Brian Lenihan Jnr (Dublin West, Fianna Fail)

I thank Deputies for their many considered and useful contributions to the debate on the Finance Bill 2009. I look forward to a constructive and informed discussion on Committee Stage. I will respond as far as possible in the time available to me to the points raised by Deputies. I note, in particular, the points made by Deputy Deenihan.

Before moving on to address some of the points made specifically about the Bill, I would like to reply on some of the more general issues raised, particularly by Deputies Bruton and Burton, on the management of the public finances and the banking system.

The supplementary budget struck the appropriate balance between the need to restore order to the public finances and protecting the economy. It was suggested here yesterday that too much of the adjustment had taken place on the taxation side of the account and not enough on the expenditure side. It is important to see the full picture. In making adjustments to the fiscal position for 2009, the supplementary budget was the final step in the process that began last July. In July 2008 expenditure savings of €1 billion were delivered for 2009. The savings made focused on reducing the payroll bill, introducing a range of efficiency measures across Departments and agencies and reducing expenditure on consultancy, advertising and PR. In addition, there was a re-prioritisation of capital projects. In October 2008 the budget strictly contained planned expenditure for 2009. Most areas of expenditure saw reductions, with the health, education and welfare budgets being the main areas where the amount of spending was allowed to increase, reflecting demographic and labour market pressures. The October budget also introduced revenue raising measures of almost €2 billion, a significant element of which was the introduction of an income levy. These adjustments were followed in February with expenditure savings of almost €1.8 billion in 2009. The most significant measure in this package was the introduction of the public sector pension levy which will have the effect of reducing the public service pay bill. The final step taken for 2009 was the April supplementary budget. This delivered improvements to the Government finances of €3.3 billion in 2009. Approximately €1.5 billion of this improvement is due to expenditure adjustments, with €1.8 billion in additional taxation being raised.

When the adjustments are viewed in their totality, it is clear that more of the impact has fallen on the expenditure side. This is an appropriate and a more sustainable approach in the long term to improving the public finances. The cumulative effect of the budgetary measures has been to rein in the deficit from a probable 15% of GDP to 10.75%. No other country in the eurozone has made such an adjustment.

It is important to also point out that the supplementary budget marked a new departure for budget formulation in Ireland. For the first time, detailed multi-annual plans were contained in the budgetary projections. Targets have been set for adjustments to taxation and expenditure in 2010 and 2011 and, while the detailed specifics of the measures are still being formulated, the overall policy areas for examination in this context have been announced. This multi-annual consolidation plan will ensure we restore the public finances to a sure footing by bringing the general government balance to -3% of GDP by the end of 2013. In this regard, the Commission on Taxation and the special group on public service numbers and expenditure programmes, both due to complete their deliberations this summer, will have an important role to play in identifying measures that will improve the budgetary situation in the coming years.

Deputy Bruton expressed concerns about our budgeting model. There have been significant reforms in recent years to the entire system of allocating and accounting for resources. Annual output statements were introduced in 2007 to provide details on public service performance. These statements are considered alongside the corresponding Estimates allocations. Dáil select committees now have an unprecedented opportunity to assess performance and budgets in their totality. In last year's review of the public service the OECD was complimentary about the annual output statements and noted that Ireland was on "a sound trajectory of modernisation" in this regard. It also made a number of recommendations for improvement which have been acted upon.

The Government's commitment to budgetary reform has put the tools of accountability at the disposal of elected representatives. It is contradictory, on the one hand, to pretend that these tools are not available while, on the other, using them in a facile manner to complain that performance targets are not being met. Transparency, value for money and accountability have been the hallmarks of the Government's approach to budgetary and Estimates reform up to now.

Deputy Sherlock asked about the recent budgets and their effect on economic buoyancy. Measures have been implemented which will support economic growth. For instance, the introduction of the pensions levy in the public sector earlier this year will lower the cost of running the public sector and send a positive demonstration effect in terms of private sector wages. In addition, the Government is helping to support employment and enterprise by redirecting the national development plan, as well as implementing a number of activation initiatives to further encourage individuals into employment.

At a more macro-level, maintaining the public finances on a sustainable path is a prerequisite for economic growth. In this regard, the various expenditure reducing and tax raising measures introduced since October will have a beneficial impact by restoring confidence, as well as improving our competitiveness. Further measures will be introduced in 2010 and 2011. Notwithstanding these increases in taxation, I reiterate that our tax system remains competitive and pro-enterprise.

Several Deputies, including Deputies Bruton, Burton and O'Donnell, raised concerns about the banking sector. While the range of measures introduced have gone a long way towards ensuring the stability of the sector, it is clear that Ireland, like many developed countries around the world, will need further measured and appropriate action. That is why the Government acted to address the asset position of the banking system by establishing the National Asset Management Agency. The aim behind the establishment of NAMA is to reduce uncertainty and the lack of transparency surrounding the level of bad debts and, consequently, to ensure the flow of credit on a commercial basis to individuals and businesses in the real economy. I subscribe to the view expressed by Professor Honohan that the need in banking reform is not just to capitalise the institutions but to ensure the deterioration in asset quality is addressed through asset purchase. The NAMA proposal will provide the certainty that the market needs and recognise the reality of the reductions in property values. The model proposed is broadly consistent with measures taken in other countries, including Germany, Britain and the United States, to address concerns over certain assets on the balance sheets of banks which restrain them from lending to the real economy.

Of course, the State will not take all the risk. The banks will have to take an appropriate write-down in value of loans transferred to NAMA, taking account of NAMA's objective, which is to operate commercially and optimise the return on such loans over time. The amount to be paid by NAMA, therefore, will be significantly less than the €80 billion to €90 billion figure to reflect the loss in value of the underlying collateral. The price will take account of current and expected market value of the relevant assets and what is sustainable for the taxpayer. In the longer term, if NAMA fails to recoup all of the costs, the Government intends to apply a levy to make good any shortfall incurred. While the initial write-down of loans may have an effect on the banks' capital, there also will be a reduction in risk weighted assets as a result of the transfer of the loans to NAMA. The setting up of NAMA and transferring the more difficult asset portfolio to it will leave the banks in a stronger position to lend to the real economy and make profits which will facilitate increases in their capital bases over time.

The Government has received expert financial, economic, legal and valuation advice at every step of its structured response to the banking crisis. The agency will be developed and implemented in close co-operation with the European Commission to obtain prior state aid approval. The Government is committed to ensuring this very significant initiative will be an example of best practice and meet all the objectives we have set for it.

Moving on to measures contained in the Bill, in respect of the income levy, I must take issue with Deputy O'Donnell's comment yesterday that the introduction of the composite rate was some form of mistake. That is not the case. It was necessary to devise a composite rate for the year as a whole. The composite rate is essentially an anti-avoidance measure which prevents individuals who can control their income from front-loading their yearly income to avoid a higher liability to charge. It was essential in the interests of equity and absolutely the correct course of action to take. For the vast majority of PAYE workers whose income is evenly distributed the composite rate will have no impact. However, it will apply directly to those subject to self-assessment and those PAYE workers who make a return to Revenue. PAYE workers who received bonus payments before 1 May will be liable to the composite rate on their bonus payments on a full year assessment, for example, at a figure of 1.67% rather than 1%. However, given the unique nature of redundancy payments, I have decided to ensure in the Bill that any taxable element of redundancy payments made before 1 May will only be subject to the income levy rates in force at the time.

Deputies Bruton, Burton and O'Donnell expressed concern about the marginal tax rate taking account of income tax rates, PRSI and the levies. Deputy Bruton asserted that the marginal tax rate was 51% for the average worker. Taking the average industrial wage as being approximately €34,000, the marginal tax rate for the average worker is now 30%. However, what taxpayers are interested in is the actual amount they will pay as a percentage of their wages. The average worker on €34,000, in fact, has an effective tax rate of just 18.5%. Deputy Burton mentioned that the average tax rate for a single income earner on €80,000 was 36%. She asserted that these were early 1990s levels of taxation. The point was well made in response by Deputy Michael McGrath earlier today who pointed out that annex A of the budget book showed clearly that average tax rates had fallen since 1997 for all taxpayers. An average tax rate of 36% for single individuals earning €80,000 represents a return to 2004 levels rather than early 1990s levels as Deputy Burton suggested.

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