step effect, as did the income levy introduced by the Fine Gael-Labour Government in the early 1980s.
I would like to clarify the position of the income levy for the self-employed and farmers. Deputy Fleming is correct in his assessment that the income levy is not applied on turnover. The levy is applied after deduction of legitimate expenses directly associated with the performance of the trade. He is also correct in pointing out that the use of the income levy is preferable to increasing the income tax rates. As the Minister of State, Deputy Mansergh, rightly pointed out yesterday, to provide the same yield as the income levy we would have to increase the standard rate by 1% and the higher rate by 2%. This would mean an increase on middle income earners of 3% and not the 1% as proposed.
I assure Deputies Ciaran Lynch and O’Donnell that the income levy will not be applied to the minimum wage. The annualised equivalent of the minimum wage is €17,542 whereas the income levy exemption threshold is €18,304. This is €762 more than the minimum wage annualised.
I thank Deputy Cyprian Brady for his comments on the changes to the mortgage interest relief provisions. This measure will provide real assistance to first-time buyers without placing an additional cost on the Exchequer. Deputy O’Donnell pointed out this initiative will result in a reduction in relief for non-first-time buyers. However, it is not possible to make this measure revenue-neutral without rebalancing the relief in this way and non-first-time buyers are not under the same pressure as first-time buyers.
I welcome Deputy Noonan’s contribution and I am heartened that he appreciates the reasons that the health expenses relief has been reduced generally to the standard rate. Uppermost in my thoughts when deciding this measure was the welfare of those in nursing homes. I was aware that the nursing homes support scheme was being drafted but would not be in place by the start of 2009. This is one of the reasons I extended marginal relief for nursing home expenses for a further period. My intention was to review the provision again in the context of a fully operational nursing homes support scheme. However, in light of this debate and having reflected on the points raised by Deputies Noonan and Mitchell, I will consider an amendment on health expenses relief for nursing homes on Committee Stage so that the default position will be continuation of marginally rated relief for nursing home care rather than standard rating at the end of next year.
On a related point, Deputy Bruton asked, regarding the scheme of capital allowances for specialist palliative care units, why provision is being made to allow qualifying capital expenditure under the scheme from the date of the enactment of the Finance Act 2008 through which the measure was introduced. The reason for this is that the scheme will not be commenced until approval from a state aid perspective is received from the EU Commission and I did not think it reasonable that legitimate capital expenditure on qualifying projects should be excluded from benefiting under the scheme in the period pending that approval. My Department will continue to engage with the EU Commission in an effort to expedite the state aid approval process for the scheme.
Deputies Bruton, Burton and Sherlock raised issues regarding the changes to the research and development tax credit scheme, in particular the availability of the credit for expenditure on buildings. Since the scheme was introduced in 2004, expenditure on new or refurbished buildings used exclusively for research and development activities has attracted a tax credit of 20% of that expenditure paid over a four-year period. However, data emerging from a review of the operation of the scheme being carried out by my Department suggests that this part of the scheme is not being used. This reflects the fact that in many instances work on research and development takes place in production or manufacturing environments and not only in laboratory conditions.
The Bill provides that a tax credit of 25% will be available from next year in respect of a proportion of the expenditure incurred on a new or refurbished building used in part for research and development activities. In this way, we hope not alone to capture the benefit of additional research and development activities which may be undertaken in conjunction with production and other activities, but also have the opportunity to benefit from the fruits of that research and development with the potential for additional production activities to be undertaken here. The provision requires state aid clearance from the EU Commission which my Department will pursue.
Deputy O’Donnell expressed concern about the time limit on companies making a claim in respect of a tax credit. The Bill provides that such claims must be made within 12 months from the end of the accounting period in which research and development expenditure giving rise to the tax credit was incurred and applies to claims made on or after 1 January 2009. This is a reasonable requirement for the future. I realise, however, that the requirement will put pressure on companies and their advisers regarding claims for accounting periods ending in 2007 and prior years. However, the Revenue Commissioners have issued an e-brief in recent days advising tax practitioners and other interested parties that they can lodge, before the end of this year, protective claims in respect of any tax credit arising in the accounting periods ending on or before 31 December 2007. Specific details on such claims can then be submitted thereafter. This should relieve the pressure on companies and advisers on the claims deadline in the Bill.
A considerable number of Deputies, including Deputies Crawford, Tom Hayes, Morgan, McHugh and Sherlock, have noted the differential in VAT rates existing as a result of the decision by the UK Government to reducing its standard VAT rate from 17.5% to 15%. This measure has been adopted by the UK authorities as part of a fiscal stimulus package. It must be recognised that our starting point is very different from that of the UK. We already have a low taxation economy, especially in the area of direct taxation, both income and corporation taxes. This lower starting position for direct taxation makes it more difficult to reduce taxes further.
As I have already said, the Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP next year, which is twice the EU average. As a small open economy, many of our standard rated goods are imported and cutting the VAT rate would benefit the economies from which we import far more than our own.
The Government increased the standard VAT rate by 0.5% as part of a general package of revenue-raising measures to fund key public services. Already we are borrowing 10% of all day-to-day public services expenditure. This is unsustainable and we faced difficult choices in bringing forward corrective measures. Each percentage point reduction in our standard VAT rate would cost €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points, as has been done in the UK, would cost around €1.125 billion in a full year.
Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, furniture, telecommunications, cosmetics, confectionery, soft drinks and adult clothing and footwear. The effect of the increase in the standard rate means an increase of 8 cent on an item costing €20, or 41 cent on an item costing €100. Approximately half the value of goods and services purchased in the State are not subject to the standard rate of VAT and, therefore, are unaffected by the change in the standard rate.
The reduction in the UK standard VAT rate will have an impact on the price differential on some goods between the North and the South. However, the UK has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on those items. Consequently, there will be no reduction in the price of those products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%. It is important that Members of this House recognise that the weakening of sterling has had a more significant impact on relative prices than any VAT changes on the price differential between North and South of the Border.
The provision on VAT and tour operators is being introduced as a result of an Appeal Commissioners’ decision which made all tour operators liable to VAT. The measure will regularise the VAT position of tour operators and bring their treatment into line with most other EU member states. Several Deputies, including Deputies Gallagher and O’Donnell, raised the issue of the air travel tax. In this regard, Ireland is not unique; the UK, France and the Netherlands all apply air travel taxes. Our rates will be lower than those applying in most other countries. Tourists to Ireland will be subject to the tax only on their return journey, so €2 or €10 in the context of a much larger purchasing decision involving hotel expenditures etc. should not have much effect on tourism.
Time does not permit me to respond on all the other points raised but before I conclude I would like to acknowledge the support of Deputy Bruton on the amendments to betting duty in the Bill. I welcome his understanding of the complex nature of the sector and the challenges it faces. There is a clear need to widen the tax base for gaming and gambling activities generally. I reassure Deputy Ciaran Lynch that persons who need to travel to work at unsocial hours and who have no reasonable alternatives to using their cars will not be liable for the car parking levy in those circumstances.
Irish taxation policy has given us a significant competitive advantage in the past 15 years. We have ensured that we have had the lowest levels of direct taxation on income; therefore, we have had marginally higher indirect taxation. That model of taxation has worked well for our economy and will be even more important now in leading us back to the path of economic growth.
This year, for the sixth consecutive year, a married one-income couple with two children, on average earnings living in Ireland, has the lowest average tax rate in the OECD. When cash benefits from the State, such as child benefit, are taken into account, such families face a negative tax burden, receiving more money in cash transfers from the State than they pay in income tax and social security contributions. After the budget changes, we are still one of the lowest taxed economies in the EU and I look forward to Committee Stage where we will have the opportunity for a more detailed discussion on the measures contained in the Bill.
An Ceann Comhairle: As it is now 10 p.m., in accordance with an order of the Dáil of this day, I am required to put the following question: “That the Bill be now read a Second Time”, “Go léifear an Bille an Dara hUair anois”.
|Ahern, Bertie.||Ahern, Dermot.|
|Ahern, Michael.||Ahern, Noel.|
|Andrews, Barry.||Andrews, Chris.|
|Ardagh, Seán.||Aylward, Bobby.|
|Behan, Joe.||Blaney, Niall.|
|Brady, Áine.||Brady, Cyprian.|
|Brady, Johnny.||Browne, John.|
|Byrne, Thomas.||Calleary, Dara.|
|Carey, Pat.||Collins, Niall.|
|Conlon, Margaret.||Connick, Seán.|
|Cowen, Brian.||Cregan, John.|
|Cullen, Martin.||Curran, John.|
|Dempsey, Noel.||Devins, Jimmy.|
|Dooley, Timmy.||Fahey, Frank.|
|Finneran, Michael.||Fitzpatrick, Michael.|
|Fleming, Seán.||Flynn, Beverley.|
|Gallagher, Pat The Cope.||Gogarty, Paul.|
|Gormley, John.||Hanafin, Mary.|
|Harney, Mary.||Haughey, Seán.|
|Healy-Rae, Jackie.||Hoctor, Máire.|
|Kelleher, Billy.||Kelly, Peter.|
|Kenneally, Brendan.||Kennedy, Michael.|
|Killeen, Tony.||Kirk, Seamus.|
|Kitt, Michael P.||Kitt, Tom.|
|Lenihan, Brian.||Lowry, Michael.|
|McEllistrim, Thomas.||McGrath, Mattie.|
|McGrath, Michael.||McGuinness, John.|
|Mansergh, Martin.||Martin, Micheál.|
|Moloney, John.||Moynihan, Michael.|
|Mulcahy, Michael.||Nolan, M.J.|
|Ó Cuív, Éamon.||Ó Fearghaíl, Seán.|
|O’Brien, Darragh.||O’Connor, Charlie.|
|O’Dea, Willie.||O’Hanlon, Rory.|
|O’Keeffe, Batt.||O’Keeffe, Edward.|
|O’Rourke, Mary.||O’Sullivan, Christy.|
|Power, Peter.||Power, Seán.|
|Roche, Dick.||Scanlon, Eamon.|
|Smith, Brendan.||Treacy, Noel.|
|Wallace, Mary.||White, Mary Alexandra.|
|Allen, Bernard.||Bannon, James.|
|Barrett, Seán.||Breen, Pat.|
|Broughan, Thomas P.||Bruton, Richard.|
|Burke, Ulick.||Burton, Joan.|
|Byrne, Catherine.||Carey, Joe.|
|Clune, Deirdre.||Connaughton, Paul.|
|Coonan, Noel J.||Costello, Joe.|
|Coveney, Simon.||Crawford, Seymour.|
|Creed, Michael.||D’Arcy, Michael.|
|Deenihan, Jimmy.||Doyle, Andrew.|
|Durkan, Bernard J.||English, Damien.|
|Enright, Olwyn.||Feighan, Frank.|
|Ferris, Martin.||Flanagan, Charles.|
|Gilmore, Eamon.||Hayes, Tom.|
|Higgins, Michael D.||Hogan, Phil.|
|Howlin, Brendan.||Kehoe, Paul.|
|Lynch, Ciarán.||Lynch, Kathleen.|
|McCormack, Pádraic.||McEntee, Shane.|
|McGrath, Finian.||McHugh, Joe.|
|McManus, Liz.||Mitchell, Olivia.|
|Morgan, Arthur.||Naughten, Denis.|
|Neville, Dan.||Noonan, Michael.|
|Ó Caoláin, Caoimhghín.||Ó Snodaigh, Aengus.|
|O’Donnell, Kieran.||O’Dowd, Fergus.|
|O’Keeffe, Jim.||O’Mahony, John.|
|O’Shea, Brian.||O’Sullivan, Jan.|
|Penrose, Willie.||Rabbitte, Pat.|
|Reilly, James.||Ring, Michael.|
|Shatter, Alan.||Sheahan, Tom.|
|Sheehan, P.J.||Sherlock, Seán.|
|Shortall, Róisín.||Stagg, Emmet.|
|Stanton, David.||Timmins, Billy.|
|Tuffy, Joanna.||Upton, Mary.|
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