Michael McDowell (Dublin South East, Progressive Democrats)

An interesting piece of archival material, Ray MacSharry's budget speech of early 1987, was played on the radio yesterday morning. I recall the occasion vividly as it was the first year I was elected to this House. In what was effectively my first contribution, it fell to me to reply to that speech. Then an Opposition Member, I remember being in the odd position of having to agree that what he was saying about the national finances was fundamentally correct. He said the time had come for Ministers for Finance to say "no" and make the requisite changes in how Ireland was being run.

I reflected on that speech and the different circumstances which now obtain in modern Ireland. I wondered how many people listening to that radio broadcast thought it sounded like something from the 1940s or 1950s. We are grateful that our young people have never seen a recession or slump. That generation did not see the circumstances that forced the State to embark on a new course which brought us to yesterday's budget.

The transformation has been far-reaching and total. In the 1980s the country suffered from mass unemployment, mass emigration, colossal taxation, little enterprise, and State domination of virtually every industry of note; there were State-run insurance companies, banks, shipping lines, energy and telecommunications companies. We have come to a different position now.

In overall terms, the dominant political outlook in Ireland has changed to one liberating the talents and innate capacity of the people to deliver. For the first time since the State was established, we have reached a point where the talents and capacities of the people can be freely expressed. The people are free to achieve what the men and women who founded the State could only have dreamed of. They would have dreamed that the State could be successful and thrive economically, that it could provide an example to other states and be populated by people with a sense of self-confidence, an abhorrence of failure and an impatience to do better.

All this has come to pass for a variety of reasons, starting with Ray MacSharry's speech. He said that the previous Administration's incapacity to deal with the fundamental macro-economic problem had to come to an end that afternoon. We began to examine the major obstacles that stood in the way of unleashing the people's potential. One of those was the question of how we taxed enterprise and work. Until then, it was done in such a way that it effectively drove work out of the economy and drove risk-taking underground. It drove the brightest and best youngsters out of our society.

It is difficult for some people to now realise that the first taxable pound of earnings was then taxed at 35% plus 7.5% PRSI. That meant that 42.5p was taken from the most modest pound paid to the least well off workers. By the time a single worker earned the average industrial wage, he or she was paying 50%-60% of their marginal earnings to the Exchequer. These are figures which some people have ceased to remember. However, those are the circumstances which Ray MacSharry was dealing with in 1987.

Even though the battle is long over, the ideological argument that tax rates and the structure of our tax system does not matter still lingers. Whether one takes a small fraction or a large fraction of a worker's earnings certainly matters. When Fianna Fáil and the Progressive Democrats came to power in 1997, a single worker on the average industrial wage paid 27% of earnings in taxes and social insurance. That has now been reduced to less than 15%. It was interesting to look at the graphs in the budget booklet. They demonstrated that while the tax burden has gone down since 1997, the number of people working here has increased hugely. Charlie McCreevy's famous decision to cut capital gains tax from 40% to 20% was described, by someone no longer a Member of this House, as a fiscal obscenity. However, the decision increased the number of taxable capital gains transactions so much that the Exchequer earned more than five times as much tax at the 20% rate that it had at the 40% rate.

Tax rates are important because they determine people's attitude to further work, such as whether it is worthwhile doing overtime, seeking promotion, making an investment or taking a risk. These things are determined as much by rates as by the overall tax burden. This is why it is important we never lose track of what has succeeded for Ireland. It is why we should never give up on the fundamentals — the sound economics Ray MacSharry stood for and a pro-enterprise and pro-work system of taxation.

It was a remarkable state of affairs yesterday that when Deputy Cowen stood up, he had a budget surplus of 1.2%. It represented a great achievement in a relatively short period. In the same budget, the Minister provided for growth of 11.5% in current expenditure and 13% in capital expenditure, while 5% of our gross national product is each year committed to infrastructural projects.

While all the above took place, the House was also presented with what Fr. Seán Healy welcomed on radio today as an historic breakthrough. That breakthrough is a welfare package which means that the fruits of the prosperity, sound economics and good government have brought to Ireland will be provided, as the Constitution requires, to those who need it most. While Members sometimes fail to look up the rule book, Article 45 of the Constitution sets out the duty of the State to look after those who are less well off. While it is a matter for the Oireachtas rather than the courts to ensure, the duty of the State is to ensure that private enterprise is favoured but does not abuse its position and that every man and woman has the right to a livelihood to sustain a decent standard of life. The Constitution is clear which is why I am strongly of the view that pro-employment social, taxation and economic policies are the keys to a prosperous and decent society. There is no unleashing of the potential of individuals if they are denied access to employment and a meaningful role in the economic life of the State.

There are many things we must do now. The mere fact that we have arrived at the current stage of economic success where a significant surplus can be run, social welfare package put before the House and tax reform put in place, does not mean we can rest on our laurels and suggest we will plateau on the broad, sunlit uplands of economic success where nothing further needs to be done. We live in a competitive, globalised economy in which there is a great deal for Ireland to do. Ireland must make up its significant infrastructural deficit. Over decades of economic failure, we fell behind many member states of the European Union in our transport infrastructure, broadband, etc. Now is the time for us to catch up.

As has been pointed out by commentators, now is the time to ensure the record levels of resources available to the State are employed on a value-for-money basis for a decent return. Achieving this goal will require a different approach to administration. We must improve the ways we manage and control expenditure to ensure that projects come in on time. While it has become a byword to say that everything is too late and expensive, we must remember that of the last 20 major transport infrastructural projects, 19 came in on time and within budget. During the week we saw that west of Kinnegad a significant motorway will open well ahead of schedule and within budget. If we get our act together in managing our expenditure, we can achieve many things.

The Government committed in 2002 to a number of targets, one of which was to ensure that the minimum wage, which was established in the lifetime of the previous Government, would be completely free from taxation. As a result of yesterday's budget, almost 38% of Irish earners have been removed from the tax net altogether. The Government also said it would ensure that 80% of people paying tax would pay at the standard rate while only 20% would pay at the top rate. While there has been controversy about the matter, I do not wish to get involved in a highly theoretical argument. I listened to George Lee on the radio today and understood that it is being said that we have not achieved our target and should give up saying we have because of the difference in approach between tax allowances and tax credits. If someone is liable for tax at the higher rate but the liability is extinguished by a tax credit, he or she is not paying tax at the higher rate. If we had stayed with the system of allowances, which was unfair, the fact would be abundantly clear. However, because the tax credit system operates on a slightly different mathematical formula, it is contended that someone who would, but for his or her tax credits, pay at the higher rate is a higher-rate taxpayer. I do not accept that for one minute.

To determine who is liable for tax at the higher rate, one must take into account tax credits to the same extent as one takes into account tax allowances. The Government's commitment, therefore, has been delivered in full. Some of my colleagues have referred to an "effective rate of tax". The danger of such references is that people take it to mean an "average rate of tax" which is not what is at issue in this context. At issue is whether people are liable for a higher rate of tax on the basis of tax credits when they would not be so liable under the equivalent system of tax allowances. The Government has delivered in that area.

We agreed at the outset of the Government's term of office that if economic circumstances permitted, we would reduce the 42% income tax rate to 40%. As the Minister, Deputy Cowen, indicated yesterday, we intend to make half the reduction in the current budget and to complete the process in the next if we are favoured with re-election by the Irish people. While it would have been possible, given the surplus at Deputy Cowen's disposal, to make the full reduction in one year, it would not have been prudent. Given the substantial tax reliefs granted by the widening of the bands, the removal of minimum wage earners from the tax system and the social welfare packages put in place, a full reduction of the higher rate could well have endangered the stability of the economy and ignited inflation. It is prudent and reasonable to implement the measure in two stages. I make no bones about my gladness that it is being done that way.

When the dust settles at the end of the budget debate, the real issues will be whether Ireland's prosperity has been guaranteed and the State has put in place a system of taxes, welfare and support which makes Ireland a fairer, more decent, hardworking and successful society. Having listened to reaction from outside rather than within the House, where I expect adversarial responses, it is clear that yesterday's budget was, by any standard, a spectacular success. I pay tribute to Deputy Cowen for the amazing achievements over which he has presided as Minister for Finance. I acknowledge his prudence, concern for the less well off and capacity to deliver and sustain a positive future for the younger generation of Irish people.

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