Oireachtas Joint and Select Committees
Thursday, 8 November 2012
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Pre-Budget Submissions: Discussion with Civic Society Representatives and Focus Groups
10:50 am
Ciarán Lynch (Cork South Central, Labour)
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This meeting is an opportunity for the witnesses, Mr. Peter O'Brien, Mr. Donall O'Keeffe and Ms Evelyn Jones, to add some words to their submissions to the committee. I will not go into their proposals in detail and I would prefer if they could give an indication of what they consider to be the headline aspects of the pre-budget proposals of the Drinks Industry Group of Ireland and the National Off-Licence Association. I call on Mr. O'Keeffe to give us some commentary on his submission.
Mr. Donall O'Keeffe:
I thank the committee for the opportunity to summarise our pre-budget submission and our position on alcohol taxation. We represent an industry under considerable pressure. Pub sales in the past five years are down 34%. We believe we have a strong case for an excise reduction but we recognise the reality of the public finances. Accordingly, we are calling for the status quo in terms of excise, that is, that excise levels be maintained at current levels. We are keen to make one important point clear and understood to the committee. Excise has a disproportionate impact on the on-trade. If an excise increase went through, it would result in job losses in the on-trade and a loss of revenue to the Government by virtue of the fact of the VAT intensity of the on-trade. More VAT is generated from the on-trade than the off-trade. We are keen for the committee to recognise the differential impact between the on-trade and off-trade when it is considering its view.
Ciarán Lynch (Cork South Central, Labour)
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Have you calculated figures with regard to the results of a minimum increase in excise levels for your industry?
Ciarán Lynch (Cork South Central, Labour)
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If there were a minimum increase in excise levels on alcohol in the 2013 budget, what would you see as the detrimental effects?
Ciarán Lynch (Cork South Central, Labour)
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If there were a 1% decrease, would it create employment or job opportunities?
Mr. Donall O'Keeffe:
A decrease would have an important and positive impact on the industry and the psychology of the consumer. People look closely at the price of drink and if the price of drink came down, it would be a positive thing. It is important to recognise that the Government has been supportive of the industry through the 9% VAT rate on food in the hospitality sector, which is positive, and in terms of The Gathering initiative in 2013, which is designed to promote Ireland. It would be conflicting to have a hike in excise in the year of The Gathering.
Ms Evelyn Jones:
I thank the Chairman for having us before the committee today. Our association represents independent, specialist off-licences. We have 350 members who run pure or specialist off-licences. These are family owned and operated in the community. Unfortunately for us, alcohol in the off-sales sector is in the crossfire of a war for market share within the grocery industry. The upshot of the deep discounting of alcohol has been the loss of 2,800 jobs in our sector. There have been 75 closures in the past four years and seven closures since July 2012. Based on these figures, we reckon we face a further 25 or 30 business closures in 2013. Our members are trained, highly skilled owner-operators located in the heart of the community. They employ expertise in retailing alcohol but their livelihood is being undermined and threatened by the use of alcohol as a driver for footfall to sell other, dearer grocery products. An excise increase is a luxury we cannot afford. Currently we are having difficulty competing with the large multiples because they can absorb increases and sell below cost and reclaim the VAT on any loss against other grocery products.
Ciarán Lynch (Cork South Central, Labour)
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The association sees the businesses of its members as different from the supermarket model of the selling of alcohol. Is that correct?
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome the National Off-Licence Association, NOffLA, and the Drinks Industry Group of Ireland, DIGI, and I thank them for their pre-budget submissions. It seems the role of the multiples in the sale of alcohol in the off-trade has completely distorted the market. I am keen to establish whether there is a way of marrying the health objectives we all share while recognising the financial and budgetary constraints within which the Government must work.
I know many members of Ms Jones's association are struggling despite a shift from the on-trade to the off-trade. Frankly, many in the on-trade are on their knees. Is there some way to address this, perhaps through the licensing system, by revising the level of licence fee paid or by attaching a levy to the multiples? The way in which they are selling alcohol makes it ridiculously cheap. This is having many negative consequences and it should be reviewed. Is there some way of marrying these two issues, perhaps through the licensing system? Am I right in saying that a large multiple only pays the same amount for its licence to sell beer, wine or spirits as a small independent off-licence or a Centra selling wine? I understand they pay €500. Is that correct?
Michael McGrath (Cork South Central, Fianna Fail)
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Is it irrespective of floor space or turnover?
Michael McGrath (Cork South Central, Fianna Fail)
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That is a glaring anomaly which should be addressed. It is a possible mechanism by which the market can be regularised and by which the role of the multiples can be put under the microscope.
I know it can be difficult to prove whether or not alcohol is being sold below cost and the point has, correctly, been made that multiples have such a wide range of products they can afford to have loss leaders to get customers in the door and increase their footfall. Is there clear evidence that alcohol is being sold below cost?
11:00 am
Ms Evelyn Jones:
I can give an example. In its latest offering, dated 5 November, Tesco offers two litres of spirits for €40. In other words, one can buy two litre bottles of vodka, rum, gin and so on, for €40, or €20 for a litre. The duty on that is €12.45 and the VAT is €2.87. That leaves €3.80 for the guy in Sweden to pick the winter wheat for the Absolut vodka, bring it in, distil it, box it, ship it through customs, send it to Ireland, give it to a wholesaler, sell it to a multiple and for the multiple to take it out of the box and put it on the shelf. To argue that below cost selling is not taking place is a farce.
Ciarán Lynch (Cork South Central, Labour)
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On that point, I will bring in Mr. O'Brien and Mr. O'Keeffe. Are certain brands of beer, or whatever, on sale in multiples at prices that are less than it costs you to put them on the shelves of your bars?
Ciarán Lynch (Cork South Central, Labour)
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Is the differential pence or more?
Joe Higgins (Dublin West, Socialist Party)
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I do not agree with the exercise we carry out every year, where tax increases on alcohol and tobacco in the budget are justified on the grounds of health. I have always opposed these tax increases, particularly on tobacco. The health issue is an excuse and hypocrisy by Governments. Health issues are serious but they should be dealt with in a different way, rather than by piling on taxes. That is also my position with regard to the forthcoming budget. At the same time, I am in favour of a complete ban on the advertising of legal drugs which can have very damaging effects, even though most of us take them to some degree or other.
If there was no increase in tax on alcohol, or even if there was a decrease, which is unlikely, what is the chance of Mr. O'Keeffe's industry giving a break to the customer? There is a huge rip-off in the pub industry on the sale of wine per glass, for example. In an off-licence premises of one of Ms Jones's members one can buy a bottle of wine for €8, but one would be charged €5.50 for a glass of the same wine in many pubs. If, conservatively, one can get five glasses from a bottle of wine, that amounts to €27.50. That is a huge rip-off of someone who is having a social drink. If the Exchequer does not take money from the public, some element of the drinks industry will.
Mr. Donall O'Keeffe:
First, we reject any notion of a rip-off. Second, when there was an excise duty decrease three years ago, the Central Statistics Office, the independent Government statistical service, showed the reduction was passed on in full across the industry. Third, there is a fundamental difference between buying a product to take home and buying the same product to consume in an on-trade environment. We have to make a margin to sustain ourselves financially. A price range is in operation in the market. One can buy a glass of wine in a Dublin pub for between €4.50 and €10. A consumer will be able to find a pub that offers a really strong price value proposition and where he or she will be happy to pay the price.
Alcohol in the on-trade is a discretionary item. People come to pubs because they want to. They come because we offer a product and service that is attractive. Not every pub is attractive to every customer, but the individual can find a pub that suits his or her needs so that we are both happy to do business.
Dara Murphy (Cork North Central, Fine Gael)
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I welcome the witnesses to the committee and I apologise for being late.
Is the Drinks Industry Group of Ireland, DIGI, an umbrella organisation that represents all drinks suppliers? Do the witnesses accept that there is a social cost to the over-consumption of alcohol in Ireland at present?
Mr. Peter O'Brien:
Suppliers, publicans, the National Off-Licence Association, restaurants, hotels and everyone except multiple retailers are in the DIGI group. We represent everyone in the chain except retail multiples.
I accept that the abuse of alcohol has a social cost. We support measures targeted at dealing with alcohol misuse. Most of us are involved in the DrinkAware campaign which is probably the single best resource for helping people to deal with understanding drink. The misuse of alcohol clearly has a social cost.
Dara Murphy (Cork North Central, Fine Gael)
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Does Mr. O'Brien accept that there is less regulation of consumption in a non-controlled environment, such as an off-licence, than in a controlled environment, such as a licensed premises?
Mr. Peter O'Brien:
Mr. Donall O'Keeffe can speak for publicans, but the pub is, clearly, a regulated environment. An off-licence is also a regulated environment, in that professional people are serving there. The difference is that the product is consumed in the regulated environment of a pub, with appropriate and trained staff. It is, clearly, different if the customer takes the product home. That is true.
Mr. Donall O'Keeffe:
We argue strongly that the pub is a controlled and social environment in which to consume alcohol. It is controlled from two angles. There is control by the management and staff, and publicans take their responsibilities very seriously in this regard. No publican wants his pub full of people drunk out of their minds. It is not an attractive atmosphere and does not attract good regular business. It is in the publican's own professional and business interest to control that environment. Second, there is the social control from other customers. Consumed socially, alcohol is very enjoyable. A customer can meet people and have a drink and a chat. It is a very positive thing to do. From my perspective, representing publicans, it is the best environment in which to consume alcohol.
Dara Murphy (Cork North Central, Fine Gael)
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I assume Mr. O'Keeffe is aware of the concept of elasticity of demand. Does he accept that it is indisputable that the availability of very cheap alcohol in off-licences is directly linked to over-consumption, particularly by young people but also by people generally?
Ms Evelyn Jones:
I will answer that, as an off-licence operator. The prevalence of excessive drinking has emerged as a result of price promotions and the merchandising of alcohol to drive footfall into multiple mixed trading environments. Specialist off-licences retail in a responsible manner. They must; otherwise, they will lose their licences. They must make margin and pay their rent, rates and staff. They cannot afford to retail alcohol below cost or at cost. If they do, they will go out of business.
The manner in which alcohol has been permitted to be price promoted by mixed trading environments in the media has permitted this.
It is incumbent upon the Department of Justice and Equality and the Department of Health to bring forward their action plans. The Commission on Taxation has stated that the impact on health and public order, among other things, must be considered. The Department of Finance has taken action in that among EU countries, Ireland has the fourth highest excise duty on beer and spirits, the highest excise duty on sparkling wines, the third highest excise duty on wine and the second highest excise duty on cider. Many member states have no excise duty on alcohol. It is difficult to park a health and justice argument into a finance and taxation argument and I do not think it is right.
11:10 am
Michael Colreavy (Sligo-North Leitrim, Sinn Fein)
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I thank the delegation for their presentation. I represent a fairly rural area in Sligo and north Leitrim. Sligo is a fairly big town but much of the area is rural. I am very conscious that a number of pubs and off-licences have closed over recent years. We spoke briefly about the social implications of pubs serving drink. I also see a social benefit in having a bar in a rural area and it is a great loss when a local bar is closed. Many rural folk may go down to the pub once a week to have a few pints, meet their neighbours and have a chat. If that pub closes, often those people will not go out.
It might be an over-simplification to hope that a reduction of 1% or 2% in excise duty rates, if it were envisaged, would change the situation dramatically. Surveys have shown that people do not have enough disposable income at the end of the week and they have to make tough choices. Increasingly, people are choosing not to go to the pub or to the off-licence. It is quite understandable that if a person wants to buy a bottle of gin or wine, they will go to wherever they can buy it cheapest. In my view that is rational and logical. How does the number of licences per capita in Ireland compare with international figures?
Mr. Donall O'Keeffe:
I have not studied European norms. We have done comparisons with the United Kingdom. In simple terms, we are not as densely pubbed, so to speak, as the UK. The UK has a deregulated system and, on a per capita basis, there are three times as many pubs in the UK as there are in Ireland. In our view, Ireland is densely pubbed in that there is no shortage of pubs. That is not a matter for debate. Compared with the UK, however, Ireland is less densely pubbed.
Michael Colreavy (Sligo-North Leitrim, Sinn Fein)
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Are pubs in the UK facing the same trading difficulties as pubs in Ireland?
Ciarán Lynch (Cork South Central, Labour)
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The British market would not have the same number of independent pubs.
Peter Mathews (Dublin South, Fine Gael)
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I have a couple of general points to raise. I understand the desire of the drinks industry not to be the subject of further tax increases. However, I am confused to hear that the consumption of alcohol is down by 20% in less than ten years. I refer to a recent report which said the very opposite by stating that in the period 1970 to 1990, there was a doubling of alcohol consumption and that 50% of the population abstained from alcohol. Now, only 15%, if even that, abstain from alcohol.
Mr. Tony Foley:
Both are correct. It depends on the length of the time period. From the 1970s there was a large growth in consumption per head. Females, who generally did not consume as much alcohol - the lady would have the glass of sherry - became almost what one might call normal drinkers. That raised the average level per head. It maximised at the turn of the century, in 2001, and since that year it has dropped from about 14 litres per head to just below 12 litres per head.
Peter Mathews (Dublin South, Fine Gael)
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Could it be that many of the people who emigrated, who are single and do not have a family, were heavy drinkers?
Peter Mathews (Dublin South, Fine Gael)
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Those aspects are a bit depressing. I want to deal with the nub of the issue which is the marketing, advertising and merchandising of alcohol. The quid pro quo is that if the industry wants a stay on any further taxation on alcohol, it should be the promoter rather than the Government or Members of the Oireachtas who seeks containment of merchandising and advertising. In my view, the glamorising of alcohol is where the problem lies, even more so than the price of alcohol.
Peter Mathews (Dublin South, Fine Gael)
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I apologise for interrupting, but rugby is Heineken now. A Heineken can equals a rugby ball visually, and it is also on the jerseys. It is the same with regard to Bulmers and Guinness with Arthur's day. Arthur Guinness, the man who discovered the drink and made it, did not drink. Do the consumers know that?
Mr. Peter O'Brien:
All brands are entitled to promote themselves responsibly. We do that very well. We have sponsorship which has had a very great impact on many sporting institutions. We have a regulated code in co-operation with the Department of Health and we have placement codes. We operate those codes.
Peter Mathews (Dublin South, Fine Gael)
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There is advert for Budweiser with three buddies which is currently on the screens. The three buddies are going around and it is so cool, I feel tempted to go out and get a bottle of Budweiser.
Ciarán Lynch (Cork South Central, Labour)
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I might go with you if we get out of here eventually at some time today.
Peter Mathews (Dublin South, Fine Gael)
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The fact that everyone is laughing means I have hit the button. I have actually hit the nerve. I suggest the witnesses think about it. They should be brave and help us to-----
Ciarán Lynch (Cork South Central, Labour)
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I ask Deputy Mathews if he could abstain from talking for a moment.
Peter Mathews (Dublin South, Fine Gael)
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I do not have drink taken.
Ciarán Lynch (Cork South Central, Labour)
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I wish to make some concluding remarks. I ask the delegation to develop its point about excise duty as this would be of assistance to the committee and to the Department. The issue of below-cost selling is recognised as a difficulty. There are three different types of outlets for the sale of alcohol. The off-site outlet issue is far more complex, and Ms Jones made this clear in her contribution. The big multiple retailer and the independent or family-owned chain of off-licences operate a different model, albeit with under the same rules.
Ciarán Lynch (Cork South Central, Labour)
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I thank the delegates for their contributions.
11:20 am
Ciarán Lynch (Cork South Central, Labour)
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We now move to the second part of this afternoon's module. What we are doing is facilitating the various organisations, associations and groups which made pre-budget submissions in the context of outlining their positions. We ask that our guests do not go into detail in respect of their submissions because these have been circulated to members for their perusal. Instead, our guests can summarise what they see as the main points of their proposals and members may then pose questions. I invite Ms Kathleen O'Meara and Mr. Ronan Lyons to make their opening comments.
Ms Kathleen O'Meara:
I and my colleague from the Irish Heart Foundation, Mr. Chris Macey, welcome the opportunity to come before the committee. As the Chairman indicated, our submission has been circulated. We have come to this budget process with a new and radical idea. Members will be aware the Irish Heart Foundation and the Irish Cancer Society are committed to the battle against tobacco in Ireland, especially in view of the high death rate relating to smoking. The idea we have come up with in the context of the forthcoming budget is that tobacco profits should be controlled. The tobacco industry in Ireland is earning extraordinary profits. These are much higher than needs to be the case and, as a result, we have an opportunity to do two things. The first of these would be for the Government to take €150 million extra from the industry, which would send a very strong signal. We would urge that at least some of this money be spent on combating the marketing practices of the tobacco industry, on assisting those who want to quit smoking and on providing help to those who have been harmed by smoking. Our proposal is specific in nature and it is designed to take some of the huge profits earned by the tobacco industry in Ireland. To put it in simple terms, the Government takes 79% of the industry's profits. The figure for the UK is 90%.
Ciarán Lynch (Cork South Central, Labour)
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That information is contained in the submission.
Ms Kathleen O'Meara:
Yes. We are proposing a very simple solution, namely, the creation of a regulator to regulate the Irish tobacco market. There are particular reasons we are proposing this and these are based on how the tobacco market operates in this country. We are of the view that a regulator is necessary both in the context of taking the profits to which I refer and to regulate the market in a certain way.
Mr. Ronan Lyons:
My name is Ronan Lyons and I am speaking today on behalf of the Smart Taxes Network. I will be brief because I would like to maximise the time available for questions and discussion. Given that a property tax is on the way, we would argue strongly in favour of a tax that is based on site value rather than on a full tax. The reason for this is that it would be better from both from the point of view of progressiveness and from the perspective of offering an economic incentive. In addition, it will be easier to introduce. I will not say any more than that now.
Ciarán Lynch (Cork South Central, Labour)
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The committee receives submissions from different groups and there would be a conflict in respect of them. As part of its presentation and in the context of the interests of its retail members, I am sure IBEC will state that the smuggling of tobacco is increasingly becoming a problem. If one sets aside the health issues and concentrates on the product, it is evident that there is smuggling and criminality on a massive scale and that, as a result, the Exchequer is losing huge amounts of revenue. Further increases in the price of tobacco are merely going to compound the problem. As Deputy Dara Murphy stated earlier in the context of price elasticity, increasing the price can often lead to unintended consequences. Perhaps our guests might comment on that aspect.
On the introduction of a site valuation property tax, a particular issue arises. This relates to the position of those who own high value houses which are situated on low value land versus people who own low value houses which are situated on high value land. How fair is Smart Taxes Network's proposal in respect of this matter? It could be criticised because it suggests that more money be taken - in the form of a wealth tax - from those who fall into the latter of the two categories to which I refer.
Mr. Chris Macey:
There is no doubt that tobacco smuggling is a very big issue. In addition to the revenue that is being lost, cheap tobacco is being made available to young people. In our opinion, this is keeping smoking rates among children very high. However, there is a great deal of misinformation in respect of this matter. We are strongly of the view that tax increases are not necessarily the driver of the problem in question. Not many people are aware that the price of cigarettes in the UK is actually higher than it is in this country. The cost of the premium brand of cigarette in Ireland is €9.20, whereas in the UK it is €9.30. The UK authorities have been increasing the price for the past ten years on a price escalator above inflation of between 2% and 5%. In the same period, they have cut the rate of smuggling from 21% to 9% because they are dealing with the problem. In this country we are reducing the number of customs officers by hundreds.
Ciarán Lynch (Cork South Central, Labour)
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I would ask our guests to be very brief in their responses because we only have 30 minutes for this session. There are members present who could speak for as long as Mr. Macey.
Dara Murphy (Cork North Central, Fine Gael)
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One could speak for longer.
Mr. Ronan Lyons:
In the context of high value houses on low value land, this is very much a footnote to the differential effect of a full value tax compared with a site value tax. The latter encourages people to use land well. If we were to introduce a full value tax, we would actually punish construction activity at the very time when we need to be fostering it by encouraging retrofits and extensions. We must encourage people to use their land well, particularly because many of them will, as a result of negative equity, be stuck on the same plot of land for the foreseeable future. The primary effect of a site tax would assist in encouraging individuals to use their land well.
Ciarán Lynch (Cork South Central, Labour)
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Would it not be possible to deal with that difficulty? One of the positive aspects of Smart Taxes Network's proposal is that it would not penalise developments or home improvements. Other jurisdictions have vacant site registers in respect of which compound penalties apply and these ensure properties are not left vacant. Putting in place such a register here would strengthen the Derelict Sites Act. We could also consider imposing a property tax that would be calculated not on a per €1,000 basis in respect of the value of a house but which would be calculated on the basis of €25,000 or €50,000 bands instead. If one's house is worth €200,000 and if one spends €100,000 carrying out work on it, we know for a fact that it will not increase in value by €100,000. The value increases proportionately rather than on the basis of the amount of money spent on improvements.
Would there not be the same outcome if there was a band based upon value?
11:30 am
Ciarán Lynch (Cork South Central, Labour)
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The band would-----
Mr. Ronan Lyons:
When any country has had an opportunity to put in place a property tax system from scratch, it has avoided bands. The UK is stuck using 1991 values more than 20 years later. We should put in place the simplest system that achieves the same effect. If one wants to punish vacant lands and sites, which is already done via site-valued taxes and, as such, an extra system is unnecessary, I recommend that it be done via a per person tax credit, which would further shift the burden of taxation away from people and onto land.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome our guests. I might take Ms O'Meara up on the idea of extracting further profits from the tobacco companies operating in Ireland. Does such a model work elsewhere and could we emulate it? Extracting profits is an attractive idea about which I would like to know more. What level of profits is being earned by tobacco companies in Ireland?
What does Mr. Lyons believe the impact will be on householders of adopting a site value tax as opposed to the Government's apparent plan, namely, a market value tax? If the burden is being spread via a site value tax to other forms of property owners, will individual households have smaller bills? What categories of people are captured by a site value tax that are not captured by a market value tax?
Ms Kathleen O'Meara:
Last year, €1.36 billion went to the Exchequer in the form of tobacco tax. It is difficult to quantify the tobacco companies' profits in Ireland. In the UK, Philip Morris and Imperial Tobacco earn 50% and 65% of turnover, respectively.
We have done a great deal of work in devising a model specifically for Ireland. From figures supplied through the Revenue Commissioners, we have been able to identify that the tobacco industry takes 21% of the retail price. In the UK, that figure is much lower. This is the gap that we are considering. I did not have an opportunity earlier to explain how the companies have done this in an interesting way. Generally, there is a price increase in every budget. In recent years, that increase has been in cent. Despite the fact that the tobacco industry approaches people such as the Deputy, the Department of Finance and the Revenue Commissioners and argues against price increases, it increases its own prices while the Government increases taxes on tobacco in the budget. Therefore, it widens its profit take and keeps its profits high. This fact has not been identified prior to our work. We are looking in that direction for profit. Normally, we would ask for a tax increase and we are not ruling it out. Indeed, we ask that members consider a tax on hand-rolled tobacco, which is currently much lower than the tax on rolled tobacco.
Ciarán Lynch (Cork South Central, Labour)
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Excuse me, but people will need to leave if their mobile phones are turned on. They interfere with the broadcasting. This also applies to persons in the Visitors' Gallery. The telephones should not be on silent, but turned off.
Mr. Ronan Lyons:
As Deputy McGrath suggested, the impact of the site value tax would be less than it would under a full tax. The principal reason is that vacant development land and developed land are treated equally. If one takes the route of a full value tax instead, it is effectively equivalent to a second bailout. The vacant landbanks on the edges of towns would not be hit in a tax liability sense. Their value would be increased relative to everywhere else and their owners would be given free money by the rest of society.
An element of the impact should be stressed. The Minister for the Environment, Community and Local Government has discussed his desire for the regeneration of town centres. A full value system would push people onto the fringes of towns and remove activity from the centre. A site value tax would encourage people to use valuable land in the centre of towns. This is as much a commercial as a residential point, but it holds true to the system.
Joe Higgins (Dublin West, Socialist Party)
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My problem with the Irish Cancer Society's policy traditionally is that it always hits on price increases to try to overcome the damage done by nicotine addiction. Unfortunately, that increase hits the poorest people in society. As the submission states, smoking is the greatest contributor to health inequalities and accounts for up to half the difference in life expectancy between the richest and the poorest groups in our society. Is this because there is a higher level of addiction among people with lower incomes? If so, piling additional costs on an addiction that is difficult to break places additional hardships on people who are already stretched financially. I always vote against the Government's increases under spurious health arguments when the reality is that it wants another grab at working class people's profits.
The executive summary of the Irish Cancer Society's provisions does not seem to refer to the advertising of tobacco, which remains prevalent in various ways. Is this not a key area to hit? Would it not be better to commit resources to helping people overcome this addiction without breaking their pockets? I fully agree with hitting companies' profits up to the limit. I am in favour of taking the companies into public ownership and, on a different basis, recognising smoking as a serious health and societal hazard.
Be it a site value tax or a property tax, the reality is that it is another grab. It will be a tax on the shoulders of people who are bailing out speculators and bankers all over Europe. In many cases, people have been impoverished as a result. The domestic economy is trashed. Whatever form the tax takes, Mr. Lyons is in favour of placing another burden on those people. Some of us fundamentally oppose that idea.
Ciarán Lynch (Cork South Central, Labour)
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One only.
Mr. Chris Macey:
A tobacco tax is undoubtedly regressive. However, 58% of 18 to 29 year old women in the lowest socioeconomic groups smoke. This figure is more than double the figure for the general population. One in four women in those communities will die from tobacco. It is the greatest driver of health inequality in the country and tobacco tax is every state's greatest weapon to tackle tobacco addiction. Not only should the taxes increase, but that money should be spent on helping people to get off cigarettes. If people can do so, they will be better off in the long run. We view it in terms of the health savings, which are more important for the communities in question than the economic savings of continuing to smoke.
The bigger the financial burden a tax increase places on people, the more likely they are to give up. That has been proven by statistics. I would not push that argument too hard but it is still a fact that this can help people to stop smoking and help them and their communities to be healthier. It can reduce overall costs to people.
11:40 am
Mr. Ronan Lyons:
In speaking about taking yet more money from the pockets of ordinary householders, I understand the motivation behind the point. There is a gap between Government spending and receipts. I would like to close that gap as fairly as possible and going after wealth is part of the solution. Two thirds of wealth in Ireland is in real estate, with the bulk of it in land. A site value tax would be much more progressive than another increase in income tax, as the increase in income tax would eat away at tax credits. One cannot hide a house in Switzerland and if a person owns a large house in Ireland, it will fall under a site value tax. The most valuable sites in Ireland are still worth up to €10 million per acre, so we should get some of that publicly created value back into public hands.
Dara Murphy (Cork North Central, Fine Gael)
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I wish to return to the issue of a tobacco regulator, which is innovative. Is it idealistic? There are two ways for the State to extract profit from tobacco companies, which operate legal businesses in this country. Some 79% of the total profit goes to excise or VAT. Has there been any legal opinion as to whether it is possible for any government to engage in a profit tax that is different from income or corporation tax? The witnesses do not have the figures but what if the State got approximately €250 million from the €1.36 billion, with the retailers getting a chunk, along with people working for the companies and costs for buildings, etc.? The tobacco companies would have a profit so has it been ascertained if it would be legal to propose to treat the profit differently than that of any other industry legally carried out in the State?
Dara Murphy (Cork North Central, Fine Gael)
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Is there legal opinion to back up that claim?
Peter Mathews (Dublin South, Fine Gael)
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An addiction tax.
Ms Kathleen O'Meara:
Yes, it is related to health. Political will would be required to do this, and we have seen examples of political will in this area in Ireland before. We are not saying this is a simple request and it is not. We have been told that it is potentially difficult in the context of the tobacco tax directive but our advice is that it can be done. In particular, it can be done because this issue is health-related as opposed to a normal market element. There is no question that it would be an intervention in the market but there are other examples of market intervention. We are asking for this market intervention because tobacco harm is so considerable and there are public health issues involved that are being dealt with internationally.
For example, the only public health international treaty concerns tobacco, namely, the Framework Convention on Tobacco Control. That is a World Health Organization treaty and Ireland is a signatory to it. It is an unprecedented treaty in many ways and it is designed to intervene in and control relationships in particular around tobacco. It is recognised internationally and by the Irish Government that the tobacco industry is not a normal industry and the level of harm being caused by it means that governments must take a particular view about it. Therefore, we ask for political will to become evident. A previous Minister responsible for health, Deputy Micheál Martin, took action that at the time was unprecedented in the world.
Ciarán Lynch (Cork South Central, Labour)
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Are you sticking with the tobacco issue? This will be your last question.
Dara Murphy (Cork North Central, Fine Gael)
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There is a specific question, bearing in mind that there is European competition and company law. Is there specific legal opinion? Political will is one thing but we are also bound by international and competition law, etc.
Ms Kathleen O'Meara:
Yes. We conducted research on this which was published in the UK in 2010, The Case for OFSMOKE: How Tobacco Price Regulation is Needed to Promote the Health of Markets, Government Revenue and the Public. I will leave the reference with the committee. It states:
It would be compliant with Article 3 of the Global Agreement on Tariffs and Trade. Although it is considered a restriction, it would be legal under international law.
Most governments have extensive experience in undertaking these sorts of activities and the fact that price cap regulation is used in other sectors provides sufficient evidence of its feasibility and legality under both World Trade Organization and European Union rules.
Peter Mathews (Dublin South, Fine Gael)
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We have moved from alcohol to cigarettes. Advertising on the packaging indicates such products damage health and there are now pictures to illustrate that. People from the tobacco industry indicated that the volume of cigarettes sold illegally for consumption is now huge. Do the witnesses have updated figures? From every ten cigarettes smoked, how many are smuggled and how many are bought in ordinary shops?
Peter Mathews (Dublin South, Fine Gael)
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The industry representatives had figures of 30% or 40%.
Peter Mathews (Dublin South, Fine Gael)
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Do they look in bins to see where the packages came from?
Mr. Chris Macey:
They follow a number of processes. A market research company carries out work on behalf of the Revenue Commissioners with the office of tobacco control in the HSE.
Peter Mathews (Dublin South, Fine Gael)
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The figures are substantial because the price differential is very large. Apparently, a person can buy cigarettes on the black market at a quarter or a fifth of the price in a shop. A shop may charge €10 for a packet of cigarettes that is sold for €2 or €3 on the black market. That is a major incentive for crime, as the Chairman mentioned. The penalties for bringing in cigarettes illegally are absurdly low. These products arrive in 40-foot containers and not handbags or suitcases. If the shippers could be fined €100,000 or €250,000, they would be more careful about the cargo taken on board and prevent illegal products from using their ships. It is not for me to ask some questions and if I am lucky, some journalist might pick up on the issue. As part of the presentation, the witnesses should articulate the answers and help us make them a reality.
With regard to Mr. Lyons's comments, I agree that a site value tax is the way to get optimum use from land and resources in an economy. If it is introduced at a low level, it could be done fairly. I have not seen practical worked examples of how people would have to complete a form or valuation on a self-assessed basis. We have been told that a decision has been taken and the Government wants to collect this through the Revenue Commissioners. That is a given unless there are strong reasons for this not to be the case. Perhaps it should. How can we get a simple form together so people can provide their own self-assessment?
Peter Mathews (Dublin South, Fine Gael)
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Is that doable?
Peter Mathews (Dublin South, Fine Gael)
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That is all we want to know. A site value tax relates to the income generation capacity of any site, either in the form of rental for a house, office block or factory. There should be a sensible economic connection with the piece of physical land, and it would be a fair basis for starting the collection of a tax. If there is income from land, there is an ability to pay tax from the income.
11:50 am
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Lyons and Ms O'Meara.
Ciarán Lynch (Cork South Central, Labour)
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I welcome Mr. David Fitzsimons and Ms Aoife Sweeney from Retail Excellence Ireland and Ms Patricia Callan from the Small Firms Association. Representatives of the Irish Exporters Association were to participate in this session but they are not present. The session is scheduled to run between 3 p.m. and 4 p.m. but a vote is expected in the Dáil at 3.40 p.m. and, therefore, we will manage this as best as we can. The intention is not go through in their entirety the submissions the delegations have made but to give the representatives an opportunity to highlight what they consider to be the most significant aspects or the priority issues and for members to question the proposals and seek further information.
Mr. David Fitzsimons:
I thank the Chairman. The fundamental point Retail Excellence Ireland, REI, would like to make is that the Minister for Finance let many retailers down in the most recent budget when he announced that the Government would not act on the matter of upward-only rents, a subject the Chairman worked tirelessly on, having pledged that it would. The one good thing that came out of the Budget Statement was the application of guidelines to insist that the National Asset Management Agency, NAMA, would engage with vulnerable tenants and potentially reduce rents. We meet NAMA officials every six weeks and they are doing that. They have reduced rents in the majority of cases for vulnerable tenants. We would like those guidelines to be applied to other State landlords in the upcoming budget such as the Irish Bank Resolution Corporation, which is currently increasing rents for tenants in Cork, and local authorities, which are forcing through rent increases on top of untenable rents.
Ms Patricia Callan:
Essentially we have two key principles in our budget submission this year. The first is that the budget ensures businesses can retain and create jobs. The way to do that is not to increase the cost of doing business. Second, we need measures to support the restoration of consumer confidence in the domestic market. With regard to the cost of employment, the budget is all about the threats rather than necessarily what we want in it. The kites that have been flown so far have destroyed investment and expansion in the interim because people are so worried about measures such as employer's PRSI increasing, mandatory pension provision and the transfer of four weeks of sick pay onto employers. Anything that adds to the cost of hiring somebody will militate against employers creating jobs in exactly the same fashion as the slashing of the redundancy rebate last year killed off the transfer of businesses. One cannot buy a business now because the risks are too high. We want the Government to job-proof all policies and to make an assessment of the impact on jobs of the implementation of various measures. That is the key and critical message. We have many tax proposals in the submission that might help small businesses, in particular in the area of finance and improving cashflow, and I can take questions about those, but the key message is not to increase costs.
Ciarán Lynch (Cork South Central, Labour)
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With respect to Mr. Fitzsimons's opening statement, the committee made a recommendation yesterday afternoon having met Mr. Moran, the Secretary General in the Department of Finance on that matter. Similar measures are needed for IBRC and other State-owned properties. In the submission, REI is seeking the establishment of a stimulus group that would encourage citizens to apply for seasonal and temporary positions within the retail sector. Could he elaborate on that?
Mr. David Fitzsimons:
We raised this with Mr. Ollie Rehn and we got a favourable response in Europe to some of the ideas we raised. Basically the retail industry used to employ more than 300,000 people and when the recession came, this reduced to a skeleton full-time staff of 255,000. That means when the seasonal peak arrives at Christmas, there is a necessity to hire many more temporary employees than we used to. It is our contention that between 30,000 and 35,000 will be employed this Christmas. The problem our members have is it is challenging to make these appointments because people on social welfare find it a challenge to get back on welfare when the work finishes. It takes six to eight weeks for them to resume their welfare payments and they are bereft of cash to live off during that period. Thus, they will not take advantage of the opportunity to work temporarily and that is a concern. We need to build a flexible social welfare system that fits today's environment, not yesterday's where we all had jobs for life.
Ciarán Lynch (Cork South Central, Labour)
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Is that an issue for the SFA?
Ms Patricia Callan:
It is. I did a piece of work on this that I will send to the Joint Committee on Jobs, Enterprise and Innovation separately about direct member experience. It is not just in this area. It relates to the general principle of how the welfare system works. We need to move to an hour-based system. The reality is our system derives from the concept of the five-day week. Most businesses operate a seven-day week and, for example, nursing homes need people for a few hours in the morning and a few in the afternoon. The system, therefore, needs to be redesigned in the sense that it should not hamper anyone to take up employment. Signing on or off should be fluid. If the welfare system can be integrated more directly with the Revenue, given employers are supplying Revenue with the relevant information when they set up employees on the tax system, it should be a simple process to offset one against the other to ensure people do not lose out. However, seasonal sectors such as the fishing industry present huge problems in terms of practical details. Even where up to three months' work is available, there is no incentive for people to take it up.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome the REI and SFA representatives. Mr. Fitzsimons said that progress is being made on the guidelines as they apply to NAMA properties and that is welcome given the ban on upward-only rent reviews will not be extended to existing leases. How widespread is the problem of State-owned institutions such as the banks being difficult in renegotiating rent for tenants? I am aware of the IBRC case in Cork. Are there cases where the intransigence of these State bodies has cost jobs or has the potential to cost many jobs?
The timing of the budget has been the subject of comment recently. The Christmas period is a critical time for REI members because so many of their sales are achieved during that period. Is there is an optimum time for the Budget Statement? Should it be brought forward by a number of weeks to give people a clearer run into Christmas or should it be put back to the new year?
The key issue for Ms Callan and the SFA is no increase in the cost of employment.
I attended one of the briefings in the audio-visual room in Leinster House that addressed the sick pay scheme and employer PRSI. It is unfortunate that both schemes fall within the Department of Social Protection, given the enormous adjustment that Department must put through in the forthcoming budget. Can the witnesses crystallise the impact of the measures? People in business are very scared that either or both measures will fly in some shape or form. What would be the impact on existing businesses and their potential to take on new staff?
12:00 pm
Mr. David Fitzsimons:
In response to the first question, on the budget scheduling, the worst time is the first week in December. People plan their gifts for loved ones and, more importantly, people decide to buy cars in November and December and then collect them in January. The most preferable date is the lowest ebb in the economic cycle in the retail context, which is February and early March. If we are ploughing ahead with austerity, as we must, it would make sense to do so at the quietest period in the cycle rather than at its peak. Speculation, kite flying and discussion about austerity measures leads to people being frozen with fear.
The State as a landlord is not a major issue because most landlords are private entities. The Minister for Finance mandated NAMA to engage with tenants and it is now the largest landlord of any type in the country. We urge committee members, the Department of Finance and the Minister to apply the guidelines if they make good sense. Vulnerable tenants need the guidelines. Why not apply them to other State landlords?
Ms Patricia Callan:
Specifically on the topic of job creation, a survey of our members showed 46% thought the biggest barrier to job creation was not enough business and 33% said it was cost. These are the top issues for people thinking about whether to create jobs. In the context of the budget, we need to move it out of peak business cycles and have uncertainty squashed fairly fast. One of our five key messages is not only to have an annual budget but to know what will hit us over the coming three years. Uncertainty kills decision making. If it is bad news and people know about it, they can decide to invest and plan accordingly. It is critical to the restoration of confidence.
With regard to cost, people are struggling to pay wages at the end of the week so anything that increases costs will militate against their decisions to hire people. One particular example concerns the redundancy rebate reducing from 60% to 15%. If someone with 20 years service was eligible for the maximum of €600 per week, the overall redundancy payment amounts to €24,600 and, under current rules, the company must come up with an additional €11,070. For every person the company was going to make redundant, it must now get rid of two people because the bank will not supply money to fund redundancies. There is no incentive for people on the margin to continue to trade or to sell a business. It makes people go into the insolvency fund. It is nonsense and was not thought through. The approach of the Department of Social Protection concerns its own budget. We need a whole of Government perspective. There is no point in the Department of Jobs, Enterprise and Innovation writing an action plan for jobs with 200 good ideas when, in one fell swoop, negative decisions wipe out that good. That is why we need consensus.
I have never taken so many calls and e-mails from our members about any single issue as about the sick pay issue. They cannot understand it. In the case of our nearest neighbours, Northern Ireland, people are paid at half the rate here. Employers there pay the sum in the first instance but reclaim the amount through the income tax system. It will also put us at a competitive disadvantage. Across Europe, there is no consistency in systems in terms of clarity, despite the Minister's comments. The briefing arranged by the Minister had experts flown in from the UK who spent two years analysing this, including consultation, examining medical issues, the problem of certification, and systems and cost problems, and they decided not to change the system because of the recession and the dramatic negative impact it would have on businesses and growth. Ireland has done no analysis, despite the Minister's promise of a cost-benefit analysis. The Minister promised she would exempt small companies up to 100 employees, which was promptly revoked by her officials. In this malaise of uncertainty, people are making decisions and have stopped creating jobs because they are worried about what will happen.
Dara Murphy (Cork North Central, Fine Gael)
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I welcome the witnesses to the committee. I had a number of retail units and I come from a small business background. I am sympathetic to the witnesses. Having said that, it is important to note the Government has reduced PRSI in its brief term in office. In international terms Ireland is going up the charts as a place to do business. In comparison with many of our competitors, Ireland is now a cheaper place to conduct business. Commercial rates have not increased over recent years, with the exception of a couple of local authorities. Although the witnesses refer to destroying investment, despite the extremely difficult economic climate, the economy is experiencing modest growth. We should all be more careful in our language and when using terms like "destroying". I accept there are difficulties for people in the retail sector and we are hopeful improvements in foreign direct investment will trickle down to small business, which is the natural order of things.
Last week, representatives from the banks appeared before the committee in an extraordinary session and there was significant questioning about how banks are dealing with small businesses and lending.
Ciarán Lynch (Cork South Central, Labour)
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I ask Deputy Dara Murphy to keep on the topic of the budget and the witnesses' proposals rather than his own contribution.
Dara Murphy (Cork North Central, Fine Gael)
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I will keep on the topic of the budget. What measures can the witnesses' suggest, either through the budget or otherwise, to force the banks to increase lending to small businesses?
Ms Patricia Callan:
It is untrue to say the country has decreased PRSI. There have been PRSI exemption schemes to support companies hiring long-term unemployed people and those coming off JobBridge. The problem with the schemes is that they have been underused relative to their value. Small companies are not tax experts and the scheme does not really resonate. One of the proposals, which is under discussion, is that it should be simplified. The proposal should be to give businesses €1,000 or €2,000 to take people on. This is plain language and is why measures such as the special savings incentive account scheme worked all those years ago. That would be better than the tax system. In real terms, we have experienced nothing but increased taxation on labour. The marginal tax rate for self-employed people is 55% and 52% for employees, which is one of the highest in Europe. It is a deterrent and we should be incentivising people to work. A tax on labour is a disincentive to work.
We welcome the reduction of business costs but it is mainly in the private sector. Government-imposed charges and fees have increased. It is business to business negotiation that has seen the benefit. It is no great feat that commercial rates have been frozen when rents have dropped by 20% or 30% in real terms. Rates have not dropped to the same extent even though we have years of deflation. There was no deflation in rates. The whole system is unfair. Why is the business community paying for the public good? It is not receiving a service in return. The whole system must be completely revisited and we are disappointed that, in the programme for Government, even if the €500 million of efficiencies in local authorities is achieved, it will do nothing to help businesses. Instead, it will offset the central Government contribution. The proposal is not to split it equally with ratepayers so rates will remain the same.
Members may be aware of the revaluation process at present, which will take ten to 15 years to get around the country. The process will impose extra challenges and people and result in bills increasing by 20% or 30% depending on location.
In terms of access to finance, we have proposed seven measures-----
Ciarán Lynch (Cork South Central, Labour)
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I will invite Ms Callan to contribute again, when she will have an opportunity to respond to members' questions.
12:10 pm
Mr. David Fitzsimons:
With regard to bank lending, the fundamental is that we have good vibrant businesses to lend to, which are not basket cases. To do that, we need to reduce business costs. We need to realign our domestic economy costs to equate to current market demand, which is dissipated.
Rates have been mentioned. I am aware that it would be a challenge to reduce rates. They are currently increasing because of revaluation. Anyone in a primary location, such as a high street or shopping centre where all the retailers are, is facing increases in the revaluation process. It is fundamental that ratepayers receive a service. We have been arguing this for a long time and we launched the Town & City Management Framework, a way of managing towns. Many retailers are happy to pay the same rates but they want the same service one gets in a shopping centre. They want a secure and safe environment, fair and equitable car parking and a good vibrant retail mix that engages with customers.
In Dublin city, the ratepayers want to pay more. They are willing to participate in a bid to pay more rates if they are assured of the delivery of services that will, in turn, increase consumer demand because customers will want to come into a safe and engaging space.
Ciarán Lynch (Cork South Central, Labour)
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We have received an apology from the Irish Exporters Association. The association made a submission but they were unable to attend the meeting.
Joe Higgins (Dublin West, Socialist Party)
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Ms Callan knows the domestic economic is being eviscerated by the disastrous austerity policy and the bailout of European bankers, speculators and the like. Small enterprises and self-employed people, along with workers, are its foremost victims. It puzzles me why her organisation continually pushes a policy that will further eviscerate the domestic economy. In her submission, for example, she shows herself to be in favour of the impoverishment of young people who cannot find jobs. For people under 25, she proposes a weekly dole of €55. She complains that social welfare benefits are too high. What does she want? Does she want a slave population that will work for nothing for her members, or for employers generally? Is that the policy of her organisation?
She has called, again and again, for a property tax and a water tax on ordinary householders. Here, she is at one with the Government which speaks in terms of broadening the tax base, as a cover-up for a grab for hundreds of euro more that many people simply cannot afford, as if there was a pot of gold hidden under every house that can be reached into to pay this tax.
She recommends a tax of €400 which can go from that up to €1,000. With regard to water, the ESRI and other agencies want a combined tax of €1,300 per annum, which will mean new taxes on top of ordinary people. This will cut down people's ability to buy the services of Ms Callan's people. There is a fundamental contradiction in her position.
Ciarán Lynch (Cork South Central, Labour)
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Deputy, do you have a question for Ms Callan?
Joe Higgins (Dublin West, Socialist Party)
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No, that is it. Thank you, Chairman.
Ms Patricia Callan:
In reality, our members have come together and looked at the budget from a realistic stance. We are where we are. No one wants to be here but we are borrowing €1 billion a month to fund our public services. Given that position, we must make choices. In our analysis, as Mr. Ronan Lyons has said, property tax is the least damaging to economic development and growth. The only way we are going to exit this crisis is by growth and by allowing businesses to get on with their jobs and try to create more jobs. I hope we will all agree on that. Our position is not incongruous. It is about hard choices. In making those choices, we accept that it will take money out of people's pockets and we do not want that to happen. It has to happen somewhere, however, and it is better that we tax assets, and a property tax is a wealth tax.
With regard to our analysis of the social welfare bill, it is a reality that we got carried away during the Celtic tiger years. The Department of Social Protection's statistical information on social services for 2010 states that the rates of short-term payments had increased by 80.5% in 2010 on a baseline of 2001. During that time the consumer price index, CPI, went up by 21.7%. Our social welfare rates went up at four times the cost of living. They are completely out of line with international trends. We certainly do not have a slave population. We have the second highest minimum wage in Europe, which is something our members are having to deal with.
Our analysis of youth unemployment is based on a UK model of trying to incentivise people who have never had a job to go and find work. Schemes such as JobBridge have been successful, but JobBridge could be much more successful. Some 2,000 of the internships that were advertised attracted no applicants. We have an issue with making work attractive and encouraging people. While I accept that there are not enough jobs for everyone, there is a mismatch that we need to get to the bottom of. This has to do with delivering on Pathways to Work and the Department of Social Protection engaging better with employers. We all have a common aim, which is to exit the crisis and to have a better life for all our people. The way to do that is to give someone a job, rather than leave them floundering on welfare.
Peter Mathews (Dublin South, Fine Gael)
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Both submissions make the same point about cuts rather than taxes. I am not saying there should not be any cuts, but I question whether there might be taxes. In order to pay a contribution for a service one has to have income. Income is the flow out of which taxes can be paid. When everything is in balance, as Mr. Ronan Lyons said in the previous submission, one can have a tax from the notional income that comes from owning sites or land, depending on whether the land is residential, commercial, retail or whatever. When in balance, an economy can put a demand on the owners of land for a contribution towards the general purse. When, however, the revenues of the State have suffered a sudden drop off a precipice and when expenditure is way above revenue, one has to look to revenue, temporarily, as bridging financing for the readjustment programme in order to maintain fairness as well as take a reality check, to use Ms Callan's own words.
There is income. We know this from having asked the Department of Finance and the Revenue Commissioners. A high incomes levy on incomes of €120,000 and over would produce €520 million. A corporation tax uplift of 2.5% on the headline rate-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy Mathews, I am sure the witnesses are enjoying your presentation. Can I draw your attention to their presentations?
Peter Mathews (Dublin South, Fine Gael)
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I am asking why they both make the same point. Here is a reason for suggesting their presumption is misplaced. They say it in two lines in both submissions. The submissions contain some good points about supporting investment and jobs through the tax system. Points Nos. 1, 2 and 3 under that heading are imaginative, creative and realistic.
I come back, however, to the fundamental point that one should not presume that taxes cannot provide the short-term three year bridging financing to carry €1.25 billion of the readjustment programme without hurting the economy, as Deputy Joe Higgins has said. The indigenous economy, GNP, is worth €130 billion while GDP is €150 billion or more. The one that everyone in Europe talks about is GDP but this country is, realistically, on GNP. For our 250,000 employees, it is GNP that counts. We must get this message across to people listening in from abroad. It is not happening. They do not understand the household and business debt burdens on our society.
That is why the proposal about the cash receipts basis being increased is very clever, because the small businesses cannot get the liquidity to pay their VAT bills due to the volatility of their incomes. Well done, but I urge the witnesses to think about it and not to be afraid. I have asked the chief executives of the multinational corporations about corporation tax. They would not blink if the rate went from 12.5% to 15%, and that would yield €670 million.
12:20 pm
Peadar Tóibín (Meath West, Sinn Fein)
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Tá brón orm nach raibh mé anseo ag tús an chur i láthair. It is correct that when we frame these conversations we must be cognisant of the catastrophe that has happened in the sector. It would not be fair to do otherwise.
With regard to the budgetary process, we met the troika and it was quite shocked at how long the process is in Ireland. It really starts in July when the discussions begin in public. Many of the sector's issues focus on cost base. That is logical because it is an item that could be under the control of the State. Obviously, demand has collapsed so I would like to hear more from the witnesses about how to stimulate demand in the economy. On jobs retention, Germany has a system under which viable companies can put in a proposal whereby over a small period of time, perhaps a year or 18 months, they get some level of support from the state to help them keep their employees employed. That stops after the specified period.
There is a view that the issue of upward-only rent reviews is dead and buried, but there are possibilities. We could legislate for a reduction in the length of rental contracts. I understand that rental contracts in this State are far longer than the European average. A reduction of those rental contracts would allow for the frozen high rents to come to an end sooner, which would be in everybody's interest.
Have the witnesses considered the idea of a progressive rates base, whereby the rates take is not changed but the balance of who pays the rates changes? In other words, a small firm that is not making a profit would pay slightly lower rates than a large multinational that is making a larger profit. Therefore, typically a rate would be based upon the type and size of the business as well as taking into consideration the profitability of the business.
What are the witnesses' views on those issues?
Mr. David Fitzsimons:
To take the latter point first, I disagree with rates based on profit. There would be an inherent motivation to not be the best. It would be rewarding the unprofitable. In retail, the most progressive, forward thinking retailers are commonly the most profitable. Indeed, last Saturday evening, we, along with the President of Ireland, interviewed the winner of the store of the year, who has hired many people over recent years despite the recession. He is a good retailer. I do not wish that guy to be incentivised with lower rates if he becomes unprofitable. The fundamental issue with rates, regardless of how they are structured, is that we get service. One pays a service charge in shopping centres. There are weekly and monthly service charge meetings, accounts are put up on the board, everybody has their say and they decide what the shopping centre will do. They spend the money and do it transparently. Currently, we have these beautiful big glass boxes called local authority buildings sitting in county towns, but there is very little transparency. There is a parade to announce the fact that the path was slightly improved or a bit of damage was rectified, but they are not dealing with vacancy, dereliction, street lighting or crime. Next week, the National Asset Management Agency, NAMA, the Garda Síochána, our organisation, Chambers Ireland and the County and City Managers' Association are coming together to devise a way forward for our town centres. Hopefully, through that type of national representation we will motivate stakeholders locally to engage with their local authority and put some plans together to re-engage with customers. Regardless of who pays the rates, if the rates are wasted we are fooling ourselves and wasting time.
Ms Patricia Callan:
On the point about stimulating demand, as I said at the outset the biggest issue in this regard is to have clarity, confidence and knowledge about what the plan is. That is fundamental. From the business community's perspective in terms of stimulating our investment and looking at expansion, notwithstanding the absence of customers there are the problems of credit and credit flow that were mentioned earlier. To refer back to the tax measures that could help, we believe it is important to introduce a roll-over type of relief in the budget whereby we can incentivise entrepreneurs who sell a business to reinvest in another business. That will help in terms of investment finance for new start-ups, which will be critical for creating an enterprise culture as we move forward. We propose moving to a VAT cash receipts basis. We understand that moving from €1 million to €2 million is no problem with the EU and can be done straight away. It would massively impact and help companies with their cashflow, which would allow them to invest more which, hopefully, will build confidence.
We also believe there should be specific examination of releasing personal pensions. It is ironic that when owner managers put money into a pension pot when they could afford it, they were allowed to invest in property and equity but not in business. It is an absurd system. Either changing the system or allowing the early release of those non-essential funds is critically important. From the business community's perspective in terms of confidence, it is very much about its ability to invest and expand. For customers, it is about messaging, clarity and knowing where we are going, which is somewhat unclear.
Ciarán Lynch (Cork South Central, Labour)
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We must go to the House for a vote at 3.40 p.m. If members have brief supplementary questions, not commentary, I will take them.
Peadar Tóibín (Meath West, Sinn Fein)
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There was a discussion about the cost of the redundancy changes and sick pay. Has any analysis been undertaken by the witnesses to estimate the reduction in the number of jobs or the cost for jobs as a result of the redundancy changes and the future possible change in sick pay? There is a major change by the Government with regard to county enterprise boards, CEBs, in terms of marrying them to local authorities. What are the witnesses's views on that?
Ms Patricia Callan:
We have conducted a survey analysis of members. I will send it to the committee so the members will have the details.
On the CEBs, it is fundamentally flawed logic. It will cause serious damage and our major concern is that there has been no attempt to ask the end user, the business person or the person who is thinking about setting up a business, what they want from the service. It is all about internal wrangling and moving things out of one Department and into another, with no end user in sight. It needs to be seriously examined.
Mr. David Fitzsimons:
Integration of services locally is fundamentally important in respect of the county enterprise board being joined at the hip with the local authority.
A final point to be made, and Deputy Mathews alluded to it, is that retail in the GNP is worth a significant amount of money to this country. It is largest private sector employer with 255,000 people employed, yet we do not have any transparent leadership in the Government for that industry. If we wish to talk about rent, we must go to the Department of Justice and Equality, in the case of rates it is the Department of the Environment, Community and Local Government, for labour issues it is the Department of Jobs, Enterprise and Innovation or the Department of Social Protection and for e-commerce it is the Department of Communications, Energy and Natural Resources.
Peter Mathews (Dublin South, Fine Gael)
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The witnesses want a Minister.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Fitzsimons and Ms Callan. I propose that we suspend the sitting until 4 p.m. and resume with the next witnesses from Social Justice Ireland and TASC. Is that agreed? Agreed.
12:30 pm
Ciarán Lynch (Cork South Central, Labour)
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We are continuing with social pillar groups and business pillar groups presentations to the committee. I welcome Dr. Seán Healy from Social Justice Ireland and Mr. Tom McDonnell from TASC and thank them for appearing before the committee. Rather than go into the budgetary submissions and give full presentations on them, it is an opportunity for the delegates to identify one or two points the would wish to raise with committee members and also it is an opportunity for members to tease out some of the concepts in the proposal in greater detail. I welcome you to the committee. I will begin by asking Dr. Seán Healy about his proposal on property tax, where he stated that he is in favour of the site valuation model as opposed to the valuation model. There are arguments for and against this, one of which is that the site valuation model does not provide the type of gatekeeping that a true valuation model would have. For example, in the early 1990s if a person was earning €35,000 his or her house would, perhaps, have been worth €50,000. People saw their house values increase to €200,000 to €300,000 but their salary did not increase with it. There would have been an immediate question as to the level of taxation on people's property not meeting that of their income. I would like to hear more on that issue.
The universal pension system was also mentioned. Perhaps Dr. Healy would elaborate his views on that issue.
Mr. Tom McDonnell proposes an 0.35% tax on residential property. How did he arrive at that rate? How does he see it applying to citizens? Does he propose that it apply to all citizens, regardless of annual income and household income?
Ciarán Lynch (Cork South Central, Labour)
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There is space to say what you wish but I would appreciate if you would take the questions as well.
Dr. Seán Healy:
That is no problem. The most important thing I would like to say to the committee is that at the core of any issue around budget is the question of consistency in government policy, what might be called coherence in government policy. What I am saying is that the Government should not have a series of policies that are working in different directions. For example, the most important issue that needs to be addressed within the overall budget context is to face up to the fact that the current set of proposals on the budgetary adjustment aimed at producing a borrowing reduction of €3.5 billion in 2013 is not a consistent or coherent position. The reason being that the way it is set up, there is a ratio of almost 2:1, that is €2 in cuts for every €1 in tax increases. If the Government persists with that policy it will not be able to meet other objectives, such as protecting vulnerable people or core public services, whether those services are delivered by the State, the private sector or the community and voluntary sector or combinations of one, two or three of those. That is not doable if the Government continues to move in that direction.
Another point about the same issue is that the overall low tax take in Ireland is not sustainable given the commitments the Government is already engaged in on a range of fronts. One the one side, the Government is trying to reduce borrowing which is desirable and has to be done. On the other side it is trying to ensure public services are maintained and delivered at a frequency and capacity that people require. People are trying to provide those services and maintain what is available with far less of a tax take than any other country in a similar position. One might say the Government is trying to deliver European Union levels of service with American levels of taxation and I do not believe that is possible. In that context what is needed is more coherence and consistency in policy. What we would be looking at therefore is the service levels that people want and how they are to be delivered, the level of social protection and so on. We also need to consider what is possible in terms of a fair taxation system and if there is a shortfall of a certain amount how then can those services be delivered. Does the tax take have to be increased or do we have to find other ways of doing it? The point is that there should not be an attempt to do the impossible.
I wish to make one other reservation and then respond to the two questions. Social Justice Ireland is strongly of the view that Ireland cannot get itself out of its present predicament without getting a serious break on the debt issue and that does not mean extending it, unless for 20 years, such as getting a bond and paying it in 20 years time. That is not the way to go unless one goes with the Karl Whelan proposal that we pay it all back in 3.1 billion years at the rate of €1 per year, with the interest to be paid at the end. Clearly it is a rather facetious proposal but it is trying to make a simple point that it is not possible with Ireland's current levels of debt, which are rising, to get ourselves out of this spiral.
We also need jobs. Without investment there will be no jobs at any scale. Without sufficient jobs there will not be recovery. Without recovery, we will be stuck in this austerity for the foreseeable future. Those issues are on the broader budgetary table which maybe we are not dealing with because we are just dealing with the taxation issue here, but the taxation issue feeds into that. We would be proposing, for example-----
12:40 pm
Ciarán Lynch (Cork South Central, Labour)
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I ask Dr. Healy to conclude answering.
Dr. Seán Healy:
We propose that there should be a substantial off-the-books investment in a program to generate jobs. All of the proposals are in the document.
The Chairman asked me about the universal pension proposal. What we are doing is straightforward enough. We are proposing that the Government does two things in the budget. On the one side it should offer tax relief at the standard rate for pension contributions so that it is no longer available at 41%. At the moment some 80% of pension contribution tax breaks go to top 20% of earners. Therefore the richest 20% in the country get 80% benefit from the tax break. For the sake of consistency in policy, coherence and trying to benefit everybody, it would be much more sensible to stop that, make it available at the 20% rate for everybody and use the money not to write off debt but to create a universal pension. At the moment there is a need for that type of initiative. Some 46,000 women in Ireland do not have a right to a pension of any kind and never will. This is an issue that has been ignored by successive governments for three decades. It is an historical issue about how pensions developed in Ireland. People never got into the system or were taken out of the system going back to the times of the marriage bar and such like. The 46,000 women would be covered in this because it would be universal. Everybody at 66 years of age would get-----
Ciarán Lynch (Cork South Central, Labour)
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Would that be a defined payment as opposed to the non-contributory old age pension which is means tested?
Dr. Seán Healy:
As we have calculated it, it would be the same rate as the contributory old age pension. We would scrap the non-contributory old-age pension and everybody over the age of 66 would get the level of the contributory old-age pension. In no case would anybody get only part of the contributory pension, which is happening to many people because they have not made sufficient contributions over their working life, have not been in the system for long enough or for whatever the reason bars them from getting full payment. That is a fairer system and is a redistribution from the top 20% throughout the system, picking up the holes and closing them off. That is what we would do with the universal pension.
On property tax, we favour a site value tax. The easiest way to calculate it is by paying a tax on the basis of the services that have been put into the site by the taxpayer in the first place. For example, if a particular area has many services, then the site value has been increased dramatically by the taxpayer putting money into that area. Another geographical area might have little or no taxpayers support put in. In such cases we believe the site value has not been enhanced by the public purse. For example, somewhere near the Custom House-----
Ciarán Lynch (Cork South Central, Labour)
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Not a place in Cork.
Peter Mathews (Dublin South, Fine Gael)
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The Opera House.
Dr. Seán Healy:
The Opera House has not nearly as much as this. The Luas practically passes the door of the Custom House. The DART railway station is across the road from it. Busáras is there and the city centre is very close. All the other public services including sewerage and water services are supplied. Therefore a considerable amount of tax money went into the development of that property. What does someone living close to Mullaghanish near Ballyvourney have? The State does not supply water there. Although there might be electricity, there is no public transport - there might be a bus once a day but people need to get themselves down to the village. With all the supports and taxpayer investment that has gone into it, that part of Dublin 1 is obviously quite different from a rural place that has had very little investment. The one condition we have on it is obviously-----
Ciarán Lynch (Cork South Central, Labour)
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I must interrupt Dr. Healy. We must finish at 3.45 p.m. and I want other speakers to be able to contribute. I called Mr. McDonnell.
Mr. Tom McDonnell:
TASC recognises the size of the deficit and it is within that context that we propose the set of measures we do. For consistency with the Government's position we have decided rather than necessarily implicit support for stating that a budge adjustment of €3.5 billion is the appropriate amount, we have to the greatest extent possible attempted to adhere to the Government's triple lock although not fully. In proposing our composite set of proposals to an adjustment of €3.5 billion we have considered the wide body of empirical literature and radical literature as to which types of tax have which types of effects. These include long-term effects, short-term effects, sustainability, efficiency, social justice, equity and so on. We have considered all of these issues and it is in that context that we make our proposals.
I echo Dr. Healy's points on debt sustainability and the need for a deal on the banking debt, but we can come back to that. The Chairman asked me specifically about the property tax. The evidence is very clear. Recurrent, as opposed to transaction, tax on immovable property is the most efficient and sustainable tax over the long-term. If properly designed, it can be equitable. For example a recurrent tax, which is a flat tax, such as the one that is in place at the moment is of course not equitable. It is a question of how the system is designed and to what extent waivers are given and so on. We advocate having no waivers and rather having an ability-to-pay-based deferral system. This ensures the integrity of the funding or revenue source over the long term because it will eventually accrue to the Exchequer in the form of capital acquisitions tax being supplemented by a lien on the house or as part of the subsequent transactions. Therefore it is sustainable over the longer term and because it is a known resource coming in over the longer term, the bond markets and everybody else can regard that revenue as being stable, which is not true in the case of, for example, stamp duty.
We picked a tax which is market-based in the short term but have given great consideration to the concept of a land or a site valuation tax over the long-term. Ultimately the current market value of the asset is the amount a buyer will pay for it rather than some notional value which will be subjective pending rezonings and so forth. Dr. Healy spoke about the services provided and of course the market value will reflect the services in the area, whether it be a Luas line, motorways, shops and so forth. Therefore a property in Ballyvourney which is identical in every way to a property in Ballsbridge except for location will be valued at a much lower price because of the amenities available in Ballsbridge. As property prices increase and decrease, it will obviously impact on the revenue to the State, but because the value of tax increases as the price of the property increases, it acts as a dampening effect, both up and down, on the fluctuations in property prices over the medium and long-term thereby helping to prevent future crises. Nevertheless the advantages of the site valuation system are also very enticing. We have proposed that it should be a 0.35% levy which should apply to all residential properties except for those for social housing, for housing homeless people and so on.
It should be universal and there should be horizontal equity. While everyone should pay, people in defined situations such as mortgage arrears or whose combined household and child care costs exceed a particular proportion of their household income resulting in it going below a certain level would qualify for a deferral. The 0.35% rate was decided on in the larger context of identifying particular forms of taxation to provide a sustainable tax base over the long term. It is our position, based upon the evidence, that these types of taxes are the least damaging to employment, growth and sustainability over the medium and long term and should, therefore, be substantial. For example, a tax of 0.35% on a house worth €200,000 would be €700. This would be deferred in respect of a person experiencing mortgage arrears, based on his or her inability to pay.
12:50 pm
Timmy Dooley (Clare, Fianna Fail)
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I welcome both contributors and thank them for their presentations. I would like to focus for a minute on the property tax. I do not agree with the notion of a site valuation tax. Support for or against it is, I suppose, based on one's general experience. There is usually a nice social mix of housing in rural villages. Often there could be one large house, built by a professional who had the means to do so, next door to a more modest house which meets the needs of its occupants and is on a site of the same value as the large house. For this reason, I would be concerned about concentrating our focus on a site valuation tax. I am interested in hearing Dr. Sean Healy's view, given his understanding of social mix and the dispersal of population, on how a site valuation tax might work negatively in this regard. While it may not necessarily lead to ghettoisation, it could impact negatively on the way in which rural parts of Ireland nicely knit together. I believe the tax would be better reflected on the property rather than the site.
Dr. Seán Healy:
I do not believe there is any likelihood it would lead to ghettoisation. In my view, people would benefit from whatever services were available and would have to provide the other services that are not available. Where there are different types of houses because some people had more money than others that is another issue. There are other ways of dealing with that, namely, an income or wealth tax or a combination of both on people with higher income who have built the larger homes which are worth more.
What we attempted to do was to link the tax with what has already been done with taxpayers' money. The services provided in a village or town will be of a particular level, with variations from place to place. The smaller the town or village, the more likely it is there will be fewer public services available because less money will have been invested in service provision there. In that context, it would appear to us that a site value tax would be fair. I do not believe it would have any real ghettoisation effect.
Mr. Tom McDonnell:
I would not go so far as to say it will result in ghettoisation or gentrification. However, I believe basing it on market value is probably less susceptible over the long term to the creation of the type of effect that a site valuation tax would have. That is not to suggest I believe that would happen. Nevertheless, it is a greater risk. Ultimately, basing the tax on the value of the wealth asset - the property, be it principle or private - should be the basic system employed. It is possible to have a maximum cap in terms of the proportion of income a person would pay. Again, we would advocate that that would be a parity, ability to pay and deferral system. While over the longer term the risks vis-à-vis ghettoisation or gentrification do appear, unfortunately every tax and public service created has a behavioural effect on the economy. There is no doubt about that. There are winners, losers and unintended consequences, as evidenced from some of the property based tax reliefs over the past decade, which relate to other factors.
We are calling for the tax to be introduced in this year's budget and to apply from next year. It needs to be done quickly and at a reasonably high level and should probably be increased in future years. Ultimately, from an economic efficiency perspective and from an equity point of view, we believe the evidence favours the type of model we are proposing.
Dara Murphy (Cork North Central, Fine Gael)
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I welcome Dr. Healy and Mr. McDonnell to the meeting. I would like to make one brief observation. The essence of our non-contributory pension is its universality. In comparative terms across the European Union, in particular the eurozone area, it is quite generous.
Like Deputy Dooley, I am not convinced by the site valuation tax model. Perhaps Mr. McDonnell will respond to following matter, which goes to the core of social justice. It has been suggested that people in social housing would be exempt from whatever type of property tax is introduced. I am aware, as I am sure are other members, of areas where there is a mix of private and social housing. In many cases the people in social housing who have far more disposable income than those in private housing who are faced with paying mortgages and so on. Perhaps Mr. McDonnell will say how he arrived at the rationale for an exemption for such a large block of housing in the State, namely, the social housing block.
Mr. Tom McDonnell:
I should perhaps have been more exact in what I said. What we specifically called for is an exemption for social housing and group residential facilities used exclusively for certain specific purposes such as the provision of housing facilities for the homeless. Perhaps I did not make that clear in my earlier remarks. We are not calling for an exemption in respect of all social housing. We are speaking specifically about residential facilities which are used for designated purposes. We are conscious of equity issues. TASC is a think-tank, whose raison d'être is economic equality in the context of efficiency and so on. Therefore, we believe it should be the market value of the wealth asset that is taxed. We should, because these are immovable assets as opposed to certain other types of assets which because of capital controls are easy to move off-shore, focus on these assets, at least for now. I agree with Deputy Murphy about the universality principle. There should be no waivers rather deferrals only should be permitted, which eventually come due.
Peter Mathews (Dublin South, Fine Gael)
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What about borrowings?
Mr. Tom McDonnell:
Borrowings are taken into account in the context of ability to pay. Where a person's housing and child care costs exceed a particular amount, in terms of the housing costs being associated with mortgage borrowings, this would have to be taken into account in the context of the deferral system. This is set out in our submission to the interdepartmental group. Broadly speaking, this is the only sustainable system that can be maintained. On the issue of people losing properties and so on, that arguably requires a different set of policies, which are not fiscal policies.
It has more to do with personal insolvency and other areas.
1:00 pm
Ciarán Lynch (Cork South Central, Labour)
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I must ask people to be very succinct when replying to questions.
Dr. Seán Healy:
The non-contributory old age pension is not universal because it is means tested. We are speaking about a non-means tested old age pension which would be paid to everybody at the same level and which would be at the level of the contributory old age pension. There is an illusion that everybody in Ireland is entitled to a pension at least equivalent to the non-contributory old age pension. This is not true. Many people receive a partial payment in their contributory old age pension and they are not in a position to claim on a means tested basis to get the balance through the non-contributory system. A total of 46,000 women receive nothing because they have no entitlement to a pension under any heading. They can make a claim for the non-contributory pension if they do not have enough income to live - whatever the basic parameters are for this at any time - but they do not have a right to it as such. It is means tested and if they have means or notional means, they do not receive it. We are in favour of a universal payment.
The question was asked that if people in social housing have more money available than people in other housing, why should they not have to pay a property tax. My approach is that they should pay tax in another way. If they have more disposable money available than other people, it is not because of their welfare payments, because these payments are already below the poverty line. In most cases a welfare payment does not provide enough to live life with dignity. It is not sufficient to provide the level of income required for a minimally adequate standard of living. Research carried out by the Vincentian Partnership for Social Justice shows this to be the case. If the people have money from other sources, this money should be open to taxation in other ways.
Joe Higgins (Dublin West, Socialist Party)
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At one stage TASC was considered to be a radical think tank alternative, but I must say Mr. McDonnell's contribution was hugely disappointing. In reality it bought in completely to the bailouts and the austerity agenda when what we need are radical alternatives. With regard to the property tax, I believe Mr. McDonnell stated every house valued between €150,000 and €300,000 should be taxed per annum at €675. Is this correct?
Joe Higgins (Dublin West, Socialist Party)
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Is it correct?
Joe Higgins (Dublin West, Socialist Party)
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Where on earth does Mr. McDonnell think hard-pressed working people on modest incomes will find this extra money? I presume he is also in favour of a water tax, which will increase this amount to €1,000 or €1,300. From where is this sacred text about property tax and broadening the tax base coming? It is as if every household has a hidden pot of gold it can pull from under the floorboards and pay as property tax. In fact, it will come from the same place as income tax and VAT, which is the take-home pay of working people. I find extraordinary Mr. McDonnell's proposals for a deferral if people are on low incomes or unemployed. Take the generation on 35 or 40 year mortgages as a result of the extortion and racketeering which went on in the property market and of which they were victims when they needed to buy a home to start a family. For the past ten years they have paid extortionate rates. Perhaps they must move on to an interest only arrangement with the bank for the next ten years, after which they may barely be able to afford the payments again. At the end of all this, thousands or perhaps tens of thousands of a tax will have mounted up. I must put it to Mr. McDonnell that this is extraordinary.
I agree with much of what Dr. Healy's organisation, Social Justice Ireland, has said, but he is opting for a site tax which would also be on the family home. The home does not earn an income. It costs money to keep.
Mr. Tom McDonnell:
Those in difficulty would presumably qualify for a deferral. One of the advantages of this system is that the tax burden is lower during a time of high unemployment and low incomes throughout the economy and rises at stronger periods. Property is wealth, and this would be a wealth tax. I regard a wealth tax as very much a progressive measure. For too long we have had a dysfunctional tax system. The amount of revenue brought in by the State is far beneath the levels sufficient to generate western European standards of public services, which I assume Deputy Higgins supports. Therefore the question is how this is paid for and who pays for it. Wealth as opposed to income only must be a component of this. It is the least damaging to employment and efficiency. The question then is how this is done. One begins by taxing immovable property in a universal system which acknowledges that those on low incomes and suffering from mortgage arrears difficulties are exempted for a period. If they remain in difficulty for the coming 20 years, they will continue to qualify for a deferral until such time as the house is transferred. If the amount is €700 a year for 20 years the total would be €14,000 which would be paid when the house is sold. It would be much less damaging to the individual at that time than it would be to have to pay €700 per year now. We feel this is by far the best system to help reduce the €10 billion structural deficit we have in an equitable and efficient way consistent with not damaging employment.
For what it is worth, the majority of the remainder of our proposals are taxes on inter-generational wealth transfer and inheritance. We also speak about reducing pension tax expenditures because the current system is a disgrace. I do not know any economist on the right or left internationally who would support our system. I agree with Dr. Healy that the basic pension should be increased because this is how one helps people. I strongly advocate that no cuts whatsoever should be made to primary or secondary benefits for vulnerable groups and taxes should not be increased for low income groups. Through carefully working out all of these measures one can design a system, even for this year at €3.5 billion, which protects the most vulnerable in society and places the burden precisely where it should be, which is on the wealthiest and highest income groups. We do not buy into the austerity narrative. We have argued for years about how it is counter-productive. We have called for the €4.5 billion from the National Pensions Reserve Fund to be targeted.
Dr. Seán Healy:
It is important to understand where we are coming from in all of this. For much longer than a decade, since before the recession hit us in 2008, we have been arguing about the tax base, and Deputy Higgins is well familiar with our arguments. We were very conscious of the fact that the tax base was being narrowed which made the tax take very vulnerable if anything happened.
Since 2001 we have clearly indicated, in print and in meetings with politicians up to and including the Taoiseach of the day, that the amount of houses being built was in excess of what was required. We used the phrase, "You did not need to be Einstein to know that there would come a day when we would have to stop building too many houses" because there was more than enough to keep us going. Consequently, the Government's tax take was extremely vulnerable because there was too much emphasis placed on transaction taxes. Then Social Inclusion Ireland reached the sensible conclusion that it was best to substantially increase the tax take from fixed assets or wealth in one way or another and thus property became part of that. We opted for a site value tax because we thought it was more likely to work, more effective and more equitable.
I shall deal with the equity side. A high value was placed on land in urban areas but much of that was tied to the social and economic investment that was paid for by taxpayers. That being the case then there should be a payment given back to all taxpayers, and not just the taxpayers living in the area, from what had been provided in the area at taxpayer's expense. We then concluded that site values was a better way to go. It can be argued that a substantial portion of the benefit of the land value should be enjoyed by all of the members of the community, not just the owner of a particular property. An increase in site values is linked to the investment in infrastructure in the area and much of that was paid for by taxpayers. Therefore, it can be argued that a substantial portion of the benefit gained by an increasing site value should go to the whole community through the tax system. That is why we opted for this approach rather than house values.
1:10 pm
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I can see where the group comes from, theoretically, in terms of a site valuation tax but in the real world and real time terms, I could not disagree more with the proposal. Fr. Healy gave the Custom House and Dublin 1 as an example and talked about all of the infrastructure. First, we must bear in mind that most of the high concentrations of poverty are also found in inner city areas and that is precisely why taxpayer investment and infrastructure was made. Second, I shall reiterate the point made by Deputy Higgins. We are not dealing with perfect equilibrium because people are up to their tonsils in debt and they were fleeced. They are now in negative equity and can only afford to pay interest only mortgages at present. That problem will not go away anytime soon.
I was surprised by how the group dealt with a wealth tax. Why was it not more expansive in how it defined wealth? There are more assets than the family home. Can I ask each of the delegations to identify what it thinks is the most important matter for the forthcoming budget when it comes to dealing with two categories of citizens, the children and the working poor.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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A proportion of them do not.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Yes.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Yes.
Dr. Seán Healy:
I shall answer the Deputy's other question. In order to help the working poor we simply propose that tax credits be refunded. There are 130,000 people in jobs but they are so low paid that their household is in poverty. Therefore, we must do something to target those people and to keep them in their jobs. We have talked about how to incentivise people to take up jobs. These people have jobs but they are paid so little that they are below the poverty line or are struggling financially. A simple measure that would help would be to refund the two main tax credits to which they are entitled. In other words, change the system so that they can benefit from the full value of their tax credit. For the most part, they do not benefit from the full value of the tax credit, so they could receive a payment from the State to make up the balance. That means that the poorest people in employment, the working poor, would benefit from the full value of any changes in the tax credit system. I know that we are not likely to see that in the budget this year or next year. There was a time when they were increasing and I hope that it will happen again. It is perverse that a tax change of that nature can help everybody except the poorest in employment. We came up with a costing of €140 million that was based on numbers from three years ago. At the time the Revenue Commissioners claimed that it would cost over €3 billion. We held discussions in this committee room that eventually sweated down their figure of €700 million and, in subsequent discussions with our technical people, the figure was further reduced to €350 million. The Revenue Commissioners have not been able to move our cost of €140 million by one cent because it was rock solid. The proposal would probably cost less now because there are fewer people in employment than three years ago. The provision can be made for that sum.
It is most important that there is no reduction in child benefit and no second tier payment introduced as a quid pro quo for a cut in child benefit. I am sure that the members will question what I am saying and whether I support the wealthy. The Department of Finance and the troika asked me the same questions but I gave them the same answer that I shall give here. Let us take two households that each have a total income of €100,000, two people live in each, the households are identical and pay the same tax. If one household has two children then it receives over €3,000 from the State in child benefit. It is a contribution for the two children but it is far below the cost involved. Along comes a recession and Ireland is in trouble and needs to make savings in order to reduce its borrowing. What does the Government mean when it proposes a cut in child benefit? Which household will it take money from? Obviously, the household that contains four persons. To me that is not obvious. It is not the right thing to do and I would leave them alone. The State already does far too little for children by way of a contribution or supports.
Instead, if the Government needs to take money from the two households in order to make a contribution to Ireland reducing its borrowing then it should come from both houses through the income tax system or some other process rather than cut the child benefit. The child benefit is the only payment of substance and my group deems it to be not nearly adequate. It is the child's payment and should remain as it is. If one examines the range of services for children the one thing that they all have in common is that they are underfunded. There is insufficient funding across the system. The last thing that we should do is to reduce the little funding that exists through that one payment. There are much fairer ways to increase the tax take and reduce the borrowing than targeting children who are in no position to speak for themselves.
Mr. Tom McDonnell:
I shall address Deputy McDonald's questions by starting with the issue she made about Dublin 1. My organisation proposes a system that is based on market value rather than site value. The measure would address the basic issue but also our ability to pay the deferral system and income is a component of that. For example, if a person is unemployed then it is certain that he or she would defer a payment and, therefore, would not pay the tax.
With regard to whether one should expand the wealth tax from the property tax, there are a number things that can be done and that Ireland should be doing. Although this is not strictly a wealth tax, we should support financial transaction taxes which ensure the movement of finance.
Taxing financial assets in Ireland is quite difficult because of the open nature of the economy. We will look at this in greater detail in the future. One of the reason we do not have specific proposals on such taxes is that we do not have cost proposals on it. We do not have the numbers.
In terms of perfect equilibrium, it is not a perfect equilibrium and that is the reason it must be sustainable over the long term. When one has high levels of unemployment and incomes go down, the income component of a deferral system kicks in. In addition, house prices are falling. This tax will be less of a burden during times such as now. When good times return, if they ever do, then the level will increase. On the issue of the sustainability of the debt and whether we should be repaying it, the position taken by TASC, as we articulated last year, is that we should suspend the payment of the promissory note, pending a full renegotiation. We have made that clear. We believe Ireland should come up with its own technical paper in which all the options available to Ireland are examined.
I have been asked what can be done for children and for the working poor. One begins by issuing a guarantee that there will be no cuts to services for children, no increase in taxation vis-à-vis the low paid, credit spans and so on. A broader commitment is also made, including a commitment to a quality audit so that as part of the budget process one looks at how the proposal will affect children over the entire year. We need to know that by looking at the evidence and having the debates in January and February and not in the middle of November when we all criticise the decisions that are not based on evidence and are made on the night before the budget. We need to take a multi-annual approach. One of the areas that Dr. Seán Healy raises is the idea of refundable tax credits, which we fully support. It is a very good way of supplementing the incomes of the working poor.
The money in the National Pensions Reserve Fund, which is approximately €4.5 billion, is uncommitted and could be committed to the domestic economy, not necessarily as a stimulus only but in targeted ways. Let me give examples. A significant cohort of the people who were formerly in the construction sector will never be able to get jobs in construction again. We had a boom. When the economy returns to normal, the levels of construction will be below the boom levels, therefore we must consider now what skills will be necessary for the economy of the future so that we do not create structural unemployment over the next decade and onwards. We need to focus specifically on the long-term unemployed and ensure they will get the education, retraining and upskilling necessary. We need to pour money into developing people. It is about human capital to a large extent.
1:20 pm
Peter Mathews (Dublin South, Fine Gael)
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I welcome Mr. McDonnell and Dr. Seán Healy. I respect and acknowledge the reasoning and motivation of the submissions which are worthy and well thought out. I will put a few questions.
In respect of the 46,000 women who are in the lacunae of having no pension entitlements, are there any men in an equivalent or identical situation?
Peter Mathews (Dublin South, Fine Gael)
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I appreciate that.
Peter Mathews (Dublin South, Fine Gael)
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There might have been men, who for reasons such as psychological damage may be unemployable and therefore would not have the credits. It is important to see if there are cases of men in these circumstances.
Deputy Higgins raised the issue of property taxation and where payment of the amount calculated on the basis of taxation could be deferred. He pointed out that the deferral would compete with negative equity. Some people whose houses are in deep negative equity might never be in a position to pay off the deferred tax and it might never be retrieved. One must think about that.
One may draw a comparison between the size of a loan and contamination of a site, when it comes to site value. If one has contamination on a site, then the site value will be zero minus the cost of removal of the contamination. If one looks at a mortgage that was too big in the first instance on that site, one has a financial contamination of the site and the site has no value. How can one raise a tax on what would otherwise have been a mortgage free site? We have the working poor and the new poor, the people who have too much debt and have temporarily lost their income. There are people who were income rich for a number of years - architects would be a case in point - and they have no income now. Engineers are in the same position. We cannot jump to a conclusion on a reflex type of movement.
It was Mr. McDonnell who said that property is wealth. It is not. If one has borrowed to finance the property, it is not wealth, it is in fact financial destruction.
Ciarán Lynch (Cork South Central, Labour)
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For the information of the Deputy, 44% of residential property in the State is mortgage free. Some 20% of properties are in mortgage difficulties.
Peter Mathews (Dublin South, Fine Gael)
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May I suggest Chairman, that much of the 44% of the residential property that is mortgage free is owned by people who are retired and not earning.
Ciarán Lynch (Cork South Central, Labour)
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The vast majority of people with mortgages are making stable payments, or are now mortgage free.
Peter Mathews (Dublin South, Fine Gael)
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I acknowledge that. Most of the people who own those houses are retired and are not working. The country needs working people to generate incomes.
One may argue for a special case allowance for people with child care costs and those out of a job. I think it was Dr. Healy who raised the issue of child care costs.
Ciarán Lynch (Cork South Central, Labour)
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We are over time. I am trying to allow everybody to speak
Peter Mathews (Dublin South, Fine Gael)
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Chairman, my last sentence?
Ciarán Lynch (Cork South Central, Labour)
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This is the Deputy's last sentence.
Peter Mathews (Dublin South, Fine Gael)
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Child care is usual for children up to the age of ten or 12 years. There is also a high cost in maintaining older children. The children who are bigger physically eat more, need more clothes as they grow out of their clothes. They need to go to the dentist and may need glasses. Sometimes it is more expensive to meet their needs than it is to leave a child in the crèche. When there are four children in a family-----
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Child benefit.
Peter Mathews (Dublin South, Fine Gael)
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They are more expensive at that stage.
Peter Mathews (Dublin South, Fine Gael)
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They create rubbish.
Ciarán Lynch (Cork South Central, Labour)
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If the Deputy would like to have an alternative meeting, I can accommodate that.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Let us talk about bin charges.
Peter Mathews (Dublin South, Fine Gael)
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The Chairman cut me short. That underlines the imperative for getting debt write-down from our outside creditors.
Ciarán Lynch (Cork South Central, Labour)
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May I remind Deputy Mathews not to interrupt.
Peter Mathews (Dublin South, Fine Gael)
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Deputy Lynch is my favourite Chairman.
Ciarán Lynch (Cork South Central, Labour)
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I am the Deputy's only Chairman at this stage. If the Deputy wants to have a Chairman, will he please desist.
Peter Mathews (Dublin South, Fine Gael)
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With all my love.
Dr. Seán Healy:
We make the argument that there must be some debt write-off on the family home, not on the properties people bought, such as the half dozen investment properties, which is a different issue. We need to work out a system starting with the debt that should be written off for the State and as that runs through the banks and so on.
Ciarán Lynch (Cork South Central, Labour)
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I will call on Deputy Boyd Barrett next.
Mr. Tom McDonnell:
On the question of negative equity, if the value of the wealth asset has fallen, then with the 0.35% property tax the amount that is liable will also fall.
That would be one direct impact but, by and large, the question of whether a person is in negative equity is a different issue. It is whether one has an ability to pay that matters.
1:30 pm
Peter Mathews (Dublin South, Fine Gael)
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There is a financial charge on a site-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy-----
Peter Mathews (Dublin South, Fine Gael)
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This is a technical matter.
Ciarán Lynch (Cork South Central, Labour)
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I will ask the Deputy to leave the meeting if he interrupts once more. We have a full agenda and we will be here all day today and all day tomorrow. If there is one more interruption from the Deputy, under Standing Orders, I will ask him to leave the meeting.
Mr. Tom McDonnell:
We are very clear. There should be no waivers in respect of negative equity but there should be deferrals based entirely upon people's ability to pay. If a person's ability to pay status changes, the deferral should be removed and if his or her ability to pay declines, then a deferral can kick in and there can be different levels of deferrals. It should be a universal system across the board for everyone - there should be horizontal equity. No groups, because of negative equity, should be able to exempt themselves from a property tax. I reiterate that all taxes have negative impacts on employment, growth, incomes and also on equity but property taxes or taxes on a moveable property specifically are the least damaging across the board in the case of all of these issues.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The witnesses are the good guys and they are pointing in the right direction in terms of what we need to do. They are right in asking do we want to have an American-style tax structure or a European-style structure and the services that go with it. It seems we want Berlin services with Boston taxes but I do not believe that works. The witnesses are right in what they said and the points about debt sustainability and the need for investment are critical.
Ciarán Lynch (Cork South Central, Labour)
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I do not need the Deputy to repeat the witnesses' points; I need him to make some fresh commentary, or else I will move on.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I want to set the scene for the points with which I disagree. On the pensions issue, the witnesses have hit on something important. They are right that 80% of the benefit going to 20% of the people is problematic and we need to deal with that but why would they not go a little further? Some €2.5 billion is given in tax reliefs and most of that goes to the top 20%. Why would they not go considerably further and argue - I think Vincent Browne argued this point a while ago - for eliminating almost all of that relief and have universal provision of the non-contributory pension at double its current level? We could afford that if most of those reliefs were eliminated and the private pension system was phased out. Why would the witnesses not take that more radical route?
On the property tax issue, the witnesses should rethink what they have proposed because they are the good guys but I believe they have got it totally wrong on this issue. The rate they propose of 0.35% would amount to a property tax of €700 a year on a house valued at €200,000. People who are not rich live in many areas Dublin where properties have high values and under that scenario they would have to pay €1,000 in property tax alone. It is of no consolation that the payment of that tax would be deferred until further down the road and people would be accumulating debts. That is an awful scenario. The witnesses should rethink this proposal. Some 70% or 80% of people own their own homes. There is nothing wrong with that and the family home should not be considered as a form of wealth in the same sense as commodities and financial investments. The witnesses' position reminds me of the joke about anarchists: Why do anarchists drink green tea? They drink it because proper tea is theft.
Ciarán Lynch (Cork South Central, Labour)
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A good performer always finishes with a joke. I will take responses from the witnesses.
Dr. Seán Healy:
I will deal with the pension issue. On the Deputy's suggestion to double the level of the universal pension, phase out the private pension industry and pay for it by eliminating reliefs, if we could double the level of the pension and pay for it by eliminating reliefs and so on, the Deputy would find no bigger supporter of that proposal than us because we would be positive in support of phasing out any kind of support for the private pension industry. There has been a great degree of rip-off in the private pension industry over decades and the major beneficiaries have been those in the pensions industry, not the people who drew pensions or were depending on them. We made a proposal previously that the State might invest a serious amount in pensions and make the universal payment of pensions as strong as possible and, on the other side, provide capacity for people if they want to invest in their pensions, but the State would do it and all the charges that go to fund the private pensions industry would be eliminated. The State would run this through the vehicle already in place for handling State money and so on. There might be a possibility of doing something in that context and that would need to be examined. I would have no problem with it and would be more concerned about how much we could do, what would be the value of the remainder of the tax breaks and so on. I would need to examine those to ascertain what would be possible. I would have no problem with increasing it, funding it in the way the Deputy suggests and eliminating support for the private pensions industry because it has a negative impact.
Mr. Tom McDonnell:
I do not believe it is the role of the State to be subsidising the private pensions industry. Broadly the role of the State is to ensure that all people within the State have an income sufficient to their needs. We should not be providing any tax breaks. That would be our longer-term position. However, a budget is a year-by-year process and one would do that on a phased basis over time and in 2013 we would do it by reducing tax relief to the standard rate, which principally would affect people on higher incomes.
On the property tax issue, 70% or 80% of people own their own homes but the one cohort of people who do not, by and large, are those at the bottom of the scale. That is the one group we could be sure would be exempt. It would have positive redistributive effects from that point of view.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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On a point of clarification regarding council houses, I am not clear on this in the context of the witness's position. Is he suggesting-----
Ciarán Lynch (Cork South Central, Labour)
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That was discussed.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It was not made clear. It is a serious question. Mr. McDonnell said certain groups would be excluded but not all council houses. He might clarify that.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Including council houses.
Mr. Tom McDonnell:
It would have to be for specific purposes such as housing the homeless and similar very limited purposes. I reiterate that if an individual is on a low income or experiencing difficulty in making repayments, a deferral would kick in until transfer of the property. Essentially, that would deal with short-term issues about creating additional difficulties for people because it is only people who do not find themselves in large difficulties who would be liable to this tax in the short term. Given the massive size of the deficit, somebody has to pay and it is our position that this is the best and fairest way to do it. It would be done in a way that effectively protects the most vulnerable in society and those who do not have the ability to pay. It would also be efficient and sustainable over the long term and, economically, that makes sense as well.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. McDonnell.
Ciarán Lynch (Cork South Central, Labour)
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I propose we suspend the sitting for a few minutes to allow the witnesses to vacate their seats and the next witnesses to take theirs. Is that agreed? Agreed.
1:40 pm
Ciarán Lynch (Cork South Central, Labour)
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The next module concludes today's engagement on pre-budget submissions. As I have told other witnesses that have appeared before the committee today, the purpose of this meeting is not to go into a detailed presentation of pre-budget submissions or for members to make statements. It is an opportunity to drill down to specific proposals contained in a submission, or to get a better insight into the thinking or rationale underpinning it. In some cases, we will try to ascertain if modelling has been done by individual organisations to see from where the information has been extrapolated.
I thank the various witnesses for attending the joint committee. They are Mr. Fergal O'Brien, chief economist, IBEC; Mr. Paul Sweeney, ICTU; Mr. Tom Geraghty, PSEU; and Mr. Roland O'Connell, president, Society of Chartered Surveyors.
I will get the ball rolling by putting a number of questions to IBEC and ICTU. IBEC's pre-budget submission suggests a grant or tax credit package to incentivise home improvement works during a three-year window of opportunity. Similar work has been done in Sweden and certain works are under consideration in Germany also. Does IBEC feel this would be effective if a property tax was simultaneously introduced, as home values would be factored in with this? IBEC's submission specifically states that it supports the private property tax. Can Mr. O'Brien clarify if that is a valuation-based property tax or is it a site valuation approach?
ICTU's proposal suggests a €3 billion three-year stimulus package. What industries does Mr. Sweeney think would be specifically targeted by this stimulus and what new jobs would be created if such a programme were put in place?
Section 5.7 of the ICTU proposal notes the support of congress for automatic enrolment in pensions. This ties into what Dr. Healy was saying earlier. Would this be a universal pension or something that citizens could opt in or out of? I would welcome greater detail on that proposal.
The ICTU submission also refers to a property tax. I would be grateful if Mr. Sweeney could expand further on this position. Is he proposing a banding of property taxes from €100,000 to €150,000 and from €150,000 to €200,000? Is that the type of model he is proposing?
I invite the IBEC representative, Mr. Fergal O'Brien to begin.
Mr. Fergal O'Brien:
I thank the Chairman and other committee members for this invitation to attend the joint committee. As regards our home improvements tax credit-grant proposal, we have examined a couple of models internationally. We have found this type of approach to be effective in stimulating activity in the domestic economy. This is what we regard as being probably the most significant challenge we face currently, which is to see some sort of normalisation of activity in the domestic economy. We have focused on the home improvement sector for a couple of reasons. One is because it is so labour intensive. It has a relatively low import content. We also believe we still have significant savings and wealth in this economy so there is a capacity for households to unlock the activity, given sufficient and adequate incentive.
Another issue of which we are particularly conscious - not just in home improvements but also across many sectors of the economy - is the growth in the black economy.
Ciarán Lynch (Cork South Central, Labour)
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There will be a compliance element to this as well.
Mr. Fergal O'Brien:
Absolutely. The business community is concerned about the growth in the black economy that we have seen in recent times. We are quite conscious that, as a result of so many people losing their jobs in the construction sector, it has added to home improvement activity in the black economy. Our proposal is for the Government to fund an element of home improvement costs. We suggest up to a maximum of €3,000 in a €20,000 spend. We are suggesting also that this would be Revenue positive because, first, it would incentivise additional activity and, second, it would move activity from the informal economy into the formal one. The tax compliance requirements would mean that one would only have fully registered contractors. In addition, one would have the personal public service numbers of employees working on the contract. We would have, therefore, fully tax compliant activity. By making all the activity tax compliant, it would fund the cost of any grant or credit.
One of the benefits of waiting this long into our crisis to start looking at such proposals is that we can see what has happened elsewhere, particularly in the crisis response measures in Canada.
Ciarán Lynch (Cork South Central, Labour)
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I am familiar enough with the concept. If one takes a model of a €20,000 extension or insulation programme with a 25% tax incentive going to the builder, however, what would the return be to the Exchequer?
Ciarán Lynch (Cork South Central, Labour)
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How would it work? Talk me through it, for example, in the case of a €20,000 insulation programme.
Mr. Fergal O'Brien:
It is broader than the energy side. The essence of the proposal is that there is an incentive for the home owner to carry out these works within the window of opportunity and get some sort of subvention from the State. It pays for itself by creating new activity and bringing activity from the informal economy into the formal one. As I said, the merit of looking at something like that now is that we can see how these schemes have worked in the recession internationally. The cost benefits are there and do stack up. This would really stack up, particularly at the moment in the Irish economy given the increase we have seen in activity in the informal economy.
I do not think there are any implications for property tax. We think it would be a significant, positive net contribution back to the Exchequer and would create in the region of 6,000 to 10,000 jobs over a three-year period.
On property tax, our submission has focused particularly on where we would be players rather than just commentators. We have particular concerns on how employers would be affected. To answer the Chairman's specific query as to whether we have opted for a site valuation or the market value approach, we favour the latter purely for its simplicity, deliverability and administrative reasons. In an ideal world, the economist in me would go for a site valuation approach, but we do not think that is practical in the short term. It is something to which we would not be opposed in the long term. For pure ease of administration in the short term, however, we favour a market-based valuation approach.
Mr. Paul Sweeney:
On the €3 billion stimulus, congress feels that the Government has got its macroeconomic policy wrong.
The evidence is in the day-to-day living, in that people know there are very few green shoots. I note the Minister for Finance appeared before the joint committee this morning and more or less stated there is very little growth. While he is hoping for some uptake on exports, no economy is going to survive on exports. It is a zero-sum game throughout Europe with little growth. Essentially, the key point I wish to make about our submission is we would reverse what the Government is doing, which is very little by way of tax rises. Moreover, it is hammering the poor as 78% of all the tax rises thus far have been on lower-paid working people. Put simply, it ain't working and while they can blame Europe, people in their hearts and souls must know it really is not working and people are going round with their fingers crossed. We have proposed that the taxes should be increased substantially, particularly on high-paid people who are not spending their money.
The second thing is the stimulus programme of €3 billion per year, about which the Chairman has asked a question. We published a document in July, which we have costed and for which we ran a model. We have a body attached to congress called the Nevin Economic Research Institute, NERI, which now has an economic model that is as good as those of the ESRI or the Central Bank and it is doing work in this regard. The Chairman also asked where we would invest and we would invest in five broad areas. The first is broadband, which is a serious area. Another is retrofitting and energy efficiency, about which we are at one to a degree with IBEC because our housing stock is poorly insulated and one would get a major gain from this. I do not know whether grants should be given but that definitely is worth thinking about. Another area is public transport, as our public transport system is pretty poor. We have made suggestions on finishing some of the major roads that are nearly ready to be finished, as well as on light rail, buses and so on. We advocated completion of the Luas BDX line, which has got the go-ahead and I believe that is great news for Dublin's citizens. Only Irish people - certain politicians - could design two tramlines that do not meet. The fourth and fifth areas are water and waste treatment and health and education and we advocated certain projects with regard to the latter, such as the children's hospital and the Grangegorman campus. The Grangegorman project is very labour intensive. It is in the inner city and is a very good project in which to invest and we are delighted the Government is going ahead with it. These are the essential points.
The Chairman asked about automatic enrolment in pensions. It would be mandatory and consequently, there would be no opt-out. Young people really never think of their pensions and it is only when one hits 50 that one starts thinking about them. An interesting point in this regard concerns people like me, who worked in England for some years. I worked there for six or seven years before going to college, but my brother, who was there, tells me I am going to get a pension from Britain for those years, which is good news. It might only be a fiver a week but it is something one never thinks of when one is young. We can revert to pensions but on the property tax, we are fairly broad in that regard. To be straight with the joint committee it is because congress represents 39 unions in the Republic and getting them together on this was a difficult task. We know what is going to happen-----
1:50 pm
Ciarán Lynch (Cork South Central, Labour)
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I refer to funding the €3 billion programme. As we are hearing presentations from 16 groups, I want to drill down into the property tax proposals. Regardless of what discussions took place, what is ICTU actually proposing?
Ciarán Lynch (Cork South Central, Labour)
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Is ICTU proposing a valuation-based model?
Ciarán Lynch (Cork South Central, Labour)
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Is congress proposing a banded model or one that is indexed to the precise valuation of the property?
Ciarán Lynch (Cork South Central, Labour)
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I will push Mr. Sweeney on this point. If one is committing the State to spending €3 billion, one must be extremely specific with one's tax-raising measures. How does congress expect to do this?
Ciarán Lynch (Cork South Central, Labour)
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If there are to be a lot of exemptions, how is the money going to come in?
Ciarán Lynch (Cork South Central, Labour)
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Yes, but I must push Mr. Sweeney on this point. I understand a banded system. The United Kingdom, operates such a system, which I consider to be highly flawed because the band begins at £800 and ends at £1,200. Consequently, it means that if one is Del Boy Trotter living out in Nelson Mandela House, one is paying £800 while if one is Queen Elizabeth, living in Buckingham Palace, one pays £1,200. The bands are too limited, too narrow and all the rest of it. A banded system that began at €100,000 and which went up indefinitely could be something to be looked at. ICTU's submission talks about a banded proposal and I would like to hear more about that. Does it envisage an indefinite band or is it a band that is very confined?
Ciarán Lynch (Cork South Central, Labour)
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I am not talking about Mr. Sweeney's personal view. I am talking about the ICTU submission before the joint committee this afternoon.
Ciarán Lynch (Cork South Central, Labour)
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It is not vague on spending €3 billion.
Ciarán Lynch (Cork South Central, Labour)
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ICTU has brought a proposal to the Government and that is the subject on which I am pushing Mr. Sweeney.
Ciarán Lynch (Cork South Central, Labour)
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But you keep-----
Ciarán Lynch (Cork South Central, Labour)
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However, Mr. Sweeney keeps making them in the hope they will be accepted. The witnesses were invited before the joint committee to be given a hearing on their prebudget submissions. I believe this is the first time a joint committee has ever done so. Consequently, I invite Mr. Sweeney to explain to me in detail how ICTU would implement and operate its property tax model.
Mr. Paul Sweeney:
I would have a threshold below which people do not pay. People on low incomes also would receive exemptions or one could have top-slicing relief. Thereafter, it would be progressive, based on the property valuation. For example, one Irish person, who has a house with ten security guards that is as big as the Vatican and who does not live here would pay a huge property tax.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sweeney should provide an indication of the first band Where would it begin and how much would it be?
Ciarán Lynch (Cork South Central, Labour)
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We all have-----
Mr. Tom Geraghty:
I ask the Chair to bear with me until I answer his question The submission is predicated on the assumption that the Government will go ahead with a property tax and that the aforementioned property tax will have a certain yield. All we are saying in our submission, which reflects the fact there has been considerable debate on the issue and the concept, is if a property tax is to be introduced, as the Government has stated it will-----
Ciarán Lynch (Cork South Central, Labour)
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Mr. Geraghty, with respect, ICTU is somewhat more explicit than that as it is proposing a banded system. The Government has been emphatic and clear as far back as October 2009, when the troika came to town, that property tax was on the way. It does not matter what party is in government in the morning and I believe this to be the only country in the world that has socialists who do not favour wealth tax through properties but that is a separate point. The fact of the matter is that property tax will be introduced. That is not for discussion. However, the congress brought forward a proposal this afternoon favouring a banded approach. The witnesses should explain to me how the banded approach will work.
Ciarán Lynch (Cork South Central, Labour)
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That is what I am reading from it, which is the proposal is that-----
Ciarán Lynch (Cork South Central, Labour)
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The banding of property values is contained in the ICTU proposal.
Mr. Tom Geraghty:
It certainly was not intended to say so explicitly. All our submission says is we are operating on the assumption that the Government is introducing a property tax, as the Chairman says, and that it will have a certain yield. However, if such a property tax is to be put in place, it should meet certain requirements. Obviously, they include fairness, equity and so on. That is the full extent to which we had anything to say.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I welcome all the witnesses. I will start with Mr. Fergal O'Brien, who I gather from his submission is extremely enthusiastic about a property tax. Perhaps he will talk to members a little about that. I also wish to ask him about the issue of lending to business.
There is, obviously, still a huge difficulty in accessing credit. I was interested to read in the document of IBEC's endorsement of a State-backed enterprise or investment bank. I note the distance we have all travelled since the crisis hit, but this does not strike me as standard IBEC fare.
2:00 pm
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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We are all socialists now.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I ask the question in a serious way. Mr. O'Brien says a little about it in his submission but I would like to know a little more. What does he think the scope of that initiative might be?
I welcome the thrust of the ICTU submission. It is not even a mile away from the thinking of Sinn Féin. It is unfair to talk about spending €9 billion in total in investment in jobs and strategy. It is investment and not spending, and is to be welcomed. It also is notable there seems to be almost complete consensus on the good sense of retrofitting and the necessity of doing it, both for job generation and as an environmental policy. There is something in that.
Can Mr. Sweeney and Mr. Geraghty talk about two things that interest me? The first is the proposal to levy a wealth tax at 1% on wealth above €2 million. I am also interested in the ICTU position on universal payments, such as child benefit, state pensions and ancillary payments to older citizens, such as free travel. Could members have a view on that?
Could Mr. O'Connell give a view on the balance that needs to be struck between tax raising measures and cutbacks?
Mr. Roland O'Connell:
Perhaps I could first comment on the residential property tax. In the Society of Chartered Surveyors Ireland, we think the residential property tax is a good idea, not because we welcome new taxes but because we feel it is better than the current stamp duty system. When the property market is booming the economy, in general, is booming and there is considerable revenue from stamp duty. When the economy is not booming the property market is not booming either and stamp duty income drops off. The residential property tax should be used to fund local authorities. Having an annual residential property tax, as opposed to a one-off transaction tax, means local authorities can plan ahead and estimate what their income is going to be.
We have recommended that the property tax be banded. We have not, however, recommended that the bands be limited when the value of a property gets up to a certain level. I have just come from a presentation by a member of the UK valuation office, who said the UK top limit is £3,000. There was also a speaker from the Northern Ireland office, where they have what probably is a better organised and more advanced system. Their band also cuts off at a certain level. The Northern Ireland bands run from A to I, alphabetically, and the UK bands from A to H. That is a policy decision, however, and not something the society would have a view on.
We would echo comments here that the property tax should be straightforward and unambiguous. It should be transparent and clear. The collection should be low-cost and done at a convenient time of the year, that is, not when several other costs are being charged. Most important, it should be easily understood by the public and there should be a level of transparency about how the money is being spent. We believe it should be used to fund local authorities but there should be an onus on the local authorities to explain to taxpayers where their money has gone and how it is being spent.
As for the method and whether the tax should be based on valuation, location, rent or size, that again is a policy decision because all these methods have pros and cons. We have done considerable investigation on this, internationally, and have come to the sad conclusion that there is no perfect way of levying this tax. Within our own society, there is considerable disagreement about which is the best way of doing it and consequently, we have not expressed an opinion as to which is the best way. Much of it comes down to what the policymakers are trying to achieve. For instance, the easiest method for the homeowner to self-assess, which also is the easiest method to be verified by the local councils or whatever the body will be, is purely a size-based one because anyone can measure the size of his or her own house. Any local authority will have records in its planning office as to what is the size of the house.
Ciarán Lynch (Cork South Central, Labour)
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The conveyancing documentation has that information. One is not even obliged to measure it.
Ciarán Lynch (Cork South Central, Labour)
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Would the property's square footage not be carried in the conveyancing?
Peter Mathews (Dublin South, Fine Gael)
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Should we be talking about cubic footage? While the Chairman referred to the square footage, one lives in a cubic space.
Mr. Roland O'Connell:
Perhaps we should be referring to square metreage. While that system would be the easiest to self-assess, it has all sorts of other drawbacks. The site value reference has many advantages on some points but one major disadvantage is that for instance, in the case of an apartment block, the site value for an individual apartment would be negative at present. It is very hard to assess a tax on a negative value. The society understands there are pros and cons in respect of all the methods. It is a matter for the policymakers to decide what is their priority and then to choose a correct method to reflect that priority. If the newspapers are to be believed, it appears as though we are heading towards a valuation based tax and if that be the case, so be it.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Has Mr. O'Connell arrived at that position? He clearly has given consideration to a property tax and is supportive of it. In his deliberations, has he considered-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I take that as read. In the society's discussions, did it consider issues such as mortgage distress or negative equity? I hear the points being made by Mr. O'Connell and the society clearly has thought out the various models in a thorough manner. However, in real terms and in real time, it is not a theoretical proposition and those very people who have paid the transaction tax will be hit again with yet another charge. Did this issue feature in the society's thinking?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Is endorsing a property tax in itself not taking a policy position? The society is entitled to do so, please do not get me wrong, but I am uncertain whether I accept the society may take a policy view on one element but shy away from the other. If the society is on board for this, I would anticipate that, as a professional group, it would have thought through the issue in its totality.
Mr. Roland O'Connell:
I thank the Deputy for that observation. We did think it through and if I am straying into the grounds of policy, I apologise for it but our view is there will have to be exceptions for a whole series of groups. Clearly, those who simply cannot afford to pay it must be an exception or some alternative route must be found for them. How such an alternative route is arrived at is a matter for those who are assessing the tax, rather then for us as property and construction professionals. Consequently, we believe there should be exceptions. It extends to instances such as those to which Deputy Boyd Barrett referred whereby people who have very low incomes may be living in relatively expensive houses and cannot afford to pay such taxes.
All of those things will have to be taken into account when levying the tax. We have not been cheeky enough to say this is how one should do it in the same way we have not presumed to say this is the right method to assess it because it depends on what the policymakers are trying to achieve. The one big issue we could distinguish within that is that it is a better system for funding local authorities to have an annual tax, even though it is not an ideal time to introduce it and there are huge difficulties with it at the moment. However, an annual tax of that nature is a better and fairer solution than transactional tax. That is as far as we went on that subject.
2:10 pm
Mary Lou McDonald (Dublin Central, Sinn Fein)
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In case Mr. O'Connell is wondering why I put the question to him on the balance between tax and cuts it is precisely because of the profession he is in. The allied professionals - architects were mentioned - have taken an absolute pasting because construction went off a cliff and because of the contraction in the domestic economy. I asked that question not to try to get Mr. O'Connell to stray into broader policy but I am curious to know, in light of discussions among a professional group such as his own, the prevailing view among his peers in terms of getting it right, fixing the deficit and getting ourselves back on some kind of sustainable footing. Is it his view that the Government is getting it right? I do not want to put words in Mr. O'Connell's mouth but does he see what-----
Mr. Roland O'Connell:
I do but that is a much broader question. We have covered a lot of that in our submission. In broad terms, the two big issues that face us in the construction business and in the property business are confidence and finance. Those are the two big issues which stop activity in the marketplace. In our submission, we dealt with those under a number of different headings. For instance, on the residential mortgage side of things, we feel there is some confidence coming back into the market but it is very fragile and it is very localised. That is very important from a governmental point of view, in particular in the case of new apartments and houses which were built but never sold. There is a large amount of VAT tied up there and if any of those are sold, the VAT revenue comes back into the central Exchequer, so it is very important to see some activity there.
From speaking to people involved in residential sales, the big issue we found was that approximately 40% of all transactions in the greater Dublin area this year were cash buyers, including people who sold abroad and are moving back and so on. That is an indictment of the fact that despite the banks being recapitalised by the State, they are not lending. Do not get me wrong. We acknowledged, and did not like, the fact mortgages were too easy to get but it is now the other extreme. There are very viable mortgagees who should be getting loans but who cannot get them at the moment and, therefore, cannot buy a house and generate revenue for Exchequer.
We feel very strongly that despite what the banks are saying, they are not lending at the rate they should be. Having approved people for mortgages, they are then creating hurdles and difficulties when people go to draw down the finance. We have asked that it is looked at by the Department of Finance.
Mr. Paul Sweeney:
Deputy McDonald asked about the wealth tax. We have suggested a 1% on wealth over €2 million, including one's personal home when it is worth over €1 million. If it is worth €1.1 million, one only pays on €100,000. There are wealth taxes in other countries and we had one here before.
Peter Mathews (Dublin South, Fine Gael)
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Is it net wealth?
Peter Mathews (Dublin South, Fine Gael)
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After borrowings.
Mr. Paul Sweeney:
To a limit. One cannot subsidise some of the mad borrowers by not taxing them. As I said before, there is no point in the likes of us doing the detail on this because the policymakers, or the implementers, will do what they are going to do.
We have a section on universal payments. There is an intellectual argument against them because of the cost, in particular in tough times. However, the big thing in favour of universal payment is that they bind society together and get the middle class committed to the social welfare system. That works very well in Europe, so we have set out a number of universal payments we think should be retained, including the travel pass and dental and optical benefits, although one pays for dental and optical benefits in one's PRSI.
Mr. Fergal O'Brien:
I thank Deputy McDonald for her questions. On the property tax issue, from an IBEC perspective, we have 7,500 member companies, the vast majority of which are in the domestic economy. No matter what we do on the taxation side, it will impact on their businesses in the domestic economy. The priority for us in the taxation proposals in our budget is to limit that damage on growth and jobs. It is nothing the Deputy will not have heard already today.
From an employer's perspective, we have a particular insight into the Government's proposal as to how the property tax will be collected. We have now heard from the Minister for Finance that the property tax will be collected through Revenue and through adjustments to personal income tax credits. In some cases, although not in all, it will be deducted by employers in monthly payroll systems. That is something about which we have quite a concern in terms of employers administering those payroll systems.
Our concern is that if we go down this route of administering the property tax through the income tax credit and the personal tax credit system, it will have two consequences for employers and business. It will put wage pressure back into the workplace. We know that from recent experience where we have had income tax increases. When people have less money in their pay packet, there is a kick back to the employer. We are going through a phase when we are trying to reduce costs and be more competitive and I think that will be unhelpful.
As Mr. Paul Sweeney said, practically every economist thinks that property tax is a good idea by nature of it being a tax on property and less damaging to growth. If we administer this through the income tax credit system, it could de facto become a tax on work and a tax which only workers will be pay, or, at the very least, it could be perceived that way. That would be damaging. It could act as another reason not to take up a job. If one looks into the behavioural economics of this issue, how one frames it-----
Ciarán Lynch (Cork South Central, Labour)
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If the employer was collecting the property tax and was to default on his or her tax payment, which is not an uncommon occurrence, it would mean that the property tax was foregone to the Exchequer.
Ciarán Lynch (Cork South Central, Labour)
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Circumstances like that happen in buildings like this, so it is not entirely rare.
Ciarán Lynch (Cork South Central, Labour)
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If the company was to default on the tax liability, that would mean the property tax would not be realised.
Mr. Fergal O'Brien:
If there were payroll taxes outstanding to the State, then that is a possibility but again I think it would probably be at the margins.
A more substantive issue is that if it becomes perceived as a tax on work, it acts as a disincentive for people to take up employment and one is undoing the rationale for having a property tax in the first place. If we are going to have a property tax, it must be a real one and not a de facto tax on work. It must not become perceived as a tax on work and a disincentive to take up a job. That is much of the feedback we have got from our members in recent times.
However, I think there are ways around that and again it all depends on how one frames this. The default option should not be for this to be delivered straightaway through the income tax credit system.
That should almost be the collection of last resort. We know there has been an issue around payment and compliance with the property charges that have already been introduced. Therefore, I can understand the Government's rationale for opting and wanting to collect the tax in this way but it should not be the first port of call, it should be the last resort in terms of a collection mechanism for the tax. People should be provided with the other options first and failure to pay in some cases could resort to adjustments to their personal tax credits system.
On the issue of access to credit for SMEs, there is no question but that this is still the single biggest issue for SME members. A number of things could be done in the budget to address the difficulty. On the specific issue of the State-backed investment bank, this works well internationally in cases where banking systems are not in turmoil or in a crisis such as in Germany and Canada. The crucial thing is that it is part of a range of options in terms of SME finance. One of the lessons that has to be learned from the crisis is that Ireland was the most reliant economy on bank lending for SMEs than anywhere else in Europe. That will change over time and was a consequence of the easy access to credit. The State has a role to play, be it perhaps through funds at our disposal through the National Pensions Reserve Fund and in time through a State-backed investment bank. Some of the other suggestions in our submission would be around our employment investment and incentive scheme, a follow-on from the business expansion scheme, which is an excellent opportunity to get funding into SMEs. That scheme is not working for various reasons. It is obviously a tough investment climate but the set-up of that scheme is not working. Traditionally the business expansion scheme worked because it was able to draw on a relatively small pool of high net worth individuals who were happy to invest in businesses. For various reasons, wealth destruction and changes to the tax system-----
2:20 pm
Ciarán Lynch (Cork South Central, Labour)
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I ask Mr. O'Brien to conclude.
Mr. Fergal O'Brien:
The employment investment incentive scheme could be a very important source of SME funding if it was altered in terms of risk profile, branded and promoted to a wider group of investors. There are many people who would want to invest in real Irish businesses if the tax system facilitated it. We are missing an opportunity by not doing that.
I will make one final comment if the Chair will allow me. On the important issue of access to credit for SMEs, in Ireland there is no incentive for anyone selling a business at the moment to reinvest the proceeds of that sale into another Irish start up or growth business, unlike in the UK where there is roll-over relief whereby if a person selling a business reinvests the proceeds he or she receives an offset against capital gains tax. There are many people selling good businesses but there is no incentive for them in the tax system to reinvest the proceeds in this country. There should be such a system.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. O'Brien.
Mr. Paul Sweeney:
In regard to the complexities for introducing the property tax and water charges, in the last budget the Government introduced a disgraceful and inequitable tax called SARP, the Special Assignee Relief Programme, for foreign executives, who at the end of the year get a cheque for one third of the tax they have paid sent to them if they earn between €75,000 and €0.5 million, in addition to school fees up to €5,000. That is a disgraceful tax and should be abolished in the budget. It saves only €5 million but it undermines horizontal equity in the tax system which is a fundamental principle in any tax system. We represent 600,000 taxpayers and are annoyed at that tax.
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Sweeney and ask him to respond to questions. There will be other questioners and Mr. Sweeney will have an opportunity to make additional comments.
Mr. Tom Geraghty:
I was going to expand on the answer Mr. Sweeney gave to Deputy McDonald's question about universal benefits. As he said, on the face it, it may appear attractive to cut the universal benefits in the circumstances but there is another issue related to the much broader problem. We have a serious difficulty with the income tax system, in that a disproportionate amount is paid by those in the PAYE sector, therefore, cutting universal benefits and means testing them will disproportionately affect those in the PAYE sector because they cannot hide their income, whereas the self-employed are in a position to do so. I do not have the exact figure off the top of my head but I think in excess of 80% of all income tax is paid for by those in the PAYE sector. Nobody would seriously suggest that anything like that proportion of total income in the country is earned by those in that sector. Clearly, they are overpaying and everybody else is underpaying.
Peter Mathews (Dublin South, Fine Gael)
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The common theme presented by all the delegates was a focus on the residential property tax. I said in the previous section that the mortgage element that attaches by way of charge to the properties that are going to be valued is like a financial rather than a physical contamination. Mr. Roland O'Connell would be aware that a physical contamination on a site or a property immediately hits the value. It is just a starting point in theory and in fairness one would say that where there is a mortgage on a property it is actually a charge on the property and, therefore, it reduces its value for the purpose of taxation. That is a matter of physical and financial fact and has been missed in the discussion.
Another issue I wish to raise because all the delegates represent various bodies is the corporation tax rate - the sacred cow - which stands at 12.5%. From my discussions which have been pointed and searching with people at the top levels of companies from abroad who have invested and are thinking of coming to Ireland, a 2.5% uplift from 12.5% to 15% in the headline rate, because the PWCs and KPMGs of this world do all sorts of planning-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy Mathews, I have to direct you towards-----
Peter Mathews (Dublin South, Fine Gael)
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I am asking a question.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy may ask as many questions as he wishes. If the Deputy's question is not related to the agencies or witnesses submissions it is not relevant.
Peter Mathews (Dublin South, Fine Gael)
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They talk about corporation tax.
Ciarán Lynch (Cork South Central, Labour)
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If there are specific parts of the submissions that mention corporation tax, or if the Deputy wants the delegates to expand on it, please do so. If the Deputy holds his own workshop the witnesses may want to go to see him.
Peter Mathews (Dublin South, Fine Gael)
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They do mention it.
Ciarán Lynch (Cork South Central, Labour)
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Let us be specific to the proposal.
Peter Mathews (Dublin South, Fine Gael)
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The figures on foot of a reply to a parliamentary question from the Department of Finance indicate that if the rate was increased by 2.5% - I suggest holding that for seven years - it would raise €670 million. I do not believe any of the top executives of any of the companies here or thinking about coming here would blink at that. That is an issue we must examine because the sacred cow has been-----
Ciarán Lynch (Cork South Central, Labour)
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The Deputy is raising the issue of changing the current corporation tax level.
Mr. Paul Sweeney:
When the rate was reduced in 1995 by the then rainbow Government, to kick in at 12.5% in 2001, I was on the Forfás committee that recommended the 12.5% rate and, of course, I dissented as I thought the rate was too low. Congress said it wanted to keep the rate at 20% but it went to 12.5%. Has it served Ireland well? It certainly has. Is it too low? There are a couple of points on it. Some 62% of companies do not pay corporation tax because they are proprietary directors and they ensure they do not and those that do, pay an effective rate of between 4% and 5%. What we have proposed for this budget, which is a little different from what we said previously, when we were talking about the headlight rate referred to by Deputy Mathews, and if everyone in the main parties is so obsessed with the rate, is that essentially the exemptions be curbed and if we raise 2% more in the effective rate, one could raise €2 billion. The rate is very unpopular. I was in Berlin last week and got hammered over it. We are looking for a handout in grants and will not even join the financial transaction tax while at the same time we are bleeding them dry with Dutch and Irish sandwiches or whatever they are called.
Peter Mathews (Dublin South, Fine Gael)
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If they are only paying at the stroke of a pen, 15% is psychologically a yield and one that would be set for seven years and would be the starting point for the discussion on the debt right-off, which is more important.
Ciarán Lynch (Cork South Central, Labour)
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Will Deputy Mathews please allow the witnesses respond to his question?
2:30 pm
Mr. Paul Sweeney:
I will make a final point, on which we have done a great deal of work. Many policy makers have been blind to this issue. I can understand the reason the Government takes a firm line because investors like certainty, which is understandable. We know that as we head towards fiscal union there will be change. It is better to organise not to have absolute harmonisation of rates but for co-ordination within bands. We talk about the consolidated rate. I agree with those who say that by using the consolidated basis, the figures will be based on the amount one sells in each country, then as a small country, we will lose out. We need to negotiate on the issue rather than let it be imposed on us. That is my worry in the long run.
Mr. Fergal O'Brien:
I believe the area of corporation tax is a bit like pricing in any market situation. We have a transparent competitive corporation tax rate which means that relatively, we get more of our tax revenue from the corporate sector than most other economies in Europe with much higher rates. If we increase the price, that is the rate, I do not agree that we will get more revenue. We will probably get less revenue or the same revenue, applying the higher rate. The main reason would be due to the lack of certainty for business as a result of that change. It would result in behavioural impacts. If one looks at the outcome for Ireland and compares it with that of other countries in Europe, we get a very high share of our total tax revenue from the corporate sector by having a simple, transparent, consistent and certain rate. It would be flawed economic policy to change that.
Peter Mathews (Dublin South, Fine Gael)
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Does Mr. O'Brien not think that the reduction in production costs of all those enterprises, which was far greater than 2.5% in the past number of years, far outweighs the small step upwards and that they should do the hard sums? I got the answers that I did and was told they would not even blink-----
Peter Mathews (Dublin South, Fine Gael)
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-----or the advisers because their interests are to hold the line.
Ciarán Lynch (Cork South Central, Labour)
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I now call Deputy Boyd Barrett, then Deputy O'Donnell before we conclude.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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How long do I have Chairman?
Ciarán Lynch (Cork South Central, Labour)
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I will indulge the Deputy.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I address my questions to IBEC, the Irish Business and Employers Confederation, which talks about the need to stimulate the economy, with which I agree. Will IBEC respond to me on the reasons the economy has collapsed? What is the problem? What has happened to our economy that there is no investment?
Mr. Fergal O'Brien:
I will answer that question. The single biggest reason the domestic economy, because the export economy is performing well, is so weak at present is not because of the impact of austerity but because of the impact of credit flows in the economy. If one looks at the data from the Central Bank and compares the net lending-borrowing of households in 2012 to the situation in 2007, we have had a swing in the region of €12 billion to €16 billion. I think that is a multiple of the impact of austerity. It is the distorted relationship in credit between our households and the banks that is the biggest single reason for the collapse in economic activity. Much of it is related to what happened to the construction sector. Some one in two people who are out of work previously worked in the construction sector. Of course the fiscal adjustment and the austerity is impacting on growth. If we had normal credit conditions, both in terms of demand and supply, there are supply issues in the banks but there are also demand issues in households. At present our households have a particularly high savings ratio. If that savings ratio, as we heard from the IMF was to come down by 4 percentage points it would add 1% to our GDP numbers. That is the single biggest reason that the domestic economy is so weak rather than the fiscal adjustment.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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That is a very interesting response, but I completely disagree with Mr. O'Brien. His analysis is that the major reason is that the banks are not lending.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Is it because people are saving?
Peter Mathews (Dublin South, Fine Gael)
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The debt is still too high.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I do not agree with that.
Ciarán Lynch (Cork South Central, Labour)
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I have indulged Deputies Mathews and Boyd Barrett, but I ask them to refer to the budget submissions. I am not having a theoretical debate on economics.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The witnesses talked about the need for stimulus.
Ciarán Lynch (Cork South Central, Labour)
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Let us discuss the specific recommendations.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Why are the members of IBEC not investing?
Mr. Fergal O'Brien:
Business is investing. Business investment is increasing and has been for the past year and a half. It is not as much as we would like and the main reason it is investing is that the export economy is performing strongly. We will have a record level of exports this year. We have very little spare capacity in the export sector. We are seeing our export companies investing more than have been in previous years. The domestic economy remains particularly weak. The vast majority of our 7,5000 members are operating in the domestic economy. Our suggestions here are around the pensions issue, where we are advocating for an early release of the additional voluntary contribution, AVC, component of our pensions. The suggestions around the home renovations sector is to some degree trying to normalise a credit flow in an economy that is suffering because of the changes in the past couple of years.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. I will pass over because we have no time for a discussion on it but I fundamentally disagree with the points made by Mr. O'Brien.
I will address the question on the property tax to each of the witnesses. Is there not a recognition on the part of all of the delegates that they accept this proposal? I find it surprising that the unions would accept it rather than actively campaigning against it. Significant numbers of union members will not be able to pay it. I do not understand the reason.
The wealth tax has been mentioned, with which I agree. There is a bit of a slippage between property and wealth tax. Surely we on the left should be advocating for a wealth tax, which would include property over a certain value, but not the family home, and opt for a higher wealth tax and higher income taxes on people at the top level? Why is the union making a concession on a tax that will be imposed on union members and will impose a very significant extra financial burden on them and is without question going to have a further dampening effect on the domestic economy, which IBEC should be concerned about? If the figures for the property tax we are talking about are implemented - ranging from €400, €500, €600 and €700 a year on ordinary low and middle income households - it will have a crushing effect on demand in the economy
Ciarán Lynch (Cork South Central, Labour)
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I will call Deputy O'Donnell who has been waiting patiently and then I will conclude.
Mr. Tom Geraghty:
May I respond to the point about the ICTU position in respect of a property tax? It is not dissimilar to what I have already said, which is that there are divided opinions among trade unions about the issue of a property tax. There are those who would argue - I am sure this is the view that Deputy Boyd Barrett would have sympathy with given the income tax system is so disproportionately skewed against people in the PAYE sector - that imposing a property tax in addition to that has a disproportionate impact on workers. Equally, others in the trade unions will argue the opposing point.
It is difficult to see how one could have an equitable tax system with a broad base of taxes without having a property tax. Rather than beating ourselves up about whether we are for or against the notion of a property tax, we accept it as a given because the Government has decided that there will be a property tax. We confined our submission to focusing on the protections we would like to see included if a property tax is to be introduced.
2:40 pm
Ciarán Lynch (Cork South Central, Labour)
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Is Mr. O'Connell indicating he would like to make a comment?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Sweeney indicated earlier that he would like to add a comment.
Mr. Paul Sweeney:
I totally disagree with Mr. Fergal O'Brien on the cause of the crisis. The crisis in Ireland was caused by the banks behaving like drunken sailors and lending money willy-nilly to anyone and everyone. There was failure on the part of the public sector in the sense that the regulator, imbued with the ideology that markets work without intervention, went along with it and that is the reason this economy collapsed. The banks have moved from crazy lending to the other extreme, and on this I agree with Mr. Fergal O'Brien, of becoming totally risk averse. Austerity has caused a problem on the domestic side. One cannot simply take €25 billion out of an economy, which is the amount that will have been taken out of this economy by the end of next month, which is approximately 16% of GNP. It is a staggering retrenchment and while it has been necessary to a degree we disagree on the amount of it.
Kieran O'Donnell (Limerick City, Fine Gael)
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I welcome the witnesses. I have a few questions from my brief reading of the submissions. Reference was made to labour activation measures but how would congress, IBEC and the SCSI envisage they would work in practice? The biggest single issue we face is unemployment. We did not discuss that at length but I am sure everyone would agree it is the biggest single issue. If people come off unemployment benefits that benefits them and the State. The witnesses might deal with that issue.
I wish to take up Mr. O'Brien's point, which was interesting. Access to credit is a major issue for the SME sector. Representatives of Allied Irish Bank and the Bank of Ireland appeared before the committee and we seemed to get different signals from them on this issue. Bank of Ireland said that the amount of €3.5 billion will all be for new lending and AIB said only €600 million of the €3.5 billion will be for new lending. There is a reluctance on the part of the banks to engage in calculated risk-based entrepreneurial lending. Mr. O'Brien might give us a flavour of the different business models in place elsewhere. I was interested in his point regarding the business expansion scheme. How does he envisage that could work in practice? I am centring both questions around employment. Rather than a headline mention of these measures, I would like to hear how the witnesses would in practical terms link labour activation measures to the provision of credit for SMEs and to comment on the types of funding models that could be used and on access to credit.
Ciarán Lynch (Cork South Central, Labour)
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Which of the witnesses wants to respond first?
Mr. Fergal O'Brien:
I thank the Deputy O'Donnell for his questions. On the labour market activation measures, there are a few points to be noted on the unemployment issue and I will return to aspects of demand and the domestic economy, which is our single biggest challenge. Specifically on the activation measures, we did some recent research with our members to ascertain what is working and what is not working. The JobBridge programme is working well and business is very supportive of it. We are seeing a good deal of transition from those internships into sustainable employment and that should continue to be supported. We have found there is a very weak level of awareness among employers of a range of other schemes such as the employer PRSI exemption scheme and the Revenue assist initiative. Our recommendation would be to streamline those programmes and research suggests that better promoted, better branded cash equivalent payment schemes rather than a tax foregone model would work better.
Regarding other issues around labour market activation, we still have incredible skill shortages in the economy. Our technology sector has 7,000 to 8,000 unfilled vacancies. We have some good programmes that are working, in particular the Springboard programme, which again is a good exemplar of something that is very close to the workplace, it is reacting to real demand for real jobs and it is giving people who used to work in the construction sector good jobs in the medical devices and technology sectors. In general, as a principle, those types of programmes that are close to the workplace and that will be able to respond to real opportunities and vacancies in sectors are the way to proceed because we have an incredible churn currently in the workplace. We are losing jobs but a good many jobs are being created, and there are many unfilled jobs.
On the issue of credit for SMEs, there is no question it is still a major issue for our members but it depends on the sector of the economy in which one finds oneself. Certain sectors of the economy have become very attractive. If someone is involved in the food and drink sector they probably do not have much difficulty in getting access to credit and there are many institutions willing to do business with them. If someone is in a less attractive sector they are in a much more difficult position. Are there problems in terms of credit supply?
Kieran O'Donnell (Limerick City, Fine Gael)
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Absolutely.
Kieran O'Donnell (Limerick City, Fine Gael)
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It is a risk-based issue.
Mr. Fergal O'Brien:
As to what can be done about it, in terms of the follow-on to the business expansion scheme, my specific proposals in the submission are that we need to reduce the risk individual investors will take on. We have examined the State aid rules because when one goes into these types of schemes they are very much tied up with the EU State aid rules. We have look at experiences in the Netherlands and Austria, in particular, where government has guaranteed some of the risk for the individual investors and we seem to have got a good behavioural response from that. We think that could make quite an impact. As I said previously, the business expansion scheme worked because a small group of investors saw the advertisement in The Sunday Business Post and went to their advisers and put money into it. It worked and sustained many good businesses We need to cast the net much wider, we also need proper promotion and branding of the scheme and some technical changes need to be made to it, but I would hate to see us give up on it because it could make a real different in terms of funding for SMEs.
Kieran O'Donnell (Limerick City, Fine Gael)
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Too much of it was property based.
Mr. Roland O'Connell:
On the jobs front, the Deputy will be glad to hear that on the property side of our business, jobs seemed to have stabilised and this year there was an under-supply of new graduates. There were more jobs than there were graduates and one of the reasons for that is employment fell sharply and people went into different business, emigrated or whatever, but now things have stabilised. We are getting this message across to career guidance teachers and parents to encourage them to get their children to consider the property sector as a job for the future because they tend to spend three or four years in college. While the construction industry has not stabilised yet, it is getting to that point. We have had a huge loss of skills but we need to start getting people back into that sector in order that we will have people with skills in the future. We are quite optimistic about the future of the country as a whole.
The Deputy asked about measures to create employment. We believe that currently there is outstanding value in the construction sector but we do not believe the State is necessarily approaching this from the right direction. One of the reasons is that the public tendering process seems to concentrate solely on the lowest tender and in recent years people have been awarded contracts for which they tendered below cost and when their businesses have then collapsed that has created a mess. We need to examine the public procurement process, how we can do that more efficiently and we need to speed up the process. What would help in that respect is if the Government across all State sectors had a chief construction adviser who co-ordinated all of those elements. Mr. John Moran, the Secretary General of the Department of Finance suggested we examine creating a centre of excellence in Dublin for both property and design skills - construction skills - because we have built up a huge level of talent that we can export. Many of these people are going abroad to work and we need to support that export of skills where they can be based in Ireland and do work abroad. There are sectors in which the Government can help with that and we have covered that in our submission.
In recent months, we have seen the benefit of investment in strategic construction projects. By that I mean things like the National Convention Centre where a couple of weeks ago the International Bar Conference was held. They brought 5,000 lawyers from around the world who used hotels, restaurants and taxis, all of which generated money for the local economy. The American football match in the Lansdowne Road stadium had the same effect. When there is such good value in the construction sector we should take advantage of that, be it investing in broadband, transport or other long-term infrastructural skills. How do we do that because we have no money? We could get private pension funds to invest in this sector as well as getting money from the National Pensions Reserve Fund and the European Investment Bank. One of the issues in getting money from those entities is that private pension funds are worried about the construction risk of investing in something at the nascent stage before it is built. That is a hurdle we have to overcome. How do we bridge that risk gap for them? If we can do that we can then see construction which will create jobs and have a long-term beneficial effect for the State.
2:50 pm
Mr. Paul Sweeney:
I wish to echo something Mr. O'Connell said about public procurements and the lowest tender. A section in our report this year was inserted towards the end. A group of unions in construction are perturbed with some of the practices that basically amount to moneys going out of the country. Outsiders are coming in bidding very low and then ignoring all labour standards and not paying tax. Frankly, they are fly-by-night cowboys. We really need people who are giving tenders in Ireland to think more creatively about it because it is a serious problem.
On labour market activation, I agree with Mr. O'Brien that the key problem is lack of demand. Looking at the supply side on activation, a lot more could be done.
We were nervous about JobBridge but it seems to be working well and we are reasonably happy with that. It is one of those things that has been very well implemented. We hope that we get the real jobs for people at the end of it.
One of the points in our submission is that activation requires an intense level of quality service from State agencies. The OECD has been rightly critical of the way we have dealt with labour market activation in the past. We need to do a lot more.
We also say in the submission that there should be many more apprenticeship systems. They seem to be dying out but a modern apprenticeship system is a great way of linking people who are not in employment or education and binding them to the workplace. We have suggested that there should be apprenticeships in catering, hospitality, commerce and logistics as well as the traditional areas. They can be flexible systems. Hopefully, with the new State agencies, including SOLAS, it is an area in which there can be progress.
Ciarán Lynch (Cork South Central, Labour)
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That concludes this afternoon's part of this module. If there is no other business I will now adjourn the meeting until tomorrow morning when it will continue its overview of the 2013 pre-budget submissions. Is that agreed? Agreed.