Brian Lenihan Jnr (Dublin West, Fianna Fail)

Pre-primary education significantly enhances the subsequent educational achievement of students and in turn increases the return for State investment in education. The free pre-school year will start next January. The existing rate of early child care supplement will be halved with effect from 1 May and abolished at the end of 2009. More details are set out in the summary of budget measures. This is an example of how a programme can be reshaped and made more effective at a lower cost to the taxpayer. We need to see more such initiatives in the public sector.

The other elements of spending reductions are set out in the summary of budget measures. These reductions affect a broad range of Vote headings in order to spread the burden of adjustment as fairly as possible.

Capital Spending

The Government is determined to maintain high levels of public investment. However, spending cannot be maintained at the levels envisaged when the economy was in rapid expansion. We must progress projects that maximise economic and social returns. The Government has decided to set a total capital allocation at €7.3 billion for 2009, which is greater than 5% of projected GNP. The Government has also fixed the overall Exchequer capital allocation for public investment for the next four years at €6.6 billion in 2010, €5.5 billion in 2011 and €6 billion in 2012 and 2013. This represents an average of 4% of projected GNP over the period out to 2013.

Significant reductions in tender prices mean that we will be able to deliver a very large part of the national development plan programme within the envisaged timescale. The Government has already re-allocated money to more labour-intensive areas and will be putting in place further measures to prioritise the more productive and more labour-intensive elements of capital investment. Details of the revised capital envelope are set out in the summary of budget measures.

There is scope to access significant private funds for infrastructure projects in order to sustain as many construction jobs and as much activity as possible. Discussions are in train with the pension industry about an initiative that seeks, on a value for money basis, to unlock additional private capital to complement debt financing provided by banks and the capital markets. This would support existing PPP projects and other projects previously funded by the Exchequer.

We need to explore all options to fund our infrastructure needs, including the disposal of assets, sale and lease back arrangements, franchising arrangements and the proposal from the Irish Congress of Trade Unions, ICTU, for a national recovery bond. My officials have been asked to examine these options with the relevant Departments and agencies.

The total reduction in gross spending for 2009 comes to €886 million in current spending and €576 million on the capital side. This is equal to €1.8 billion in a full year. Further savings of €4.8 billion will be required over the period from 2010 to 2011.

TAXATION

We need to broaden our tax base so that everyone makes a contribution. We will remove unjustified reliefs and we will ensure that capital is taxed in a fair manner. We will retain our 12.5% corporation tax rate as a key aspect of our inward investment strategy.

A key structural weakness of the Irish taxation system is the narrow base. Too many people do not pay tax at all and there are too many ways in which those who have wealth could shelter their income. Many of these reliefs were abolished in 2006 by my predecessor, the Taoiseach. Today I will continue this process by reducing those tax expenditures that can have an impact this year.

I propose to reduce the level of tax relief investors can claim on the interest for mortgages and loans on residential rental properties to 75% of the interest with immediate effect. I propose to abolish the current 20% rate applied to the trading profits from residential development land and restrict the treatment of trading losses. The profits will be charged at the relevant marginal rates of income tax or at the 25% rate of corporation tax.

I will terminate the property-related accelerated capital allowance schemes in the health sector. This scheme covers private hospitals, registered nursing homes, convalescent homes and associated residential units as well as mental health centres. Schemes for palliative care units and child care facilities will remain in place.

The Government has decided that from 1 May, mortgage interest relief for principal private residences should only be available for the first seven tax years of the mortgage. I believe this move is justified given the significant recent reduction in interest rates and in house prices. The relief will now be targeted at those who bought their homes when prices were at their peak. It will also support those who now wish to move, improve or buy for the first time. As house prices fall, the provision of mortgage interest relief will be kept under review with a view to eventual abolition. In this regard, I look forward to the recommendations of the Commission on Taxation, which I will receive later this year. I would like to thank the commission for its work to date.

At this stage of the annual tax year it is not possible, for technical reasons, to restrict or abolish further reliefs. It is the intention of the Government to continue to remove reliefs and shelters from the tax system in successive budgets.

Capital Taxes and Savings

It is important that we treat all sources of income in a similar manner. I am increasing the rates of capital gains tax and capital acquisitions tax, CAT, to 25% with immediate effect. In light of declining asset values, I am reducing the CAT thresholds by 20%. The details are contained in the summary of budget measures.

I am increasing the deposit interest retention tax, DIRT, rate on ordinary deposit accounts to 25% and to 28% on certain other savings products. The existing 2% levy on non-life insurance premiums will increase to 3% and I am also introducing a new levy of 1% on life assurance policies.

Income Tax

In good times, it was possible for us to keep minimum wage earners outside the tax system. This is no longer sustainable. With up to 40% of income earners paying no income tax at all, we can no longer meet our fiscal needs. The challenge is to spread the burden in a fair manner to a wider range of income earners while avoiding economic disincentives. The scope for income tax changes half way through the income tax year is limited. To raise the necessary revenues, the Government must use the various levies and charges already established in the tax code. Accordingly, the Government has decided to double the rates of the income levy and to reduce the entry points for each rate. The new rates will be 2%, 4% and 6%. The new entry points will be €15,028, €75,036 and €174,980 per annum, with the weekly equivalents being €289, €1,443 and €3,365 respectively. Health rates will also double to 4% and 5% and the entry point for the higher rate will be reduced to €1,443 per week which is €75,036 per annum. Finally, the PRSI ceiling will be raised to €1,443 per week or €75,036 per annum.

These measures will reduce all our living standards. I am acutely aware of that. The Government has taken care to ensure they are fair, equitable and highly progressive. I would point out that, notwithstanding all the increases made today, Ireland will continue to have one of the lowest tax wedges within the OECD.

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