Oireachtas Joint and Select Committees
Tuesday, 15 July 2014
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Pre-Budget Submissions: Discussion
2:30 pm
Ciarán Lynch (Cork South Central, Labour)
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We will now proceed to No. 4 on the agenda, session 1 of pre-budget submissions, a round-table discussion on the economy and taxation. I welcome Dr. Nat O’Connor, director, Think-tank for Action on Social Change, TASC, Mr. Ian Talbot, chief executive, Chambers Ireland; Mr. Padraig Cribben, board member, Drinks Industry Group of Ireland, DIGI; and Ms Mary Rose Burke, director of business representation, IBEC.
The format is a round-table discussion on the economy and taxation based on the pre-budget submissions received from the organisations the representatives of which are present. They will make their opening statements in the following order: TASC, Chambers Ireland, the DIGI and IBEC. Questions from members will then ensue. Given the time constraints and to ensure we will have a constructive debate, I insist on all opening statements being kept to a maximum of three minutes. For our purposes today, it is the questions and answers that will be most beneficial, rather than the equivalent of Second Stage speeches which should take place in the Dáil Chamber. The delegates have already been advised by the committee secretariat that I will stop them if they exceed the time allowed. Each member is entitled to ask questions only once and the relevant delegate or delegates may respond immediately.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of the proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.
I invite Dr. O’Connor to make his opening statement. The other delegates may follow him in the sequence I have outlined.
Dr. Nat O'Connor:
I thank the joint committee for the invitation to address it. TASC is an independent, progressive think-tank and our core focus is on the growth of economic inequality in Ireland in recent decades, which follows trends in the United States and the United Kingdom, as described by economists such as Professor Thomas Piketty who recently spoke at TASC’s conference. Economic inequality is bad for society, but it is also bad for economic growth and stability. We recently analysed Ireland’s tax system and how it interacted with the economy. We present evidence that defending and, ultimately, growing our level of taxation is essential for economic recovery and to boost job creation, in addition to tackling inequality.
Ireland is caught in a low-tax triangle; our tax and social insurance take is just three quarters of the European average. Low taxes mean lower levels of public services and social transfers and everyone has a higher cost of living, with more out-of-pocket expenses for services that would be cheaper or free of charge in other countries. As a result, many do not have enough money for essential goods and services, meaning less demand in the economy and calls for lower taxes. However, this is a downward spiral. In response to a parliamentary question the Minister for Finance, Deputy Michael Noonan, confirmed that “Ireland does indeed have the lowest tax wedge of all EU members, for those on average wages.” To be clear, the actual combined tax and social insurance figure paid by people on average wages in Ireland is the lowest among EU members of the OECD, despite the nominally high marginal rate. This is because of the much higher rate of tax credits and tax reliefs in Ireland.
Recent calls for cuts to Ireland’s higher rate of income tax are based on two false premises. First, a cut to the 41% rate will not benefit those on middle incomes. The Minister for Finance has confirmed that only 17% – the top one in six of income earners – pay anything at the higher rate of income tax. The vast majority would not receive any benefit from changes to the higher rate or bands.
Second, tax cuts in a low-tax economy are not the best way to boost growth and job creation. Drawing on recent research by the ESRI and the Central Bank, it is highly likely that tax cuts for the higher paid would lead to people paying down debt, not boosting the domestic economy through consumption or investment.
In considering options for budget 2015, in addition to arguing for Ireland’s tax base to be defended, we have circulated other tax-related policy briefs to members. We outline TASC’s analysis of the inequitable step effect in PRSI. An employer must pay €1,680 to give a one euro net pay increase to a worker. We present the case that cutting VAT would benefit everyone rather than cutting higher income taxation. We propose a third rate of income tax for high earners. We have a detailed analysis of the cost of tax breaks in Ireland, which continue to be very high. We recommend the best practice in Australia, where there is an annual report on all tax reliefs which can be scrutinised by the parliament.
Tax cuts would lead to a decrease in public services, social transfers and public investment, which would have the net effect of shrinking the economy and worsening economic inequality. Those on low incomes or reliant on welfare would gain nothing from tax cuts but would be worse affected by reduced income or service cuts.
In a recent study the IMF pointed out that the economic growth multipliers from investment were higher than what would be achieved through income tax reductions. To boost growth and job creation, we need public investment in infrastructure and human capital, which business groups and economists have suggested. A virtuous cycle in the economy is possible, with public investment crowding in private investment. However, to do this we need to strengthen the tax base. This is to maintain public services and social transfers and fund new public investment.
Mr. Ian Talbot:
I thank the Chairman and members for the invitation. Chambers Ireland is the representative body for chambers of commerce throughout the State. Owing to the geographic spread of our membership, we have unique insights into the issues faced by businesses in all regions. We recognise that signs of a partial economic recovery are evident in certain sectors, but we believe the budget will present an opportunity to focus on more broadly based economic growth. The issues raised in our pre-budget submission can be grouped into two main themes: taxation and job creation; and taxation and local economic development.
On taxation and job creation, our members represent businesses that create and sustain jobs in their local areas and we believe there are a number of adjustments to the tax system that would enable them to create more jobs across the country. Taking on an employee is a big risk for a small business and businesses need to be incentivised to take that risk. It is vital that the employer’s rate of PRSI for class A staff be returned to 4.25% from the rate of 8.25% to which it was increased. Capital gains tax should be reduced to 20% for genuine entrepreneurs to encourage them to invest their capital and create opportunities for growth and job creation. The current level of CGT is a disincentive to potential entrepreneurs setting up a new business. We need to give businesses certainty on the 9% VAT rate for the hospitality sector. That certainty could give rise to additional jobs.
Moves to support SMEs to improve their cash flow should be encouraged. In particular, we would like to see the limit for cash accounting for VAT increased from €2 million to €2.5 million.
Tax credits for research and development can also be of real benefit to business. In our pre-budget submission, we outline a series of potential reforms. We also believe that the employment and investment incentive and seed capital schemes need to be significantly enhanced or the finance put aside for them moved to something more productive. We believe the marginal tax rate should be reduced to below 50% as it is an important part of bringing high value jobs to the country. Another factor we raise is health insurance. A large number of people in the country pay health insurance and those costs have been escalating very significantly through Government policies and general health costs. We believe a focus on that is important. Jobs and job creation will be crucial to achieving a sustainable economic recovery. This budget is an opportunity for the Government to prove its commitment to the businesses that are central to that process.
I will now turn to local economic development. The local authority landscape has fundamentally shifted. We have always worked closely with local authorities and know what local government can to do to help. The process of subsidiarity, which accompanied the recent reform of local government, has made some of our suggestions outside the control of central Government. However, we believe Government must use its influence, particularly in respect of central funding, to ensure an effective local authority network that facilitates economic growth. For example, the local property tax should be retained by local authorities to be spent on local issues. Reductions in the cost of local government must lead to reductions in the cost of doing business. Proposed reductions in the rate of local property tax by up to 15% must not convert into a corresponding increase in commercial rates. We recommend targeted rates reduction in certain areas. The funding model for municipal districts must not affect business through increased parking charges where there is an anomalous calculation that might encourage their increase.
More specifically, there are a number of issues which can be directly addressed in the budget. The 80% windfall tax on rezoned land is proving to be an impediment to building residential properties in certain areas. A VAT anomaly whereby developers pay 13.5% VAT on residential property development costs but not on commercial development should be eliminated. The Government must commit to a number of strategic infrastructure projects that will help drive economic growth in every region of the country.
2:40 pm
Ciarán Lynch (Cork South Central, Labour)
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I call on Mr. Cribben to make his opening statement.
Mr. Padraig Cribben:
I thank the Chairman for the opportunity to address the committee today. I am here on behalf of the Drinks Industry Group of Ireland – a membership organisation which includes pubs, restaurants, hotels and independent off-licences as well as drinks suppliers throughout the country. In my day job, I am chief executive of the Vintners Federation of Ireland representing pubs outside Dublin. I am here as a representative of the 92,000 people throughout Ireland who depend on the drinks industry for our livelihood. The simple fact is that excise increases in successive budgets have cost jobs, have made our tourist offering less competitive and have been used as a sneaky way to get more money out of struggling Irish consumers.
There are some who believe that increasing taxation on alcohol can address misuse of the product. This is not the case. Additional taxes damage the industry and do nothing to address misuse. I, and the 92,000 people we represent, want to see misuse of alcohol addressed and to this end, we have signed a pledge for the introduction of policy options to tackle misuse. These options include addressing the widespread sale of alcohol at very low prices in a meaningful way, banning price-based advertising and also introducing a statutory code on alcohol merchandising. Alcohol costs are 78% higher in this country than the European average so clearly pricing is not addressing the problem.
However, pricing is creating a huge problem for the 92,000 workers we represent. Excise increases in successive budgets have cost thousands of jobs, made our tourism offering less competitive and punished the hard-pressed Irish consumer. Since 2007, over 1,000 pubs throughout Ireland have been forced to close. These are pubs are not in Dublin city centre or Cork city centre. They are in small villages around Ireland and as representatives of the constituencies which contain these villages, I know that members are all too aware of the serious challenges currently facing our rural communities. It is no different in the pub trade. While there is no one item that can be blamed for all of our ills, the fact that 80% of the increase in the cost of a pint in a pub since 2011 has been directly caused by taxation increases does not help.
The impact is especially pronounced in rural communities where once the pub was a centrepiece of rural life. Increasingly, we see the devastating effects of rural isolation – particularly amongst older men. The huge tax rate on alcohol products in this country is leading to another unadvisable situation - a rise in the black market trade. Seizures of counterfeit alcohol are steadily rising and a number of high-profile seizures this year show that the problem is only going in one direction.
Ireland is one of the most expensive places in the world to buy alcohol products and this has been identified by tourists in Fáilte Ireland research to be one of their chief concerns about coming back to the country. The tax take alone on a bottle of Jameson in Ireland is more than the total cost of the same bottle in the US. Excise on a pint in Ireland is six times more than it is in Portugal and ten times greater than it is in Spain so it is no wonder that tourists feel as they are being price-gouged when they visit Ireland.
When the committee weigh up the arguments for and against excise tax, I hope that it will take into account the huge impact that it has on Irish jobs and Irish consumers. In terms of tackling alcohol abuse, excise is a blunt instrument that unfairly impacts on small local businesses and does not deliver on reducing harmful patterns like binge drinking. It is a sledge-hammer, not a scalpel. The Drink Industry Group of Ireland stands ready to work with Government on policies that can deliver a difference on this important issue without costing jobs in communities that can ill afford to lose them.
The 9% VAT rate has proved that tax measures can stimulate jobs through improving our image as a tourist destination. At the same time as the Government boosted the hospitality sector with this policy, it saw fit to take with the other hand through levying further excise increases and putting pubs, restaurants and hotels under severe pressure. A reduction in excise can have the same job-creating effect as the VAT cut did. It is a boost to consumer confidence and more than that, it will help curb cross-Border activity, which is in real danger of taking off once again. It will address one of the few negatives that tourists identify with Ireland. I hope that the committee take these points under consideration as it looks to make a recommendation to the Minister and I am more than happy to answer any questions that members might have.
Ciarán Lynch (Cork South Central, Labour)
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I call on Ms Mary Rose Burke to make her opening statement.
Ms Mary Rose Burke:
I thank the Chairman for the opportunity to address the committee. IBEC represents businesses large and small, indigenous and multinational, right across the country. IBEC recently launched a major campaign called "An Ireland that works", which sets out business priorities for the next stage of our recovery. Those priorities have five key elements, which are based around reducing the tax burden, investing in the future, better Government and better regulation, extending Ireland's global reach and supporting enterprise and entrepreneurship. Two of those elements form the main thrust of our budget submission, which is around taxing less and investing more.
The latest growth figures from the economy show that a net adjustment of €200 million will be sufficient on budget day to deliver the deficit targets. This is significantly less than the mooted €2 billion and will bring us comfortably under the 3% limit. We have an opportunity to put some momentum behind the recovery we see in the economy. Now is the time to draw under the period of painful austerity we have seen. That was very necessary but the economy has now entered into a new phase. We need to give consumers a break, put spending power into their pockets and kickstart a period of private commercial and public investment. If we get this right, there is a potential to enjoy strong growth over the coming months and years and it will also deliver thousands of jobs across the country.
The budget must focus on reducing tax rates and stimulating investment in the economy. I will look first at cutting income and consumer taxes. With the economy doing well, there is an opportunity to give people back more of the money they earn. Consumers deserve a break and putting more money back in people's pockets will stimulate the domestic economy and further job creation. We have specific asks of the Government in respect of budget 2015. Specifically, we would like it to increase the entry point into the higher marginal rate from €32,800 to €34,800; to reduce the marginal tax rate from a fully loaded 52% to 51%; and to address the anomalies in the universal social charge that mean that self-employed people are not treated in the same way as PAYE workers. We are also asking that recent increases in excise on alcohol be reversed and would argue that the 9% VAT hospitality rate should be maintained. We have seen that this has been very beneficial. We would also request that the very unfair pensions levy be dropped, as was initially promised.
Along with that, we need to be cognisant of the tax environment for business. We need to encourage investment by business and investment in infrastructure. The capital gains tax regime needs to be completely overhauled to encourage companies to re-invest money in new projects and create new jobs. The employment investment incentive scheme needs to be entirely re-branded and reformed to encourage people to know what it means about stimulating investment in Irish SMEs and Irish jobs.
We also need a period that involves taking advantage of the low interest rates that are available and a programme of public private partnerships to deliver on some key infrastructure projects. We also need to be cognisant of our international tax offering. We have become increasingly less attractive to mobile investment in recent years. This is due to rising personal income taxes but is also due to some of the competitive offerings in other countries.
This applies particularly to the UK, where the tax code has been realigned to attract foreign direct investment. We must remain committed to the 12.5% rate of tax but we must examine other areas, particularly the tax regime relating to intellectual property. We must bring greater certainty to the matter of tax credits for research and development.
2:50 pm
Ciarán Lynch (Cork South Central, Labour)
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I thank Ms Burke and will ask some questions before the other committee members begin. I thank the witnesses for their submissions and concise presentations. These meetings usually take place around October or November but the budgetary cycle has changed and the semester is different so it is now taking place before the summer holidays. I appreciate the time the witnesses took to prepare for today.
Regarding this year's budget, it is significant that this is the first year since we exited the bailout programme. The Irish Government and other eurozone EU member states now have country-specific recommendations as part of the package. Perhaps the witnesses took account of this when formulating their proposals and perhaps they could touch on this in their answers.
My question for Dr. Nat O'Connor is simple. Is it the view of TASC that people on the national average industrial wage do not pay enough tax?
Ciarán Lynch (Cork South Central, Labour)
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I am asking whether it is the view of TASC that people on the national average industrial wage do not pay enough tax.
Ciarán Lynch (Cork South Central, Labour)
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What is TASC's recommendation? This is a budget meeting about balancing the books.
Ciarán Lynch (Cork South Central, Labour)
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It seems TASC is neutral on this matter and is not suggesting people should pay more tax. It is making a statement of fact.
Ciarán Lynch (Cork South Central, Labour)
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Forget about higher earners. I am talking about people on the national average industrial wage of between €36,000 and €38,000.
Dr. Nat O'Connor:
I would make the point that those on the average industrial wage are the higher earners. The average does not lie in the middle because not everyone has employment income and, of those who do, a couple will not pay the high rate of income tax until they earn between €45,000 and €65,000 between them, if they combine credits. A couple could bring an average industrial wage into their household but if the spouse is not working, they will not pay income tax at the higher rate. Only single people on the average industrial wage pay some income tax at the 41% rate and they pay the lowest amount of tax of all people on average wages in EU countries.
Ciarán Lynch (Cork South Central, Labour)
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Should households where both income earners are on the average industrial wage pay less tax?
Ciarán Lynch (Cork South Central, Labour)
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Does TASC have any observations on the country-specific recommendations?
Ciarán Lynch (Cork South Central, Labour)
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Could Mr. Talbot tell us more about the procurement concerns outlined in his proposal?
Mr. Ian Talbot:
The whole issue of procurement has been difficult and small businesses are concerned that they are being excluded from much public sector procurement through a combination of the Office of Government Procurement, the need to find cost savings in the procurement process and other factors. We must not throw the baby out with the bathwater by simply seeking the lowest price in the drive for efficient public procurement, regardless of quality. The impact on local businesses can be serious when they can no longer do work they had done previously for local authorities and schools. Too much goes into central contracts or is channelled to bigger suppliers outside the country. There may be too much focus on price in the tendering process. When considering the most economically advantageous tender, MEAT, the additional costs to the economy of procuring goods and services outside the country must be considered.
Ciarán Lynch (Cork South Central, Labour)
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How is this dealt with in other jurisdictions? It is said that in France, small and medium enterprises are better able to secure Government contracts and the system is designed to that end.
Mr. Ian Talbot:
It is very difficult to get exact reasons. Ireland seems to have a higher percentage of contracts with foreign companies but it is difficult to identify a precise reason for this. Those involved in procuring contractors are very aware they may have to appear in front of the Committee of Public Accounts and the Comptroller and Auditor General. They are also aware of the threat of legal action if they do not follow the appropriate steps
Ciarán Lynch (Cork South Central, Labour)
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The same legal and corporate requirements apply to all EU companies tendering in Ireland but medium-sized Irish companies feel they are at a disadvantage compared with other jurisdictions when it comes to procurement in Ireland.
Mr. Ian Talbot:
Definitions vary and an SME is defined elsewhere in Europe as a company with up to 250 employees whereas in Ireland that would be a large company. Some of this issue relates to matters of size and scale. Regarding the individuals who make decisions on procurement, it is very easy to evaluate price but it is harder to make decisions on service level agreements and so on. There is a real fear among procurement purchasing managers that they might do the wrong thing.
Ciarán Lynch (Cork South Central, Labour)
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Could Mr. Cribben explain whether the DIGI represents only off-licences or all aspects of the drinks industry?
Ciarán Lynch (Cork South Central, Labour)
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I am not sure whether Irish pubs are the most expensive in Europe. I was in London at the weekend and the price of a pint frightened the life out of me. It is an expensive city in which to have a pint. The cost base is far lower in eastern Europe but surely Dublin is cheaper for a pint than most European capital cities.
Ciarán Lynch (Cork South Central, Labour)
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I am not interested in the excise burden as the argument relates to customers buying pints. If I put X amount of money on the counter I will get X amount of alcohol back. In Ireland it seems one gets a reasonable amount of alcohol for a given price compared with other countries. I discovered at the weekend that measures for spirits in Britain are around half as big as those in Ireland and around twice the price.
Ciarán Lynch (Cork South Central, Labour)
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We seem to get a good deal in Ireland.
Mr. Padraig Cribben:
The statistics show that the price of alcohol in Ireland is 178% of the European average. Research carried out on tourists by Fáilte Ireland shows the price of alcohol is one of the factors that puts them off returning to Ireland. Figures from the Central Statistics Office, CSO, show that one third of the price of a pint goes to the State and this is a significant factor in keeping prices high.
Ciarán Lynch (Cork South Central, Labour)
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That is more or less the case in every European state.
Ciarán Lynch (Cork South Central, Labour)
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That just means we are better at squeezing producers than other jurisdictions. The price of a pint is still relatively cheap compared with other jurisdictions and the Irish taxpayer does well from the arrangement.
3:00 pm
Ciarán Lynch (Cork South Central, Labour)
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It is a tax on consumption.
Ciarán Lynch (Cork South Central, Labour)
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In other jurisdictions the cost of a pint is more than €5.
Ciarán Lynch (Cork South Central, Labour)
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That is not the case in all pubs. In any of the pubs I have been to in Britain, France and so on, alcohol was around the same price as in Ireland.
Ciarán Lynch (Cork South Central, Labour)
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In what European capitals is the cost of a pint cheaper than in Dublin?
Ciarán Lynch (Cork South Central, Labour)
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Am I correct that what Mr. Cribben is saying is that prices in Dublin are marginally more expensive than everywhere else in the country?
Ciarán Lynch (Cork South Central, Labour)
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With regard to minimum pricing, in what direction should we be going?
Mr. Padraig Cribben:
The view of the drinks industry as articulated in a pledge earlier this year is that the issue that has manifested in relation to alcohol misuse arises out of the availability of cheap alcohol rather than alcohol itself. We believe the issue of cheap alcohol needs to be addressed. The Government has said it proposes to address it. It is now time to do so.
On the availability and segregation of alcohol in supermarkets, the view of the drinks industry is that this should be tackled by way of a code of practice. The other key factor which in the view of the drinks industry needs to be tackled is price-based advertising, be that in the Sunday or daily newspapers - which regularly carry full-page advertisements relating to alcohol - because alcohol is being used as a loss leader. In some places this is being portrayed as consumer-friendly, but the opposite is the case in that what actually happens is that the price of more stable products is increased to compensate for the fact that alcohol is sold as a loss leader. The multiples do not work on small margins.
Ciarán Lynch (Cork South Central, Labour)
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IBEC's presentation is based on the assumption that the correction at the end of the year will be approximately €200 million. Some people say the actual correction needed is €1.5 billion. Two hundred million is a fair bit off that amount. Let us take it that the correction will be €200 million. Ms Burke referred in her presentation to the need for tax and other reliefs. From where then are we to get the €200 million?
Ciarán Lynch (Cork South Central, Labour)
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The €200 million projection is based on our doing nothing. IBEC is proposing that tax and other reliefs be given, which means that that €200 million could become €1 billion.
Ms Mary Rose Burke:
No; €200 million is the net adjustment. Some €300 million will be needed to meet the cost of tax cuts and €100 million for the excise cuts. As detailed in our submission, this is predicated on €500 million being achieved from water charges and a further €385 million in current expenditure reductions as part of an ongoing reform agenda.
Ciarán Lynch (Cork South Central, Labour)
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IBEC is in favour of current expenditure reductions and a lessening of the tax regime.
Ciarán Lynch (Cork South Central, Labour)
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This correction is to be made by continued public expenditure reductions but no tax increases.
Ms Mary Rose Burke:
No. The €200 million net adjustment takes into account an increase of the entry level into the higher marginal tax rate, a reduction in the higher marginal tax rate by 1%, the abolition of the excise increases imposed last year and maintenance of the 9% VAT rate in the hospitality area, as well as the pension levy. This should be balanced and paid for by the €500 million expected to be achieved from water charges, which we are assuming will be efficiently and effectively collected, and an additional €385 million in expenditure reductions as part of the ongoing reform agenda.
Ciarán Lynch (Cork South Central, Labour)
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In essence, IBEC is suggesting that this year's budget will come in more or less on target.
Ciarán Lynch (Cork South Central, Labour)
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In ratio terms, over the past four and a half years taxation has been running at 14% and public expenditure has been running at 16%, which on a compound level over a three- or four-year period is quite high. Does IBEC have any recommendations in relation to areas wherein public expenditure could be increased to address the difficulties of the past three or four years?
Ciarán Lynch (Cork South Central, Labour)
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There is nothing in IBEC's proposal for the Minister, Deputy Howlin.
Ciarán Lynch (Cork South Central, Labour)
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It is all about revenue?
Ciarán Lynch (Cork South Central, Labour)
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Thank you.
Seán Fleming (Laois-Offaly, Fianna Fail)
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I welcome the witnesses. My first question follows on from the questions raised by the Chairman. Ms Burke referred in her presentation to current expenditure adjustments of €385 million. In response to questioning from the Chairman, she stated that IBEC had no view on where this saving should be made. For me, that diminishes the credibility of the IBEC presentation. Ms Burke also referred in her presentation to income tax reductions and in this regard proposed the termination of the pension levy.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy has only 12 or 13 minutes to put his questions.
Seán Fleming (Laois-Offaly, Fianna Fail)
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When it comes to balancing the books, IBEC has no idea where this money will come from. I would have expected IBEC to be a little more specific than simply asking for current expenditure adjustments of €385 million and saying it has no ideas as to where the money will come from. None of the companies that are members of IBEC could run their businesses if they needed to make savings but had no ideas as to where they could be made. Perhaps Ms Burke would explain the basis of IBEC making such a proposal without providing recommendations in regard to how what is proposed can be achieved.
Ms Mary Rose Burke:
The proposal is based on the run rate of growth in the economy, projections in relation to employment and unemployment and so on into the future, the expected intake of €500 million from water charges, and other pre-announced reductions which will also feed into savings. However, we have not looked at where the expenditure savings should come from. There should be technology-related reductions as part of normal good governance and efficiency reductions in various areas of administration.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Is Ms Burke speaking about cuts in government procurement, about which other witnesses have just been complaining?
Seán Fleming (Laois-Offaly, Fianna Fail)
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IBEC is in favour of those efficiencies. Mr. Talbot has a problem with the over-zealous-----
Seán Fleming (Laois-Offaly, Fianna Fail)
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That IBEC has not addressed where the savings will come from is a fundamental flaw in its proposals. Items such as a reduction in social welfare payments as a result of an increase in employment could have been used to back up IBEC's proposal. I suspect IBEC does have some ideas of where savings could be made.
Do the witnesses agree with the requirement for an overall adjustment of €2 billion? I would welcome a response from each witness to that question. The target for last year's budget was €3.2 billion. However, the Minister for Finance, Deputy Noonan, when introducing the budget, announced that taxation measures and expenditure adjustments amounted to approximately €2.6 billion and thus he needed to make only €600 million of non-tax or expenditure adjustments. In terms of the €2 billion adjustment this year, in the witnesses' view, is it possible that double that amount could be found this year? How, in their view, should the deficit adjustment be met, taking into account that some of the adjustments last year were in relation to items that did not come under the heading of taxation or expenditure? Perhaps Dr. O'Connor would respond first to that question.
Dr. Nat O'Connor:
Our analysis would be that any further cuts to public expenditure would be a false economy. Cuts to public spending means cuts in public services, social welfare payments and public investment. While this money will of course transfer into people's pockets, they will also have to pay for extra school and health fees. As such, there is no real saving to the economy. Taking imports into account, there is likely to be an overall shrinking of the economy. This is why we focused on the tax side.
We know that in the budget there is €500 million coming from water charges and €300 million due to come in from the changes made under the Haddington Road agreement. We know also that the Irish GDP will be calculated differently. The target is for the deficit to be 3% of GDP. We have to be fiscally responsible and deal with the debt. However, there is no need to go beyond the 3% target. There is plenty of scope on the tax side. We would bring in more than €350 million by introducing a 48% rate of income tax only on that part of earnings over €100,000. That would not be out of line with other European countries and would only affect one in 20 taxpayers. Likewise, tax breaks continue to be extremely high in Ireland compared with other countries and there is plenty of scope there.
3:10 pm
Seán Fleming (Laois-Offaly, Fianna Fail)
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Most people have a view on whether tax relief on pensions should be reduced to 20%. Some support it while others do not. Do the different organisations have a view on that? If we reduced it, while there might be a reduced cost to the taxpayer, there might also be a reduction in contributions through AVCs, and it would even hit public servants who get the benefit of their superannuation contributions at the top rate. Are there differing views on standardising tax relief on pension contributions? I ask the witnesses to state whether they agree with changing it to the standard rate. What is TASC's view on that?
Seán Fleming (Laois-Offaly, Fianna Fail)
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What is IBEC's view?
Seán Fleming (Laois-Offaly, Fianna Fail)
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What is the view of Chambers Ireland?
Seán Fleming (Laois-Offaly, Fianna Fail)
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Would that be by way of credit or something?
Seán Fleming (Laois-Offaly, Fianna Fail)
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I ask each of the witnesses to outline whether they believe VAT reductions would help consumption. Does each of the organisations generally agree with a VAT reduction in key targeted areas, if it helps consumption?
Mr. Padraig Cribben:
The key to recovery is consumer confidence, and we must recognise that within a mile radius of where we are there is a different level of recovery from anywhere else. The key to consumer confidence is putting more money back into people's pockets. Every town in Ireland has closed businesses and boarded-up shops. To get recovery going we need to get those shops open again and we need to get those businesses going again. The only way to achieve that is by allowing people to retain a higher percentage of what they earn and giving them the confidence to spend it. That is the key to recovery.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Most of the submissions refer to VAT rates. The organisations generally favour some reductions in certain areas.
Ms Mary Rose Burke:
The distressed areas of the economy, hospitality, construction and retail are all dependent on local expenditure in the domestic economy, which is very much driven by the amount of money in the consumer's pocket. Any measures to make that money go further or put more money in consumers' pockets will benefit each of those distressed areas.
Seán Fleming (Laois-Offaly, Fianna Fail)
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Another issue has been mentioned is the issue of procurement, on which we have not made much progress. The Government has its office of procurement. I believe we are at least 5% behind other EU countries in terms of contracts that are given to native businesses - businesses that are registered here in Ireland. Between capital and current expenditure, the Government spends about €13 billion. That 5% represents €650 million. The Government is giving €650 million of money to be spent in Ireland to contractors or businesses from outside the State. There are some good reasons for that. We all agree that schools should not be paying an inflated price for a sheet of photocopying paper if it can be got cheaper.
What discussions have the various organisations had with the Department on what I would call customising the tender documents such that they would help Irish people? One cannot just say, "No non-Irish companies need apply." However, the French are well able to customise their tendering approach to suit French businesses. The Germans are expert at it. With the Italians, I am sure nobody gets a look-in at all. I would even go so far as to say that locally, Ireland is very good at doing this. When it comes to road construction or maintenance in Cork or Kerry - no disrespect - if one is from outside those counties one should not be wasting one's time sending in a tender. So procurement officers are well able, if they want, to gear their tenders to suit the market that is out there. I am seriously depressed that we are handing €650 million to those outside the country. I am sure we could ensure that 80% of that stays in the country with proper imagination and without breaking the EU rules. Other countries are better at it. I thought we were clever in Ireland.
Ms Mary Rose Burke:
It is an interesting area. Obviously, we are an open global economy and we have to have an open, competitive tender process. However, it is important that the tenders are structured properly and that they take into account various elements - price being one, but not the only one of those. The structure of the tender document should include issues such as corporate social responsibility, whereby people can demonstrate the activities in the community marketplace around employment of people, environment and climate. All those elements can be put into a tender document to balance the ratings that one gives.
Mr. Ian Talbot:
We brought out a public paper on procurement a few months ago and we laid out a number of recommendations. We have socialised that widely. We have had several meetings with OGP. We have met officials from several Departments, including the Departments of Health and the Environment, Community and Local Government. We have met the CCMA and we have socialised the document as much as we can. We believe that some of the recommendations we have put forward have been picked up in a new circular, Circular 10/14 on public procurement, that the OGP has issued. That needs to be rolled out. Procurement managers need to be hired and trained to do it.
It is a great source of frustration to us. There are two things. It is not just that the money is leaving Ireland; there is also the issue of small businesses around the country seeing relatively small contracts, such as printer contracts for local schools, going to a big central contract. It is potentially a big issue for local authorities. A bit of reciprocity needs to go on. Small businesses are paying rates to their local councils and local councils need to put some money back into the economy as well. We need to find a balance on these things.
Seán Fleming (Laois-Offaly, Fianna Fail)
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People will be surprised that Chambers Ireland is seeking a reduction in capital gains tax to 20%. I ask others to comment on whether they agree. I know it had been 20% and has been crawling up substantially in recent years. I would like those from the different organisations to comment.
My final question is probably more about inequity than anything else. Do the witnesses have a view on items such as tax relief on medical expenses? By definition, one must have taxable income to get tax relief on a medical expense. So if I have medical expenses in my household of €2,000, I get €400, or 20%, back from the taxman. My next door neighbours may have the same amount of expenditure but they are on a low income but above the threshold to get a medical card. They actually get no rebate because they do not have a taxable income. They might be on an income of €20,000 or €25,000 a year in the family. There is a deep inequity there that such reliefs are only available to those on a taxable income. Does TASC have a view on that?
Dr. Nat O'Connor:
Tax reliefs are generally inequitable. Ireland has many tax reliefs. With tax reliefs such as health insurance or pensions, 80% of the benefit goes to the top 20% of earners. Many people are caught in the middle. They do not have a medical card, but they do not have enough income to claim back any tax. So they are worse off and these kinds of tax relief reduce the overall progressiveness of the income tax system.
Ciarán Lynch (Cork South Central, Labour)
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Do Mr. Talbot, Ms Burke and Mr. Cribben have anything to add?
Seán Fleming (Laois-Offaly, Fianna Fail)
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What about CGT?
Mr. Ian Talbot:
I believe there is an argument that investment in shares on the stock market should be at a different rate of tax. We need entrepreneurs to get out there and invest, putting blood, sweat and tears into a business to create jobs at the moment. We believe there should be a capital gains tax incentive to do that. For active gains, that is one thing; for passive gains based on stock market investment, that is another thing. We need to differentiate between the two in our legislation.
Ms Mary Rose Burke:
I agree with what Mr. Talbot has said. There should be differentiation between the different types of capital gains. We need to incentivise entrepreneurs to repeatedly invest their gains and the tax code must do that in such a way that they are not waiting ten or 15 years to see the benefits.
Equally, we have seen previously that where capital gains tax has been reduced, the overall capital gains tax take has increased. We would argue that the rate should be reduced to increase the total revenue from that stream.
3:20 pm
Pearse Doherty (Donegal South West, Sinn Fein)
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I welcome the witnesses. We do not have many members of the Government parties here today. They have all been elevated to higher offices.
Ciarán Lynch (Cork South Central, Labour)
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I am the only Government Deputy who has not received a ministerial appointment, but I wish them well.
Pearse Doherty (Donegal South West, Sinn Fein)
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Deputy O'Donnell rightly feels aggrieved that he has not received the call, although the buzzing sound is still the hope that the Minister might call. We will forgive him for the interruption.
We are having a discussion with four different groups and have received different submissions from each. Some of them contradict each other in terms of what they seek and they have different priorities. However, I welcome all the submissions. We will read them in detail in preparation for our alternative budget.
With regard to the drinks industry, there was a call to ensure that the excise increase of last year is reversed and that there are no further increases. The witness spoke about the impact it has had and offered comparisons between the cost of alcohol here and the cost in other European countries. In terms of the increase last year, and there have been increases in the last number of years, how has it impacted on the industry? We know that rural pubs are closing down, as people from rural areas see on a daily or monthly. They also see the effects of it. However, has the number of litres of alcohol sold in Ireland reduced as a result of the increase in excise?
Ciarán Lynch (Cork South Central, Labour)
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Is that per annum?
Mr. Padraig Cribben:
Yes. That fell to 10.73 litres in 2013, which is a reduction of just under 26% in the intervening period. However, that probably only tells half of the story. Another thing has happened in the last five or six years. In 2006 and 2007, 60% of all alcohol sold in the country was sold in what is generally termed the on-trade, that is, pubs, restaurants, hotels and so forth, and 40% was sold in the off-trade. Today, those figures are reversed. It is now 60% in the off-trade and 40% in the on-trade. When speaking about the off-trade one must be clear that it is not the independent off-trade but the headline grabbing advertisements we see in the Sunday Independent or the Irish Independent on Thursday and so forth. Excise increases broaden the gap in price between the on-trade and the off-trade. The excise remains the same on both, but the on-trade sells alcohol only, so it does not have other products over which to spread it, whereas the supermarket trade has 4,500 to 6,000 other products on which a cent here and a cent there can recoup what has been lost on the alcohol. Take the example of what happened in the last two years. In the weeks after the budget, the headline advertisements stated "no excise increase here". They absorbed it, mar dhea, but they passed it on through other products.
As to the effects of the excise increases, alcohol consumption has reduced and is now bordering on the European average, but the channel from which the alcohol is bought and consumed has changed considerably.
Pearse Doherty (Donegal South West, Sinn Fein)
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What about the argument that if the Government were to reverse its decision and decrease excise in this year's budget, the off-trade would reduce the cost of alcohol because it is absorbing the excise duty on other products? Therefore, the cost of the bottle of Jameson or bottle of wine would reduce in the off-trade comparably with the on-trade, so the position would be the same as the witness outlined today.
Mr. Padraig Cribben:
One must look at that in conjunction with the other initiatives that the Government has said it will introduce in terms of pricing, advertising and segregation. It is not just one element alone but that element together with the other elements that will create the scenario that will remove the possibility of the supermarkets acting as the Deputy has suggested they might.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Cribben talked about a peak in consumption in 2001.
Pearse Doherty (Donegal South West, Sinn Fein)
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It was 14 litres of pure alcohol.
Pearse Doherty (Donegal South West, Sinn Fein)
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I presume that was just adults.
Pearse Doherty (Donegal South West, Sinn Fein)
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What would the drinks industry like us to consume in pure alcohol per annum? What would the target be?
Pearse Doherty (Donegal South West, Sinn Fein)
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Therefore, we should not be increasing the sale of alcohol. The industry just wants to balance it.
Mr. Padraig Cribben:
Precisely. The reduction in excise that we are seeking is not geared towards having more alcohol consumed but towards giving a better offering to our tourists and preserving jobs in the on-trade. Bear in mind that of the 92,000 jobs that are dependent on the drinks industry, 55,000 of those are in pubs around the country. We would see the reversal of the excise increase as being germane to protecting those jobs as well.
Pearse Doherty (Donegal South West, Sinn Fein)
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I also appreciate the comments in the submission regarding cross-Border trade and so forth and the disruption it could cause. With regard to the 9% VAT rate in the tourism sector, the drinks industry and Chambers Ireland believe it has been a huge success. It is being funded by the pensions levy. Have the representatives engaged with the Department about retaining it? There was a huge lobby exercise last year. Are they confident it will be maintained or do they think they have a battle on their hands?
Mr. Padraig Cribben:
One is never confident about a budget measure until the day after the budget, but we are engaged with the relevant people in respect of that. We believe it should be maintained. It has contributed significantly to job creation and to ensuring a good offering for our tourists. The tourist trade is increasing and we must ensure we continue in that vein. We are continuing to engage with the relevant Departments. As to whether we are confident, we are certainly not complacent.
Mr. Ian Talbot:
I agree. It is about not being complacent. Every year in our budget submission we speak about the 12.5% corporation tax rate. Even though we do not believe it is under threat from anybody, we still say we cannot be complacent about this and that it is a vital component of Ireland's strategy. We reiterate that it must be in place. We felt that way this year about the 9% VAT rate. It has been very successful and that is recognised. It is not particularly on the agenda to remove it, but we still believed it had to be reiterated to remind people that it was a good thing and that we achieved a great deal from it. We do not have The Gathering this year. The tourism trade got a great boost from The Gathering last year. There are still many initiatives taking place but it is about continuity and to let people know it will remain in place would be a good message for confidence.
Pearse Doherty (Donegal South West, Sinn Fein)
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Obviously we table parliamentary questions for the Minister to scope out different options. One of IBEC's proposals is to increase the entry point to the marginal tax rate by €2,000. It claims the gross cost of this would be €240 million per year. I received a reply to a parliamentary question to the Minister which states that an increase for that marginal tax rate by €2,080, which is roughly the same, would cost €312 million. Where has the €72 million gone?
Pearse Doherty (Donegal South West, Sinn Fein)
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IBEC's figures are not calculated by the Revenue Commissioners. The Department's figure arises when it asks the Revenue Commissioners about how many people are employed today.
3:30 pm
Pearse Doherty (Donegal South West, Sinn Fein)
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Compared with the Department, IBEC has underestimated the cost by 25%. I cannot imagine that strong growth in the economy-----
Pearse Doherty (Donegal South West, Sinn Fein)
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IBEC claims it is a gross calculation, which is €240 million, and the Department states it is €312 million.
Pearse Doherty (Donegal South West, Sinn Fein)
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The other IBEC proposal is to reduce the marginal tax rate, from 41% to 40%.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy has just a couple of minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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IBEC claims this would cost €130 million. This goes to what TASC has stated, which is broadly in line with that the Department states, that only 18% of employees in the State would benefit from either of those proposals. Why would IBEC like to confer €500 million of a tax reduction on 18% of the workforce and confer nothing on the other 82% of the workforce?
Ms Mary Rose Burke:
The entry level of €32,800 to the marginal tax rate is significantly out of step with all our main competitor countries, and when one has foreign companies looking at investing in Ireland, that is a key influencer in bringing jobs to Ireland. The level of personal income tax is a inhibitor to those taking on promotions, taking on extra time, and moving from part-time work to full-time work. It is completely out of line with other countries. The average industrial wage is higher than even the level we propose. We are saying that on an average industrial wage, workers will still be on the higher tax rate which is out of step with every other country.
Pearse Doherty (Donegal South West, Sinn Fein)
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I will move on because my time is limited, but I make the point that I disagree strongly with that. The employer is interested in how much it costs him or her to employ somebody and to pay the worker the wages necessary and that is where the issue of tax wedge comes into it. Ireland, in the case of those incomes, is not above the average. Indeed, we are below the average.
Pearse Doherty (Donegal South West, Sinn Fein)
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No employer looks at tax rates. He or she looks at how much it costs to employ.
Ciarán Lynch (Cork South Central, Labour)
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I will allow Deputy Pearse Doherty one brief question.
Pearse Doherty (Donegal South West, Sinn Fein)
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I have one question for TASC. In terms of reducing and eliminating tax reliefs, TASC singled out two in particular, health and pensions. Will Dr. O'Connor discuss the effect on low and middle-income earners if one were to eliminate or standardise tax reliefs in the form TASC suggests?
Dr. Nat O'Connor:
For example, the pension tax relief is currently available at the marginal rate. Only one in six earners, the highest earners, pay any tax at 41% and only they can get any relief at 41%. If one has a standardised tax relief so that tax reliefs are available at the standard rate, most income taxpayers will benefit. Of course, not everybody earns enough to pay income tax and those on part-time work, very low pay or couples where there is only one earner on low pay might not benefit from that 20% relief, and there are issues in that regard. Most workers do not benefit from the tax relief at 41%, which is why 80% of the benefit goes to the top 20% of income earners.
Pearse Doherty (Donegal South West, Sinn Fein)
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I thank Dr. O'Connor.
Ciarán Lynch (Cork South Central, Labour)
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I will round off something with Mr. Cribben before I bring in Deputy Donnelly. On this consumption figure of 14 litres, I am trying to quantify what 14 litres of alcohol looks like. It is quite a frightening concept. It was 14 litres per adult per annum in 2001 and it was just 10.7 litres in 2011, is that correct?
Ciarán Lynch (Cork South Central, Labour)
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In 2004, the smoking ban was introduced. It certainly had an impact on the publican side of DIGI's trade. In 2008, the transport Act reduced the consumption of alcohol for drivers to one drink. In the way that the smoking ban is travelling east out of Ireland, what the Swedes introduced is travelling west. It is only a matter of time before there will be no acceptable level of alcohol in the blood for drivers in the same way that smoking is not tolerated. There was also a massive economic collapse in that period of time and people substantially changed their drinking habits with a move to off-licence sales, whether the big retailer or the local corner shop. I note consumption is now at the European norm. Is the drinking pattern at the European norm as well? Not to give the impression that I am an international pub visitor, but there is a difference when one goes to France. Where somebody might pay €7 for a glass of wine, he or she will sit outside that pub all night with it. They are not like Paddy who goes to the pub and will drink five or six pints. The French or German drinker will sit in the pub and will nurse that glass of wine for three or four hours. It is incredible. The Italians are the same. Many publicans in Ireland remark on this. When Europeans come into their pub, the publicans say, they nurse a glass, not a pint, of Beamish between four of them. Has the behaviour changed somewhat here as well? Are we now drinking like Europeans where our consumption is more at home than outside?
Ciarán Lynch (Cork South Central, Labour)
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Is it about time the vintners of the country looked at a different business model, that the business model of 14 litres per adult per annum, where the vast majority of that was being consumed on premises, is gone and that we need a new type of business model?
Mr. Padraig Cribben:
One must recognise that has happened considerably over recent years. For example, if one were to go back and look at the concept of food in a pub seven or eight years ago and look at the concept of food in a pub today, they are chalk and cheese. The publican population has changed dramatically the offering that they are making to the consumer, whether domestic or tourist. That is happening and is accelerating all the time.
One of the trends we are seeing is that the pub experience is becoming event and occasion driven. Publicans are ensuring they have the right offering for that and that they are properly positioned to avail of it. Traditionally, one had in pubs in Ireland what would be called wet sales. Now there is a combination of food, wet sales and events.
Ciarán Lynch (Cork South Central, Labour)
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This brings me to the fundamental question I want to ask Mr. Cribben. He is dead right. The pub experience in Ireland is unique and gives our business model a particular type of branding and a particular advantage over other destination points. Those in the retail trade have embraced significantly online technology and even though one can buy a mobile phone online, the research will show that most consumers want to go their phone shop to buy the product. They like to feel it before they purchase. Likewise, in recent weeks there was a big difference between sitting down and having a drink at home watching the World Cup and going out to the pub to watch it. A concern Mr. Cribben and I would share is that there are many employed here in the drinks sector, not only at the pub end of it but in the manufacturing of alcohol. Predominantly, we are a whiskey and beer manufacturing country but we have seen exponential growth in the consumption of wine which is not a domestically manufactured product. Has Mr. Cribben any thoughts on how we can ensure that alcohol-producing sector is provided an incentive in the way that sector is in other jurisdictions? I note the French have a particular bent towards providing incentives for the production of wine, and the consumption of wine reflects that in those areas. Could we be doing something differently here, but in the way we market our pubs? Visitors do not come here for the sunshine. They come here for a unique Irish experience of which the pub is one part. They do not come here to drink wine. They come here to drink beer and whiskey. How can we provide such an incentive?
Mr. Padraig Cribben:
The number one attraction for tourists, as found in successive Fáilte Ireland surveys, is the experience of music and what they call "craic" in Irish pubs. It is the number one attraction.
The Chairman is correct. If one looks across Europe at the excise on wine, for example, in the wine-producing countries of Europe, it is zero in both Spain and Portugal, and two degrees north of zero in France. They have their own mechanism to safeguard the products that are produced in their countries. We do not tend to take that kind of approach in this country.
We have to ensure manufacturing and retailing jobs in the drinks sector are protected. The real jobs in the retailing side are in the pubs. The ratio between pubs and off-licences - not the independent off-trade but in the multiple retailers - is 7:1 or 8:1. The Government has been discussing for too long the suite of measures required. We have heard a lot of talk followed by more talk when we need action on pricing, segregation and price-based advertising. The way in which supermarkets deal with alcohol is sold as being consumer friendly, but it is quite the opposite because consumers are paying more for staple products to compensate for the below-cost sale of alcohol.
3:40 pm
Stephen Donnelly (Wicklow, Independent)
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I thank the witnesses for taking the time to meet us and to provide us with submissions, which are useful and contain interesting analyses. In regard to the representatives from TASC, Chambers Ireland and IBEC, I could not find in their submissions a table setting out the total adjustment. I am looking for the walk, that is, the estimates of the deficit next year if there are no budget changes, the amounts carried forward, the accrual through revenue buoyancy and accruals from GDP increases due to changes in the way it is accounted for. Such a table would indicate a certain gap, in respect of which I could expect the witnesses to propose a bundle of taxation and expenditure measures. I acknowledge they do not have a breakdown of the bundle of approximately €400 million but it would be useful to provide that walk. The submissions contain a number of interesting ideas but I would like to see how we can get from a no-change budget scenario to whatever target the various groups believe we should achieve. Is this something the witnesses could provide to the committee in the coming days?
Ms Mary Rose Burke:
We will certainly do so. Our submission contains a table showing that if no adjustment is made, we would meet the deficit targets this year on current run rates. However, we feel that to be more prudent than the commitments already given and to make changes to the structure of Revenue and taxation, we need to see some of the changes we suggest. However, if the Minister stood up and sat down again, we would still come under the 3% deficit target.
Dr. Nat O'Connor:
One of the difficulties we face is that we are only halfway through the year and we do not yet know the end-of-year tax take. It is good at the moment but we do not know the end-of-year position. Likewise, we have seen cost overruns in the big spending Departments and the HSE. That may be additional to the deficit. It is difficult for us to indicate exactly what the adjustment should be in monetary terms. We think it should be 3% of GDP, which is the target. It should not be more than that. There is ample possibility in the various tax proposals we put forward to make as much of an adjustment as is necessary on the tax side, particularly by cutting tax relief but also by a higher rate of income tax.
Mr. Ian Talbot:
From our perspective, I agree with Dr. O'Connor that it is a moving target. We are, for example, concerned about the current rush of councillors to reduce the property tax by 15% because this will have a direct impact on budgetary figures. If these reductions come through, we will need to work out how they will be funded. Given the dispersed nature of our organisation, with affiliate chambers in 48 towns throughout the country, our resources are dispersed and we do not have the economic capability front of house to carry out the depth of analysis required to produce figures we can stand over. We are trying to pass on the local messages from around the country in regard to the issues that arise and to provide solutions to them.
Stephen Donnelly (Wicklow, Independent)
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I am surprised. I did not mean to ask a loaded question but any organisation that sets out the total package of reductions that it thinks will get us to the target should not make such a statement without having the other figures. It cannot mathematically be done without having an estimate for the carryover for revenue buoyancy. I did not mean to ask a trick question but it is mathematically not possible to provide estimates without those figures. We might speak about the matter after the meeting because I may be operating under a misunderstanding.
The general thrust of the submissions is that we should cut taxes in various places but Ireland is already a low-tax economy. We are significantly below many of our peers and the European average. Are the witnesses who advocate further tax cuts also advocating tax increases in other areas and, if not, do they accept that further reducing Ireland's tax take will degrade the quality of public services?
Ms Mary Rose Burke:
I do not believe so. We are making growth enhancing proposals because a combination of reductions in income tax and consumer taxes will stimulate the domestic economy and, matched with investment from private, public and commercial sources, will give the economy the momentum it needs to continue its growth trajectory. Our submission sets out detailed projections on GDP over the next couple of years. The tax rates in and of themselves are fine but the effect of the USC gives us a fully loaded top tax rate of 52%. That is out of line with other countries, particularly given the level of income at which one enters it. The tax rate is not 41%; it is 52% when it is loaded up with all the other charges. In terms of personal income tax and consumer taxes, we are out of line with competitor countries.
Stephen Donnelly (Wicklow, Independent)
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We are but across the board this is a low-tax economy. In terms of income tax, VAT and corporation tax, Ireland is a low-tax, low-spending and low service provision economy. We are closer to America than we are to the social democratic model. Is IBEC suggesting that further tax cuts would be more than offset by increased revenue from the economic activity thereby stimulated?
Stephen Donnelly (Wicklow, Independent)
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Is IBEC also advocating increases in consumption taxes such as water and property?
Stephen Donnelly (Wicklow, Independent)
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Is the objective to lower total tax paid or to rebalance how those taxes are paid, from whom they are taken and for what kind of activities they are used?
Stephen Donnelly (Wicklow, Independent)
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I have been struggling with an issue that is not in any of the submissions. We are overly reliant on foreign direct investment in this country and we need to develop a vibrant domestically owned SME sector, and bigger than SME sector. When I speak to investors and private equity fund managers about all of this cool high technology entrepreneurial investment that we keep hearing that we need, and which I think we do need, they point out that one of the oddities of the Irish market is that investors in Germany, London, Boston or Palo Alto describe how their companies will look or feel in 20 years' time but investors in Dublin, Cork or Galway speak about how much they will sell their company for in three years' time. The result is that we do not have a culture and tradition of investing intergenerationally or over decades. I acknowledge there are various recommendations on capital gains tax and employment investment schemes but is there anything in particular the witnesses think would help Irish investors and equity owners, including employees, to hold on to their companies rather than be incentivised to sell them?
Mr. Ian Talbot:
I agree this is an issue. An issue also arises in that we are particularly reluctant in Ireland to hand over share ownership of family businesses.
It is kept very tight, which makes it very difficult for an investor. It part of the finance for small business debate also. I refer to banks that have a methodology for looking at attractive propositions to which to lend and lend 80% which would be the normal percentage. They will want to get the other 20% from an equity investor. The equity investor will say he or she would like a shareholding, but the typical Irish family oriented company will not want to give him or her a cut of the business. We have to move on that issue.
I am almost "committeed out" at this stage, but the small business finance committee established in recent weeks in the Department of Finance has set up a sub-group to specifically examine the issue of equity finance. I understand there is a draft initial report, which is a problem statement. Equity finance is a major issue in the problem statement and a body of work is needed by a variety of sources around education. It comes back to encouraging people to grow their businesses. There are scary figures available, which goes back to the Deputy's statement on an over-reliance on foreign direct investment. Approximately 93% of our exports are by FDI companies, which leaves 7% by Irish companies. We would like to see a more balanced economy and an increase in that figure. There is a big education issue in this regard. It is about educating and incentivising managers to grow their businesses rather than sell up and move on.
If we look at some of the modern entrepreneurs, they include many young individuals with hot shot ideas. They have the skills set and their brains are wired to get an idea to production, but they are not the ones to turn an organisation into a 500 person behemoth. They need to move on to their next good idea and let somebody else who is better at structuring and managing a scaled up to business take over. A balance must be achieved in that regard.
Much of it comes back to education in a modern economy. In recent years a good deal of the money for education of management has dried up. Approximately €350 million a year is collected by the national training fund from businesses and it is not going back into training.
3:50 pm
Stephen Donnelly (Wicklow, Independent)
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Dr. O'Connor's figure of one sixth paying at the marginal rate surprises me. The CSO is stating the average industrial wage is €42,000. I thought it was €36,000 or €37,000. The 52% tax rate kicks in at €32,000 or €42,000. How is it that only one in six workers pays it if it is payable at the average industrial wage?
Dr. Nat O'Connor:
There are a few things at play. Revenue publishes statistics for income distribution. They show a figure of 2.8 million people across 2 million tax cases. It includes people in employment but also pensioners who might make a tax declaration. Of the 2 million tax cases, only 200,000 have an income of, say, €75,000 or more; that is one in ten. If we take a couple, each of whom is on the average industrial wage, they are on a figure of €75,000.
Stephen Donnelly (Wicklow, Independent)
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But a couple will kick into the marginal rate at €41,800.
Dr. Nat O'Connor:
A couple both of whom are on the average industrial wage will not pay at the marginal rate until they reach €65,000 because it is optimised in terms of tax credits, tax bands and so on. Marriage plays an important role also. Somebody might be on the average industrial wage but his or her spouse might only work part-time or earn lower wages. They can combine credits. They might not pay at the marginal tax rate until they reach €40,000, €45,000 or €50,000. Marriage is important in terms of the exchange of tax breaks between spouses.
Stephen Donnelly (Wicklow, Independent)
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And for so many other reasons.
Stephen Donnelly (Wicklow, Independent)
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That is fascinating; I would not have thought so.
I have a final question. If I understand him correctly, Dr. O'Connor is advocating that tax relief of 20% on health insurance be dropped. Is there not a concern that that would price a group of people out of the market at a time when we need people to get back into the health insurance market?
Dr. Nat O'Connor:
There is an argument that tax relief is priced into the cost of health insurance. When the cap was placed on health insurance relief, we saw a tax relief figure of about €800 a year. Many health insurance products are now hovering at that point. We know that tax breaks can distort market activity and pricing. Tax relief is also grossly inequitable for those who do not earn enough money to avail of it. They are not incentivised in that regard. They are the ones who are caught in the middle. They are not entitled to a medical card and cannot afford health insurance.
Stephen Donnelly (Wicklow, Independent)
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Is Dr. O'Connor suggesting the price would fall fully to compensate for the 20% relief being taken away?
Dr. Nat O'Connor:
No, not fully, but there would be absorption of some of that tax relief; therefore, it is inefficient. There is a dead-weight loss and the tax relief is also inequitable.
Let me come back to the Deputy's earlier point about the tax rates and public spending. An issue arises in terms of Ireland's future growth model. For example, we see a shift in Europe, with Jean-Claude Juncker talking about the social wage and the importance of minimum wages across Europe as part of the growth model. In looking at the question of cutting taxes to incentivise economic activity versus public services and public investment to grow the economy, we are very much moving from the latter, which is a shift of thinking in regard to the tax system.
Stephen Donnelly (Wicklow, Independent)
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I thank Dr. O'Connor.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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When I hear the positions of Chambers Ireland, IBEC and industry as against that of TASC which would come more from the left in terms of its general perspective, I wonder if there is a false dichotomy in that Dr. O'Connor, on the one hand, argues that this is a low tax economy - the implication is that we should increase the overall proportion of tax to fund public services - while the other side argues that we should reduce taxes to put money in people's pockets. Is that not a false dichotomy because as I listen more carefully to some of the points made, I find myself agreeing with both sides? It has more to do with the number of factors. It is a question not of whether this is a high or a low tax economy but about whom we tax and for what purpose. How do we balance the tax system? I would like Ms Burke to respond to this question. I agree with Mr. Cribben that we have to put more money in people's pockets. I have opposed the excise increases on alcohol and cigarettes because they are regressive, but, equally, when we are talking about tax relief, there is a big difference between giving tax to low and middle income earners who need extra spending power and to people at the very top end because even if they pay fewer taxes, they do not put the money back into the economy. They will invest it in property abroad, buy more yachts or whatever else it is very rich people do with their money.
Timmy Dooley (Clare, Fianna Fail)
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They live in the Deputy's constituency.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Possibly, yes. Is there not sometimes a false dichotomy in this regard?
With regard to business, Ms Burke seems to be hinting at a more progressive rates system. I am in favour of a more progressive rates system that distinguishes between the small and medium enterprise and the big multinational or in parking charges, which are regressive. I agree with her on these points, but I do not fully understand why the logical follow-on would not be that we increase corporation tax or have a progressive corporation tax system, for example, in order that very profitable big corporations would make a bigger contribution, with progressivity at least in terms of small and medium enterprises.
Ms Mary Rose Burke:
The Deputy is right that there is a dichotomy between the different areas. It is more than the fact that many of these issues are just points in a continuum. Our basic premise is that work should reward people, that they should be able to retain a lot of the money they earn, that the real way to prosperity is to make sure we get back, as close as we can, to full employment. Most of our policy decisions should be about encouraging growth and employment, which is the most effective way to get money back into people's pockets. It is a false argument to look at the yacht buying consumers at the very top because they are very few in number.
No matter what one does, it is not going to make a difference. The vast bulk of people earn the average wage which is why IBEC’s proposals will reward most people who are earning. Over half of earners will benefit from the increase in that entry level into the marginal tax rate would increase from €32,800 to €34,800. The numbers are skewed somewhat by those who pay tax on unearned income, part-time workers, for instance students and so forth.
4:00 pm
Dr. Nat O'Connor:
Increasing the band makes no difference. It will be one in six people who are earning over €32,800 or the equivalent if they have a married income. Five in six people with an income are earning less than that and will get no benefit whatsoever from increasing the band or changing the rate. These are the descriptive facts from Revenue statistics and from the Minister’s replies to parliamentary questions on the issue. The married tax credits are not being taken into account and, likewise, average earnings are skewed by many people on low or part-time wages and an extraordinary small number of people on high-earn average wages.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Mr. Cribben is making a distinction between the plight of the on-trade and independent off-trade as against the big multiples. Would it not make sense to have a progressive corporation tax rate on the multiples in this regard?
Mr. Padraig Cribben:
That would not redress the balance on individual products. It may affect the overall profitability or take from those companies. There are two keys to recovery. One is to increase consumer confidence. The other is that those who are not earning are given the opportunity to earn. We have to find the balance between making sure those large, medium and small companies have the opportunity to create those jobs which will get those people back into employment. The Deputy is correct in his analysis that it is almost a virtuous circle. What we need, essentially, is more people with more money in their pockets. How we get there through taxation incentives is always a matter for debate. The key to developing industry and employment is small and medium-sized enterprises. That is not to denigrate foreign direct investment but we need a balance between both. Whether it is a small engineering or software company, we must ensure they have the opportunity to flourish alongside the larger multinationals. How this is achieved is for the collective wisdom around this House. It is to get people with money that they can spend in retail and in other areas.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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An issue about which I am concerned and have flagged at the last two budgets is the attitude to the property sector, particularly real estate investment trusts, REITs. These are contributing to what is now an increasing speculation and pumping up of the property area. Mr. Talbot made a distinction between incentivising active as against passive investment. REITs are a classic example of incentivising passive activity. Big international investors with lots of cash are buying up what was initially cheap property and making a killing while driving up rents and property prices and creating a new bubble while we still have a massive housing crisis. I believe we should get rid of REITs and any measures that incentivise property market speculation. What are the veiws of the delegations on that?
Mr. Ian Talbot:
I have not formed particular views on REITs as we have been looking at the overall property market. We overdid it in the good years and now we have overdone it in the bad years. It led to this point where the price of commercial properties had collapsed. People with cash, both in the residential and commercial sectors, were effectively able to move in and cut a good deal. This should balance itself out over time. However, we have an important issue going on at the moment in that we do not have enough residential properties being built, particularly in the Dublin area. That shortage is because we have not built much for the past seven years and for a few years before that we were building the type of property in which Irish people do not particularly want to live.
If we want to get residential property built in the Dublin area, we need to start looking at repealing measures such as the 80% windfall tax introduced in 2009 which is actually preventing industrial sites around the Luas on the Naas Road, for example, being sold and converted to residential units. We have still got the balance wrong on property. I agree with some of the Deputy’s sentiments but we need to get the balance right to ensure we are building the right residential units in the right areas. REITs are one of the measures to get investment in. We are struggling with issues around how we fund people to build new houses. Building an apartment block takes longer and requires more funding before there is a return in a few years compared to a development of semi-detached units. We are focused on getting construction moving and creating jobs. For that, we need some investment vehicles.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I was looking at Mr. Cribben's submission and the concept of whiskey tours is very interesting.
Ciarán Lynch (Cork South Central, Labour)
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I can organise one for the Deputy in Cork.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I do not have to go outside my constituency to avail of one of these tours.
The conversation so far has been on the taxation equation. Ms Burke makes the case for money in people’s pockets. All of that makes plain common sense. Will Ms Burke talk us through where IBEC sees current expenditure adjustments to be made?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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We will come to that later. Will Ms Burke take me through the expenditure cuts?
Ms Mary Rose Burke:
The net adjustment we are suggesting that needs to be made is €200 million, which will bring us to a 2.7% deficit.
On the funding side, we have identified that there is €500 million in pre-announced water charges and that there is a need for €385 million in further current expenditure reductions but, overall, our thrust is moving from taxes on labour to taxes on property and user charges, such as water charges. However, there further expenditure cuts of €385 million will need to be found.
4:10 pm
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I see this in the synopsis. From where does IBEC envisage those cuts coming? What is Ms Burke's view?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Should some of it come out of the health budget which, as Ms Burke, knows is-----
Ms Mary Rose Burke:
We have not specifically looked at different areas but I would suggest the problems in health in Ireland are not due to lack of money. We see comparable populations providing health care for similar amounts of money. For instance, Scotland has a population similar to ours and for a very similar budget, it provides complete health care through the NHS, so I do not think lack of money is the issue in health care.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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We would probably agree on that point but when one puts forward a proposal, it has to be reality checked as to its deliverability. I am curious to know from where the €385 million should come. We face an additional Estimate for health because it has been undercalculated again. This is a yearly occurrence. Has IBEC given any thought as to where we should find that money?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Could I just put to Ms Burke the potential flaw in IBEC's argument in the following terms? On the face of it, Ms Burke talks about an adjustment of €200 million when one nets it all out but for many people, the more significant figures are actually the adjustment figures. I refer to the €500 million in respect of water charges. I also refer the few shillings in the pockets of the people IBEC is targeting with its adjustments in tax. Many of those people will see that flittered away as they pay their water charges. One has the additional issue of those current expenditure adjustments because it must come from somewhere. Does it come from the welfare budget, for instance?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Does IBEC also support welfare cuts?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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IBEC is not waiting to see straight cuts to welfare payments in the budget.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Would IBEC be upset if that happened?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I am not asking Ms Burke personally but what is IBEC's general disposition to a proposition like that, namely, that welfare rates should be cut? Would that be good or bad?
Ms Mary Rose Burke:
Our main focus is that work should reward people, that any disincentives to work or any barriers to taking up work should be removed and that any supports that are needed to move people from welfare into work should be supported. We would certainly look to investing more in JobBridge. That has been successful and we would like to see more places being made available on that. We would very much like to see the focus on getting people from welfare into work.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Does Ms Burke also accept that, in line with IBEC's overall orientation around economic buoyancy, consumer demand and customer confidence, people on fixed incomes, that is, social welfare recipients, are part of that equation too and that to cut those very basic fixed payments has a deflationary effect and affects consumer confidence and demand?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Can I just say to Ms Burke - I say this in a spirit of having the debate because I also read the foreword by the IBEC CEO, Mr. Danny McCoy - that if, for argument's sake, Mr. McCoy and I happened to be on a panel debating the budget, as one does, and if I or anybody else was to produce figures which suggested all sorts of interesting things but which had a hole in them of the magnitude of €385 million, we would be chastised by her CEO. Equally, for IBEC to suggest these measures - some are very helpful and make complete sense - and to have them contain an assertion that current expenditure adjustments of the order of €385 million should be just found from somewhere is, to say the least, incomplete.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Would Ms Burke accept that point? Can I ask another question which relates to some of IBEC's expenditure priorities? Ms Burke highlighted the issue of social housing in which I was interested.
Ms Mary Rose Burke:
It is particularly social housing because this has been covered both in this House and in the media quite a lot. We have seen shortages in housing across the entire market, both in the private market and in social housing, where we think it is one area where we can deliver on a social objective while contributing to growth in the economy. At the moment, social housing is pretty much primarily provided directly or through rent supports by the Department but there is an opportunity to make significant inroads into the housing problem with some large-scale social housing developments done through off-balance sheet investments with public private partnerships. We can avail of money at very low rates at the moment. Now is the time to invest in that and to deliver on two policy objectives.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Has IBEC had conversations with the Government on the issue of social housing and this form of stimulus?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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I understand the point around keeping these matter off-balance sheet but, as Ms Burke knows, the experience of public private partnerships for the provision of social housing has not been a good one for many people, not least in this city.
Ms Mary Rose Burke:
It is an area at which we need to look. We have had mixed experience with public private partnerships but that does not mean the concept of public private partnerships is not a good one which can be worked and managed well. There is no reason we would not structure that in such a way that it will be-----
Mary Lou McDonald (Dublin Central, Sinn Fein)
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Has IBEC looked at experiences in other European jurisdictions - for instance, in Britain?
Mary Lou McDonald (Dublin Central, Sinn Fein)
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In terms of public private partnerships.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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It may interest Ms Burke to know that they discovered they were inefficient and expensive. The experience here, in terms of many large regeneration projects, was that they were utterly unreliable and that because of that particular funding model, a lot of people in dire need of social housing were left in the lurch.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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We can debate that at a later stage. Does IBEC have an issue, in principle, around direct funding from the Exchequer for the provision of social housing? Has it considered that?
Ms Mary Rose Burke:
Not in principle, it is more about the constraints that are on the Government at the moment and the size of the housing problem. A large sum of money would be needed to resolve that issue at the moment and we have wide shortages in provision. It is not a principled objection to it.
Mary Lou McDonald (Dublin Central, Sinn Fein)
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As I said, Ms Burke's submission was very interesting and bar the €385 million hole, it was very useful.
Could I ask each of the contributors about equality budgeting? It is something we asked Government to consider. It has considered it and said "No". The notion is that one measures the impacts of decisions taken on the taxation and spending sides on key demographics. Very briefly, I would like to hear the contributors views on that method being-----
Ciarán Lynch (Cork South Central, Labour)
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Dr. O'Connor would have a view on that.
Dr. Nat O'Connor:
We think it is certainly a good idea from a social justice perspective but also from an economic one. We need to look at the distribution of income and wealth. That tells us where the demand will be in the economy. If one takes the example of tax cuts that might give €100 back to every person who is employed - there are 1.9 million people employed - that is €190 million but that comes out of public services or social transfers. There are 1 million people of working age who cannot find work due to disability, care duties or unemployment. We need to look at the balance. It is not just about putting more money in people's pockets, it is also about looking at how public services can reduce the cost of living, so that people can be better off.
Equality budgeting is part of the economic framework as well as the social justice framework and it really should be basic to how we do budgets.
4:20 pm
Ms Mary Rose Burke:
In terms of equality budgets, if one looks at our major policy campaign, which is quite separate to the budget submissions, one of our key metrics we are looking at for 2020 is to have Ireland in the top five of the OECD measures of great places to live. It is not just about the financials of a budget; it is very much around making sure Ireland is a good place to work, live and invest. It is not just about finance; it is about taking it in the round. It is about absolutely making sure that this country is a good place for all citizens to live.
Ciarán Lynch (Cork South Central, Labour)
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In order to move things to a conclusion, because we are going to conclude at 5 p.m., I will try to put a macro shape on the proceedings. Ms Burke’s reading of the economy might be considered a very optimistic one. As a member of the Government I am not too sure whether I would go out to bat for that, but I hope she is right that we will end up in a neutral position at the end of the year if we do nothing, give or take €200 million, which is very different to €2 billion. Is there a danger that all the good work of the past four to five years will go out the window and we will go back to tax breaks and do what politicians typically do?
One of the things that was very evident when the country crashed was that there was no structural tax base; it was very much based on consumption, and that was based on taxes being derived from property and, in the main, stamp duty. I would be interested in what Mr. O’Connor has to say about the troika programme. Mr. Talbot is also indicating. Is there further work to be done on our structural tax base rather than just looking at tax giveaways all over again? Are consumption taxes to be looked at as something that gets put aside for a rainy day rather than being spent on current expenditure? If there is an improvement in the situation, which Mr. Cribben has indicated, people will start consuming more. If one starts operating one’s real time budget out of ongoing consumption, the moment consumption stops, the economy crashes. Even if we did not even have a property crash in the past, the economy would crash because consumption crashed. I would be interested to hear a response from Ms Burke, Mr. Cribben, Mr. Talbot and then Mr. O’Connor on the overall macroeconomic position with regard to the budget.
Ciarán Lynch (Cork South Central, Labour)
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How does the structural tax base get increased according to the IBEC proposal that came before the committee? Does it contain anything that broadens the structural tax base?
Ciarán Lynch (Cork South Central, Labour)
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They have been introduced.
Ciarán Lynch (Cork South Central, Labour)
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IBEC is not advocating an increase in property tax or water charges, so what does IBEC advocate in terms of broadening the structural base?
Ciarán Lynch (Cork South Central, Labour)
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There is a world of difference between income tax and consumption taxes.
Mr. Padraig Cribben:
Your point is well made, Chairman. If one goes back five or six years ago, we had a very narrow base where we were dependent on income tax and spending tax, be it VAT or stamp duty. In the meantime, the base has been significantly widened. It has been widened through the property tax, water tax and even on the commercial side in recent years water charges were introduced which did not exist in every county six or seven years ago. One now has water tax in and water tax out. That base has been considerably widened. The key is in looking at each individual tax and seeing its net effect rather than the headline grabbing effect it might have. The reduction in the VAT rate from 13%% to 9% within a specific area has been able to deliver jobs, which is good for the economy and for people. It has been able to help towards the deliverance of a better tourism product which, again, is good for jobs and the Exchequer. It is more a case of where they are pitched rather than if they are pitched.
To return to a question raised by Deputy McDonald earlier on equity, it is not just about equity in the taxes, which is very important, but it is the effect it has on jobs, which has a roll-on effect on equity as well. It must be seen in the round rather than just from a narrow base.
Mr. Ian Talbot:
First, I do not think we want to undermine or not recognise the huge achievements that have been made. We are around this table arguing about whether it is the last €200 million or €2 billion or somewhere in between. Four years ago we were sitting around this table and we were discussing €15 billion. We have done that through a combination of tremendously hard work by a lot of people and the citizenship of this country got on with it, much to their collective credit.
We have broadened the tax base. We have increased many taxes that have been reduced in the good years. In 1991 the top rate of tax was 54% and we got it down to 40% and now it has gone up to 52%. We have brought in property tax and water charges. The business community has supported the need to broaden the tax base and to take the pressure off. We are at the point now where to keep things moving we can tweak the system a little. We must recognise as well that we have done this at a time when some of our major markets were in disarray. The euro was constantly in crisis and eurozone inflation is being kept below 2%. Currently it is 0.5%. The United States has been struggling and we have had major credit issues. We sometimes think the difficulty SMEs have with borrowing is unique to Ireland but if one picks up any newspaper in almost any developed country in the world one will find issues about lending to SMEs, which reflect a tightening of credit globally. Many of our issues are global ones.
We have done a fantastic job. Times will improve in Ireland. We will deserve them as we will have worked hard for them. At that time we need to stand back and ask what other good ideas we should have as a society to continue to improve and to make the system more equitable, and to do it at a time when we have the ability and capability to do it. We should be much more open next time. The last time we just gave the money away as it flooded in. The next time we need to make proper structural change to suit the type of society we want to be. That is a big statement. I do not know exactly what type of society we want to be. I do not think we ever want to be Scandinavian but we should make choices and do it when we have some breathing space. At the moment our collective achievement in sitting around this table arguing over whether it is €2 billion or nothing is fantastic and let us not take away from that achievement by everyone.
Dr. Nat O'Connor:
Certainly, we would be in favour of strengthening the tax base. In previous submissions we have looked at an equality-proof property tax. We have looked at a water credit system to make water charges more equitable. We are in favour of the tax changes as long as they are equality proofed. We have looked in detail at Ireland’s tax system. EUROSTAT, the European statistical service, for example, produces a book every year called Tax Trends in the European Union, and there is a phenomenal amount of data in it. In looking at that what we have seen is the biggest difference between Ireland’s tax system, broadly speaking, is our level of social insurance. Our social insurance levels are incredibly low compared to other European countries, in particular employers’ PRSI contributions are incredibly low. That keeps down labour costs in Ireland. It is part of the tax wage we discussed earlier, but one could double employers’ PRSI contributions and they would still be the lowest in the European Union. There is a real difference.
This means that people take a greater risk if they lose their jobs, as they immediately go to a welfare level and there is no income replacement. In other countries, one is insured through social insurance payments and might get 80% of one's income per year upon losing one's job, then 60%, before dropping down to a subsistence level. This allows people to find other jobs, keep making their mortgage repayments, etc. Social insurance is the main gap.
The level of local taxation in Ireland is low and only 2% of all tax revenue is spent locally. The European average is 10%, with 50% in some Nordic countries where people pay taxes locally and see services locally. Irish local government has been eviscerated in terms of its finances. The property tax may go some way towards addressing that, but we are yet to see the system settle or know how much property tax there is locally.
Consumption taxes are indirect and regressive because they affect people on lower incomes more. We tend to have more of these taxes and fewer direct income taxes than other European countries. There is an imbalance. A part of the reason for this is not the rate of tax, as many countries have higher marginal tax rates at average earnings. For example, it is 59.4% in Belgium, but people there pay higher actual amounts of tax because they have fewer tax credits and reliefs. I have two pages of Revenue's statistics showing the items for which we give reliefs and expenditures. This approach reduces the amount of income tax people pay. Australia has a large book that allows its parliament to scrutinise whether reliefs are value for money and good for the economy. Ireland has many tax breaks compared with other European countries, but they are not scrutinised and they can expand in the economy. During the boom, they distorted investment decisions in hotels, property and so on. There is plenty of scope for a structural examination of the detail of the tax system.
The European assessment of Ireland's finances was mentioned. According to Europe, the fact that we charge no or low VAT on food and other large categories makes it poorly targeted. In other words, many people are getting them VAT-free. However, much of this benefit can be absorbed through higher prices. Compared with many European countries where VAT is charged on food items, Ireland does not have cheaper food despite the fact we pay no VAT on it. We need to examine the detail of the tax breaks and how we distribute consumption taxes. There is scope for another tax commission if people have the appetite for it.
4:30 pm
Ciarán Lynch (Cork South Central, Labour)
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I thank Dr. O'Connor. If there are no supplementary questions, I will bring matters to a conclusion. I thank the witnesses for attending. It has been a constructive and worthwhile discussion on issues of critical importance and will assist the committee during the budgetary cycle when we resume after the recess. We welcome the four organisations' contributions and their engagement with us. I thank Dr. O'Connor, Mr. Talbot, Mr. Cribben and Ms Burke for their engagement and wish them and their respective organisations well for the future. We will continue our hearings tomorrow and on Thursday. We will resume our pre-budget submission hearings tomorrow. Is that agreed? Agreed.