Oireachtas Joint and Select Committees
Tuesday, 3 July 2018
Committee on Budgetary Oversight
Priorities for Budget 2019: Discussion
Before we begin, I remind members and witnesses to turn off their mobile phones. The interference from mobile phones affects the sound quality and transmission of the meeting.
I welcome Mr. Fergal O'Brien, director of policy and chief economist with IBEC. He is accompanied by Mr. Gerard Brady, senior economist. I thank the witnesses for making themselves available to meet the committee. Meetings with a range of national stakeholders will be held in advance of budget 2019 to discuss their budget priorities and challenges.
Before we hear the opening statement, I will draw the attention of witnesses to the position on privilege.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of the evidence they are to give to the committee. If, however, 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 these proceedings is to be given and are 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.
I remind members of the long-standing parliamentary practice to the effect that they should not 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 Mr. O'Brien to make his opening statement.
Mr. Fergal O'Brien:
I thank the Vice Chairman and members for the invitation. We are delighted to present the views of IBEC members in advance of budget 2019. Before I address some of the specific priorities from a broad business perspective, I would like to share the insights into how we regard the Irish economy to be performing, as relayed to us by our members from over 40 sectors of the economy. We continue to experience very good trading conditions in the economy. If we consider the main drivers of economic growth, we note the consumer economy is performing very strongly. Our export markets are doing very well, with the exception of the United Kingdom. Pretty much every other developed market is performing very strongly. We estimate that the growth rate of the UK economy is probably about two percentage points below what it should be currently given the strength of the overall global economy. Notwithstanding that, export demand is very good. The third main driver of the economy is investment. We see a strong increase in investment both from the business sector in terms of capital deepening that is occurring across industry and in respect of a much-needed recovery in construction activity.
When we consider the economy in the context of the latest observable data, we note it is performing strongly. It is, however, very much a rear-view perspective on the economy, to a significant degree. When we look ahead we are quite concerned about the external pressures we now see emerging. We see real risks to our global trading system, as we have known it for so many decades. It has been a bedrock of the Irish economy and has helped us prosper in respect of international trade and internationalisation. The economy has not yet felt the impacts of Brexit, whatever they will be. We see a significant risk on the horizon. The third risk, and perhaps the most significant, is that we are now witnessing the most rapid decline in our competitive position that we have seen in a decade and a half. The cost base for Irish business is increasing very rapidly. We are experiencing severe capacity constraints in the economy in the context of labour and other resources. Irish business is rapidly losing competitiveness. That is the context in which we approach budget 2019.
I will mention five specific priorities we would like to set before the committee this afternoon. We may discuss other issues during questions and answers.
First, we believe this is a budget that should deliver a step change in the supports for indigenous business. We urgently need some brave and bold moves to achieve a better balanced economy to really bolster the SME and indigenous sectors. That will help to protect us against some of the international threats to the Irish economic model that we see emerging. Specifically, we are proposing that capital gains tax for entrepreneurs be set at a flat rate of 12.5%, and we would move beyond the current restrictive regime we have. Also for indigenous business and entrepreneurs, we propose that Ireland follow the lead of Sweden by introducing a much more meaningful share-based remuneration scheme for start-up and SME firms to help them to attract and retain talent. That is a real pressure point for the indigenous sector, particularly the start-up sector. We should adjust the stamp duty regime on equity to have a more diversified range of funding options for the indigenous sector. We should move with a much more ambitious programme of capital allowances to encourage indigenous businesses to invest more in capital and improve automation and to help them to be better prepared for Brexit. That is the platform for the indigenous sector.
Second, let me make some remarks on the international traded sector, particularly the inward investment sector. This has long been the bedrock of the Irish economy. Notwithstanding our objectives to achieve better economic growth, we must recognise how important the foreign direct investment sector is. We also need to be realistic about the challenges we now face as a result of US tax reform. The US tax reform of the past year has been highly significant in terms of the Irish business model. We no longer enjoy the type of competitive advantage we had in the past in terms of being able to win and retain mobile investment projects.
Specifically in the upcoming budget, we will be looking for certainty on our corporation tax regime. We probably regard that as the most important element of the regime in order that business can be given certainty that allows it to plan. While many US tax reforms have been very attractive, there are some questions remaining over the long-term certainty of the US corporate tax reform regime. In particular, we point out the need to have the administration and functioning of our research and development tax credit scheme, which supports research and development activity in both indigenous and multinational business and which is really a key pillar of Ireland’s international attractiveness, streamlined and improved and the need to make it as accessible as possible for all businesses. There is a very significant opportunity now for Ireland to be a world leader in robotics and increased automation in industry. We would like to see some dedicated schemes to help us accelerate in that domain.
The third priority, which is associated with a key challenge we see across all our sectors, concerns the ability of business to attract and retain talent. We are now approaching an unemployment rate of just 5%. We have a very tight talent and labour market at the moment. Probably the most significant challenge facing businesses is that they are struggling to get and keep the right type of staff to meet strong demand. With regard to what we believe we can do in budget 2019, we think some income tax reform needs to be delivered. In particular, workers on average earnings should not be taxed at the higher rate. That would be our primary income tax reform priority for the budget. We really need to do more to help all businesses, large and small, to attract and retain talent through a meaningful share-based remuneration model. Ireland simply does not compare well with other jurisdictions in terms of the taxation of share benefits. This needs to be radically reformed. A key factor, which is driving quality-of-life concerns we have in the context of the Irish labour market, relates to housing. In recent weeks, IBEC has published a major report on the housing challenges we face. Specifically in budget 2019, we will be favouring a move towards a new site valuation tax encompassing the existing residential property tax, the vacant site levy and other development charges on business. That would lead to a much more efficient use of land. It really is the high cost of land in the Irish economy that is driving our uncompetitive position in respect of housing, affordability and availability.
Fourth, we believe sustainability and our environmental challenges will become a much higher priority for our members. Business is very keen to embrace the opportunities provided by the circular economy, in particular. Some specifics we believe can be achieved in budget 2019 include long-term certainty on the tax treatment of electric vehicles and much more effective planning for low-emission and zero-emission vehicles for bus and rail transport. We want to see much more effective funding provided for renewable heat technology.
The funding available to the Sustainable Energy Authority of Ireland for retrofitting existing building stock should be doubled.
On the broad fiscal position for the budget, as I said in my opening remarks, Ireland’s competitive position is being eroded rapidly. It is time to be cautious on the economy. We favour a prudent budgetary stance. It would be right not to add to any overheating pressure which might appear to be emerging in the economy. However, we do not support the principle of the rainy day fund; rather, we support a prudent budget that is not excessively expansionary. When it comes to the rainy day fund, there are existing pressures elsewhere on public expenditure, specifically in the higher education sector, through which there is a storm ripping. The university rankings are falling significantly and we are experiencing reputational damage internationally. This is leaving us ill-prepared to face a future downturn in the economy. The best way to protect its sustainability is to invest now in infrastructure and the education system. We have a plan in place for infrastructure under the national development plan and the ten-year capital plan. However, we have no plan in place to address the crisis in funding in the higher education sector. We urge the committee to support our position that we take a prudent budgetary stance but instead of putting the money into a rainy day fund, it should be ring-fenced to tackle the crisis in the higher education sector which we are experiencing.
This afternoon we saw corporation tax receipts in the first half of the year come in at €335 million more than expected. Over five years corporation tax receipts will most likely have jumped from €4 billion to €9 billion. We need to ask ourselves what are we doing with the additional resources coming into the Exchequer and how can we continue to allow the level of under-investment we are seeing, in particular in the higher education sector.
The issue of the tax treatment of electric vehicles came up at one of the branch-out sessions last week at the national economic dialogue. There are significant incentives for the purchase of electric vehicles such as tax-free concessions, the return of VAT and so forth. The cost is practically zero to run an electric vehicle. Why then is there no major take-up of electric vehicles?
Mr. Fergal O'Brien:
It goes to the core of our point that we would like to see the regime extended to give certainty that there will be a regime in place for a certain period. The absence of certainty on what the tax treatment will be in the future and the fact that it has been introduced for a limited period means that it is struggling to gain traction
I welcome the delegates and thank them for their thought provoking presentation. A few members probably agree with IBEC about the rainy day fund. When we prepare submissions, we usually cost them. What would be the total cost to the Exchequer of a proposal similar to the Swedish scheme?
Mr. Gerard Brady:
On the Swedish scheme, it would cost nothing in the first year because one would be deferring payment of the tax for future years. It would probabrly cost €5 million a year in future years. It would really just be for small firms and start-ups where there is probably not a huge amount of activity, but it would cost as activity picked up.
However, Sweden seems to be privatising many services which used to be publicly funded such as childcare, eldercare and so forth. It is moving away from the social democratic approach. Perhaps that has something to do with the numbers of companies coming forward.
Mr. Gerard Brady:
It probably has had an effect in Sweden. When we talk to Swedish colleagues in BusinessEurope, one sees the impact of the regime, particularly for small companies. We have done it very well for multinationals in that we have an attractive regime in place for them. However, when one looks at the tax regime for indigenous companies, we have the third highest capital gains tax rate in the OECD and the highest rate of stamp duty on shares for indigenous companies listed on the Stock Exchange. It is the highest in the world and double the second highest rate. We have a high share options tax rate, particularly for smaller firms. Last year the Government introduced the key employee engagement programme, KEEP. However, the feedback from members suggests there has been no take-up of it because of the restrictions. The Swedish scheme has the advantage of being state-aid approved, meaning that one will not have to go through a two-year process of asking the Commission for permission. As it is working in Sweden, there is no real reason it could not work here.
IBEC puts a good deal of stress on competitiveness, which is everything in economics. The summer economic statement also emphasised the growing feeling competitiveness was slipping a little and that we were not developing as fast as we could. Does IBEC have precise proposals for how it would develop it?
When the Irish Fiscal Advisory Council reported to the committee, Mr. Seamus Coffey said there could be some scope for revenue savings with the research and development tax credit. What does IBEC think about that suggestion?
Mr. Fergal O'Brien:
When we talk about competitiveness from a business perspective, we always focus on both the cost side and the productivity side. Very often the focus is excessively on the cost agenda. Costs obviously matter. We need to keep our labour costs in line with what our competitors are doing. We need wage increases in the economy, but they need to be moderate, sustainable and in line with those of our competitors. By and large, that is what we have seen to date as the economy is recovering. However, we are concerned that the labour market is getting so tight that we need to be cautious in imposing any other cost, either regulation or other costs, that will impact on payroll.
The cost of insurance is a source of significant concern for business. Listening to the previous session, the cost of transport and getting goods off the island, particularly in the context of Brexit, is a concern.
From a productivity perspective, we would like to see more being done to support the indigenous sector in the context of its talent and management capacity. We mentioned trying to help companies to take advantage of the new technology in automation and robotics. Very often it is much more complex than just buying the latest high-tech kit. It can be a management capacity challenge which can require extensive upgrading and investment across the technology systems of a business. It might be about generating awareness, particularly in the indigenous SME sector, of the available new technologies.
On making much better use of the research and development tax credit, one of our specific recommendations to help more SMEs to use it is to have a more streamlined pro formaapproach to it. We also recommend reducing the administration involved for companies below a certain size to make it more accessible and reduce professional services costs in availing of the credit.
On the broader issue of the value of the credit to the economy and the tax forgone, we point to the additionality in research and development activity.
Extensive research with our members has shown a substantial return to the Exchequer from the cost benefit of the research and development tax credit. We have estimates for that economic return. The Government also continues to see this surge in corporate tax revenue. That is indicative of continuing higher quality business activity in the Irish economy and much of that goes back to us growing our innovation capacity and our research and development activity. There is a tax forgone element of the research and development tax credit but it is creating a significant amount of additionality for the economy. That is evident in respect of-----
Mr. Gerard Brady:
We did work on this in 2014. More recently, the Department of Finance did work on it last year which showed that about 40% of all the research and development that takes place in the economy is supported by the credit. It supports about €2 of research and development for every €1 we are spending on the tax credit itself, or a little more than that. That is really high when we compare our credit to those in the UK or other countries where a similar kind of analysis has been done. It is about €1.50 for every €1 spent there, so ours is much more efficient. It does not just help bring more research and development here. It is also becoming a more important part of bringing FDI - and high quality FDI - here in the first place.
Mr. O'Brien mentioned changes in the US tax reform. The headline rate of 12.5% is still important but it is becoming less important as competitors in the UK, the US and elsewhere close in on that 12.5%. To bring the high value jobs now, the next step up in the food chain of FDI, we need those research and development supports in place. Companies are looking to get smart people and those kinds of research and developments in the State as well as more investment in third level. They want to have the capacity to push out those skills and to work together on research and development.
On the cost of the research and development changes we are suggesting, many of them are administrative changes particularly aimed at SMEs. Many of the changes would not have a huge cost. It is partly about administration, partly about how scientific advisers - who are under the research and development tax credit - are appointed, and who takes part in that, and also the consistency and certainty of the credit. It does not have to cost a huge amount of money to make the credit better because the credit as a tax incentive is pretty good and attractive. Its operation, however, may not be. Making that easier, particularly for smaller companies, would not cost much but it could have a big impact. Getting the people working in those small companies into higher productivity jobs means higher wages and better living standards.
Is Mr. O'Brien concerned about rail and the impact it has on businesses? I refer in particular to the cost of rail. My understanding is that the regulator applies a cost to the usage of rail and maintenance of the tracks and that cost impacts on businesses using rail to transport their goods. Ireland is an underachiever in this and in trying to future proof our economy. Has IBEC looked at this in the past or is it an area of concern?
Mr. Fergal O'Brien:
We have not received extensive feedback on this from our members. In the context of the sustainability challenges we face as an economy, we do support the greater use of rail transport where possible but we have not received specific feedback to say we are out of line from a cost base perspective. Our focus centres on investing in the infrastructure, providing good access to our ports and being strategic in how we are planning long term for some of the challenges Brexit is going to throw at us. As a general theme, we have seen substantial under-investment in our transport and physical infrastructure over the past decade. In addition to the road projects, we would like to see rail investment prioritised, particularly for the export sector.
On small and medium enterprises and corporation tax, the witnesses mentioned the bumper receipts we have had in recent years. I will come back to that in a minute. Sometimes when we talk about our economy we tend to focus on the FDI. Indeed, when we deal with finance Bills there are changes which support FDI. FDI is hugely important as are the tax receipts and how we use them, as Mr. O'Brien mentioned. If we stripped that away though and looked at the economy and how businesses are operating excluding FDI, the picture is not as rosy. It is actually quite concerning and this budget needs to get to grips with all of this because there is volatility. We can talk about what we do with corporation tax receipts but we need to look at profitability in respect of SMEs. IBEC has a number of proposals. I am not sure if they are the right proposals or if they are enough but we need an action plan for small businesses. That was said at the national economic forum. FDI performance is masking what is a problem. Does IBEC see that as a concern and a future risk? Why are our small and medium enterprises underperforming compared to their peers and why are they less profitable in this State than they should be?
Mr. Fergal O'Brien:
I will make some initial comments and my colleague Mr. Brady might also comment. It is a concern for us. We have a great foreign direct investment sector but we spoke about some of the risks it faces including international tax pressures and other volatility in the global economy. Looking at the productivity index of the indigenous sector, some parts are quite average in a European context. We are not achieving the type of research, development and innovation performance that we need to be achieving. Our businesses and our public system are not spending enough on research and development. Research and development performance, particularly at the indigenous level, is well below the northern European high performing economy average seen in Germany, Denmark, Sweden and economies like that. That is one particular area.
Talent is a significant challenge. The labour market is very tight and it is difficult for small businesses to attract and retain talent. It is difficult for an SMEs to give a good proposition compared to the other employment opportunities in the economy. That is why we point to a meaningful share option scheme. It would really benefit the indigenous and SME sector to help companies to bring that talent in and tie them to the success of the business.
Mr. Fergal O'Brien:
The practical realities often mean an SME cannot afford to pay the salary and other benefits that skilled employees are going to get in another sector of the economy. We have a scheme at the moment - the key employee engagement programme, KEEP - but it is incredibly restrictive in how it can be applied. Mr. Brady might want to comment on some of the things we have looked at internationally in how we see that working, the success it looks like it is bringing and how we can replicate some of it here.
Mr. Gerard Brady:
The advantage of a share option scheme is that where a company cannot pay more but does have some idea what the future growth of the company, the employee can buy into it. It is common in the tech sector, in particular, but it could probably be more common across many different areas. It is a problem in Ireland in particular because we have this huge sector - it is like the problem the League of Ireland faces keeping good footballers. There is a huge, very profitable and productive sector in Ireland and it is very difficult to keep good staff even if a company has them and trains them. Being able to give them shares in the company will help retain management talent and also overcome some of those issues around not being able to pay the same wages.
The London School of Economics has done comparative work on management skills in Irish indigenous companies versus companies elsewhere. We are down with Greece and Portugal in a European context and near India and Brazil in a global context. We are probably the third lowest in the EU in respect of management skills available. Our multinationals have really good skills. We are producing many skilled people but they are not going into the indigenous sector. That remains a major problem.
Profitability was also spoken about and Irish indigenous firms have very low margins in the grand scheme of things. They have a high labour share, about the second highest in the EU, and very low margins at the same time, so they pay quite a bit in wages compared to their profitability. Then they do not have room to invest after that.
The role of the State to step in there is help them to invest them by giving them some kind of incentive to invest thorough the tax system or them direct grants in research and development where if one has low margins, it is very difficult to justify investment in areas like robotics that might be risky that might not work. They are also heavily reliant on short-term financing from banks and are different from other European firms. I mentioned Sweden where there is much greater access to equity investment. The schemes that we have helped traditionally in the past and equity investors get involved in companies.
Our stamp duty is twice that of the UK, which is second in the world and ten times the European average, which has a massive impact on mid-caps. The employment incentive and investment scheme, EIIS, was a good scheme for smaller companies a number of years ago, but state aid changes that had to be made in last year's Finance Bill resulted in a 50% drop-off in the take-up of the scheme in the first quarter of this year compared to the first quarter of last year, which is a disaster for small companies, which are high potential and which could grow if they got that equity financing into them.
Mr. Brady mentioned research and development and my colleagues had questions on this. We have had discussions in this committee and indeed on the Finance Bill regarding research and development tax credit. It is coming to a point where we need to figure out this out. This tax credit is likely to cost a €1 billion at some stage. It was up to €708 million in 2015, and is likely to have increased in 2016 and 2017 again. A smaller number of companies are availing of it and we imagine that these companies are the larger multinational companies and not indigenous SMEs. How does one design something that is focused on making sure research and development is taking place, and that it is incentivised at local level?
Mr. Gerard Brady:
We have gone through a huge amount of work on this with our smaller members, in particular, but the big problem is even if they are doing qualifying research and development and could apply for the scheme, and get the money back, they are not applying for it because the administration is too burdensome for them. If a person is working six days a week running a company, he or she is not going to spend half of Sunday doing tax reports, and he or she cannot afford to pay the huge amount that accountants would demand to do it, so they do not bother. We have got lots of examples of that in smaller companies. Pro formatemplates could help. The UK has introduced this in recent years. It has online and offline pro forma templates that make it easy for SMEs to fill out what they need. Sometimes that means lower standards in terms of how much information they have to give to the Revenue Commissioners but that is the trade-off. They have to give less information in these templates. That means that they do not have to spend as much on administration and they will take it up, if that is the case. That has been the experience in the UK. It is just a time constraint; it does not work for them at the moment.
I am told by SMEs that they are doing research and development but not availing of the tax credit, although I have not discussed the complexity of it but it is not on their radar. Sometimes they do not see it as something for them. Are a significant proportion of indigenous SMEs missing out on research and development tax credits because of lack of awareness or that they are just busy trying to keep the company afloat, or is it the administrative burden?
Mr. Gerard Brady:
We have some survey data from 2014 which I can share with the committee. Off the top of my head I cannot remember but it was a somewhat significant number. The number one issue was the administration of the regime, the volume of information that they had to give, and how complex it was. The second issue was the audit period, which is four years. If they were doing research and development and claimed the credit but were audited and the money was taken off them, they could not take that risk because they do not have the money to pay back, or they might not be able to so do in a bad year.
Those are the two main reasons from the survey and I am happy to share the data with the committee on this.
I heard Mr. Danny McCoy's comments at the national economic dialogue. Mr. Brady is a contrarian in respect of the rainy day fund and so am I. He has argued that the investment should be made in a specific area of education and it is important to outline that. Has he concerns regarding the operation of the rainy day fund, even if the money does not go into education? the State will not be able to draw down from this fund unless there is an unforeseen event such as a natural disaster or an outbreak of disease. If the €500 million should be invested in education, which would I presume would support the SMEs and FDIs, does IBEC support the concept that €900 million of the available funding under the expenditure benchmark should not be utilised this year on capital or whatever other type of investment?
In that scenario the Minister would be left with about €800 million in uncommitted expenditure, while we are hearing that the health budget has overrun because of demand by €600 million which will be carried into next year's budget. Therefore there is little left for tax changes, not to mention dealing with other crises. What is IBEC's position on this?
Can Mr. O'Brien elaborate on those pressures? Every agency that has come before us has told us that while there is no overheating, there is a medium-term risk of overheating whereas the risk in respect of housing is high, with a high impact. Even if there was overheating, they also say the impact would be medium.
Mr. Fergal O'Brien:
It is very different from the kind of pressures that we have seen in the past. We are not seeing a credit bubble emerge that will infect the financial system like we witnessed a decade or more ago. It is a pressure around our competitiveness position. There is probably a significant lag in the data relating to the cost of doing business. The tightness in the labour market is something we are observing on a weekly basis in terms of the practical decisions that businesses now have to make their operations viable. Some businesses are reducing shifts, for example, while others are curtailing opening hours, because there is not the capacity in the economy on the supply side. We have a supply side problem which is leading to some overheating but it is very different from what we experienced ten or 15 years ago, but it leads us to the same place - competitiveness is being eroded quite rapidly. We should not have an expansionary budget. The main issue of difference is how we would take some of that money out of the economy, and not use the full budgetary space available. Instead of putting it into a rainy day fund that will bring complexity, as the Deputy rightly said, in terms of how it will be utilised - it should be invested in a specific ring-fenced purpose in the short term, that is, to address this crisis in higher education funding. We see that as impacting on Ireland's competitiveness at the moment, and our ability to attract labour and investment projects. The perceptions of those international university rankings become the reality. When our reputation is eroded, it will be hard to repair it.
We cannot wait another two or three years before we have a solution to the funding of higher education; we want that addressed immediately. We could buy something significant if we were to use the money that is being earmarked for the rainy day fund now for a ring-fenced fund for higher education. It would make a meaningful difference in the resourcing, staffing, quality and the ecosystem for indigenous business to engage with the Higher Education Research Centre.
I agree 100% with Mr. O'Brien on the issue of competitiveness. I have made a couple of points about housing, health, education. The international rankings are a wake-up call for us all. The best way to support SMEs and other businesses is a highly skilled, educated workforce, which we need to invest in. I speak to many of IBEC's members around the country who tell me the issue of competitiveness is real. We went through a period of austerity. There are very weary businesses out there. There is a big danger around competitiveness, wage inflation and all those issues. People need to survive in the real economy. They tell me about house prices and the cost of childcare. Is it not a catch-22 scenario? This year's budget has earmarked an additional €200 million for social housing. Rents will continue to go up. We are still not even catching up, never mind dealing with the lag that is there. Will that not put more pressure on businesses, and the wage demands that will come from workers? If they are operating in Dublin or its environs, or Cork or other areas, rents and house prices are going up, and wages need to match that. The cost of childcare is the second highest in Europe for couples and the highest for single parents. Is the way to deal with competitiveness within the sector to ensure we make that investment, especially in childcare, which can help to grow the labour force, to ensure businesses can survive in a scenario where we may be close to full employment?
Mr. Fergal O'Brien:
We are concerned to see a repeat of the wage-cost spiral that of 15 years ago that ultimately did not lead to an increase in people's living standards, and put us in a precarious position when the global crisis hit. Housing is the most significant challenge we have around the pressures coming through. As I said in my opening remarks, the cost and availability of properly serviced and zoned land with full infrastructure is the key issue in the affordability of housing in the future. We have a lot of land in this country that is not zoned in the right places with the right infrastructure for the development industry to deliver the housing we need. We published a housing report in recent weeks, in which we made a number of comprehensive recommendations about how we can address the housing affordability and supply issue, and we would be very happy to share it with the committee.
Mr. Gerard Brady:
We support a strong increase in social housing. Rebuilding Ireland is too reliant on rental and leasing, as well as on the approved housing body, AHB, sector which possibly will not be able to deliver, given the CSO reclassification. We should increase funding to direct-build social housing, rather than rent allowance or the housing assistance payment, HAP, scheme. It is far too skewed towards HAP rather than direct build. A step change is needed in that regard but it will be difficult to do. We support it.
Speaking to IBEC's members, I hear that the marginal tax rate is no longer the issue. When we were discussing the matter at the finance committee, the Government's argument for a reduction in taxes was that it would boost employment. We are now in a different scenario where there is almost full employment and there is a danger of overheating the economy. Mr. Brady made the point here that somebody on the average industrial wage, which the Taoiseach says is €44,000, should not pay the marginal tax rate. The cost of increasing that would be massive. The standard rate band would have to increase by €10,000 for a single earner, which would cost in the region of €2 billion. I am not sure if some of IBEC's members are asking Mr. Brady to say that. How important does he think that is at this time? That is one way of dealing with the high cost of housing, childcare and so on, but the other way is increasing capacity. How serious is that? I am hearing otherwise from IBEC's members, who say it is not the issue at this time.
Mr. Fergal O'Brien:
We still believe it is a significant issue. Last year was the first since the start of the recovery that there were fewer Irish people coming home to work than the previous year. There are a number reasons for that. Housing was probably number one. Other costs such as childcare are probably a part of it, but so is the marginal tax rate. People who are working in the UK, Australia, Canada, be it on €50,000, €60,000 or €70,000 tell us that if they come back to Ireland they will have less take-home pay. The point of entry to the marginal rate is a big disincentive to taking up a promotion or taking an extra hour of overtime, when one knows that 50 cent of each extra euro earned in overtime goes to Revenue. We may not be able to get to a marginal tax rate of €44,000 in one budget, but over a period of years average earners must be taken out of the top rate of tax. We put forward proposals that would be affordable in the context of the budgetary space available this year. Over time, it must be targeted at the income tax system. At the moment, our income tax system is unbalanced.
Mr. Fergal O'Brien:
Again, much of it comes to the capacity constraints that are in the labour market. A withdrawal of labour is probably happening. We mentioned some of the businesses which are not able to operate at full capacity in respect of opening hours or production shifts. Having an income tax system that will-----
Mr. Fergal O'Brien:
The feedback that we have about what is happening in the labour market suggests we are at a point of capacity pressure. The entry to the marginal tax rate is a factor on that marginal contribution of labour, whether it is overtime, a promotion or an extra shift, and that impacts on businesses' capacity at the moment. It also impacts significantly, however, on our ability to bring labour back into the country. There will be demand for between 80,000 and 100,000 construction workers to meet our housing and national development plan requirements over the coming years but we are struggling to bring people home. The marginal tax rate is part of that challenge. It is not the only factor, but it is part of it.
Mr. Gerard Brady:
It is a difficult question. It gets more difficult. If one talks to people in Dublin, one will see the recovery in tourism. If one talks to our members in much of the rest of the country, however, particularly in the north west where approximately 40% of the tourists come from the UK, and UK tourism has dropped by 7% year on year, one will see a very different story. VAT rates cannot be varied by region. The Greeks and the Austrians have some kind of opt-outs from the VAT directives but we do not. Our view is that it should be kept because of the significant Brexit threat to the regions, particularly for areas of the country that are non-traditional for tourism. The south west and Dublin are traditionally strong, but in the north west and midlands some 40% of tourists come from the UK, where tourism numbers are dropping off. On balance, it should be kept for that reason.
The witnesses were obviously aware of this, but the penny did not drop for me until Ms Patricia King appeared before the committee that all the industrial-scale fast food outlets have benefitted from this relief during the four or five years that it has been in place.
Mr. Gerard Brady:
Newspapers are covered by it as well.
It is part of the state aid implications. There is a technical reason connected with VAT that a certain number of sectors have to come under it. That is the reason for it and the one we have been given. Only about €150 million goes directly to hotels. Restaurants and everything else are included. One of the issues is that hotels have restaurants and bars which cannot be separated out because they are all part of the same complex. In some cases, they also have a hairdressers. It makes it very complicated to split the different sectors from each other. It is one of the reasons it affects more than hotels and that it has a broader reach.
I am very interested in this issue. Of the figure of €500 million, €300 million relates to hotel beds, while the other €200 million relates to the other sectors. Given the comments the delegates made on the regions which are very true and that there is no rationale for having a tax such as this in Dublin or many other urban areas, does IBEC support the introduction of a hotel bedroom tax, as operated in many European cities? It would have to be brought forward by local authorities as opposed to the State. It would be an additional tax to recoup some of the money.