Brian Lenihan Jnr (Dublin West, Fianna Fail)

I move: "That the Bill be now read a Second Time."

In the past number of weeks there have been some glimmers of hope that an end may be in sight to the deepest and most widespread recession that the world has experienced for over a half century. Given the turmoil we have seen in the global financial markets and the dramatic contraction in economic output world-wide, there is a natural caution and reticence about forecasts of recovery and there is considerable uncertainty about the sustainability and strength of that recovery at this stage. At present, global economic output is continuing to contract and it is accompanied by falling world trade. According to the IMF, the advanced global economies - which constitute Ireland's major trading partners - are predicted to contract by 3.75% this year, which will weigh upon our export performance. The depreciation of sterling has been unhelpful for our indigenous exporters.

However, policymakers around the world have responded to the financial crisis with marked determination. There are signs now that these efforts are beginning to bear fruit. In the past week, the world's leading central bankers have noted improvements in business and consumer sentiment while some important indicators in key economies have shown tentative signs of stabilisation. When it emerges, the recovery will, in all likelihood, be slower in Europe than in the US. Nevertheless, these tentative signs of stability underscore the importance for this country of continuing to pursue the policy path set by the Government to guide the economy and position it to benefit from a global recovery.

GNP is projected to contract by 8% this year. A more moderate decline is expected in 2010, but as the international recovery gains momentum and the sharp shock in residential housing output passes through, our economic growth rate is expected to turn positive by 2011. Though the challenges are great, we should not forget that our economy has many strengths on which to build a recovery. Our labour force continues to be highly skilled and flexible. We are continuing to invest in education at all levels in order to ensure we have the skills demanded by our knowledge-intensive economy. The Government remains committed to providing a pro-enterprise environment and to maintaining our relatively low tax burden on business. We are ensuring capital spending remains at a high level by international standards. This will allow us to maintain our investment in productive infrastructure which will help enhance our competitiveness.

Our economy also remains flexible and resilient. Labour costs are falling in both the public and private sectors. This adjustment is painful and I do not for one minute underestimate the difficulties it is causing workers and their families. However our capacity to make these adjustments in labour costs and work practices is critical to our recovery. The sacrifices we make now will reap large economic gains in the near future. Our agility in responding to this most difficult of economic crises has been acknowledged by Mr. Jean-Claude Juncker, the head of the eurozone Finance Ministers. Just two weeks ago, Mr. Juncker said Ireland is "making some very brave efforts and we very much welcome the feeling of national consensus that we detect in Ireland and we take our hats off and pay tribute to the Irish people in rising to the challenge and bearing the sacrifices that the Government is asking them to make".

Both Mr. Juncker and Commissioner Joaquín Almunia endorsed our recent supplementary budget as the correct approach to our economic and fiscal difficulties. The purpose of the supplementary budget was to restore order and stability in the public finances so that we can protect existing jobs and generate the essential economic confidence that will lead to further employment creation and a return to prosperity.

This Finance Bill, in giving effect to the supplementary budget measures, addresses the two important requirements of showing a credible way forward on our structural problems while protecting our economy. Our approach must be rooted in a determination to put the economy on the road to renewal. We must demonstrate that we have the ability to make the right choices for everyone in this country, choices that will not only determine our immediate economic future but also our long-term future.

We must never lose sight of the principle that economic and fiscal renewal cannot be achieved at the expense of fairness. It is essential that each of us contributes according to our means. Tax increases are required. They are not palatable, nor are they easy to accept, but the measures detailed in this Bill are progressive and fair.

I note the comments of the ESRI in its recent quarterly review about the redistributive impact of the budgetary measures we have taken since my appointment as Minister for Finance. The institute's study shows that those on the lowest income levels fare best from the combined effects of the October and April budgets. The Government will continue to protect the vulnerable in this difficult period but in doing so it must be borne in mind that we all have a responsibility to accept a proportionate share of the burden of adjustment needed in this economy.

If we are to address the fiscal challenge we face it will be necessary to significantly broaden our tax base. To advance this I announced in my supplementary budget speech that I was terminating property-related accelerated capital allowance tax relief schemes in the health sector to help broaden the tax base. As Deputies are aware, all such schemes are now being terminated with the exception of the specialist palliative care units and child care facilities.

This Bill sets out the transitional arrangements for the pipeline projects affected by the termination of property-related capital allowance schemes announced in the budget. The schemes being terminated cover private hospitals, nursing homes including associated residential units, convalescent homes and mental health hospitals. The estimated annual saving from the termination of these schemes is approximately €60 million in a full year.

I am satisfied that the transitional arrangements strike a balance between the requirement for the Minister for Finance to terminate remaining property-related capital allowance tax reliefs and a recognition that the schemes cover large-scale projects which have a long lead-in period involving design and planning work which can be expensive. The Bill also gives effect to the budget day announcement of the abolition of the special 20% tax rate applicable to trading profits from dealing in or developing residential land. The income will now be charged at the individual's marginal income tax rate or at the 25% rate of corporation tax. There will also be a restriction on the relief of trading losses incurred from dealing in or developing residential development land. The proposals relating to dealing in or developing residential land represent another significant step by the Government in ensuring everyone makes a contribution toward raising additional revenue and broadening the tax base in our efforts to address the difficulties we are experiencing in the public finances.

It is important, notwithstanding our straitened circumstances, that we continue to support enterprise. I made the point in my budget speech that, despite the recent increases, our tax system remains competitive and pro-enterprise in character. Accordingly, I renewed the Government's commitment to our 12.5% corporate tax regime. This is essential to economic renewal. We cannot stand still. I undertook in the supplementary budget to introduce a scheme of tax relief for the acquisition of intangible assets as a means of supporting the smart economy. This measure will help maintain employment in our existing industrial base and will help attract sustainable high quality jobs in the future into the economy.

The budget also sought to support the hard-pressed motor industry. However, since the supplementary budget, further discussions have taken place with the motor industry. While the Society of the Irish Motor Industry, SIMI, was appreciative of the Government's efforts to try to assist the industry, it considered, in view especially of the difficult financing situation facing the industry, that on balance it would not be in its overall best interest for the VAT margin scheme to be introduced at this time. There will be further dialogue with SIMI, especially in regard to dealing with the large stock of second-hand cars held by dealers.

The Bill before the House runs to 28 sections and is structured by tax headings. I will outline some of the main provisions, in the time available to me. Section 2 makes provision for the doubling of income levy rates and reducing of the rate thresholds from 1 May 2009, as announced in the supplementary budget. A rate of 2% will apply on income up to €75,036, 4% on the balance up to €174,980 and 6% on any income above that amount. The exemption threshold is also reduced from €18,304 to €15,028. Those with an entitlement to the medical card remain exempt from the income levy. For those over 65 years, the exemption remains at €20,000 for single individuals and €40,000 for married couples. Social welfare and similar type payments also remain exempt from the levy. The income levy is a progressive measure, with those most able to pay paying the most. The most vulnerable are protected by exemptions.

The composite rate provision, applying to 2009, included in this section is intended as an anti-avoidance measure which prevents individuals who can control their income from front-loading their yearly income to avoid the higher rates. This section also clarifies that redundancy payments made in the first four months of the year will only be subject to the income levy rates in force during this period.

Sections 3 and 4 make provision for the supplementary budget announcement that from 1 May, mortgage interest relief will be limited to the first seven years for qualifying home loans. This measure focuses resources on those most in need and provides a saving to the Exchequer. The relief remains available to first-time buyers and those taking out a new qualifying loan for the purposes of trading up or improving their principal private residence.

Section 5 gives effect to the budget announcement whereby the level of tax relief investors can claim on the interest for mortgages and loans on residential rental properties is reduced to 75% of the interest accrued from 7 April 2009. I am introducing this measure at a time when mortgage interest rates are at historical lows and the repayment burden on investors has been reduced significantly. The interest component of repayments is now less than 50% of the levels that obtained as recently as two years ago. I am aware that rents are falling after a number of years of strong growth. This fact was taken into consideration when I framed the supplementary budget and decided to reduce rather than abolish this relief. Ordinary workers on relatively modest incomes are being asked to make additional contributions to help with the recovery in the public finances, and it is fair and equitable and ensures that residential investors contribute a proportionate share of the burden of adjustment needed in this economy.

Section 6 abolishes the 20% incentive rate of tax for income arising from dealing in residential development land with effect from the 2009 tax year. Such income will be taxed under normal income tax rules. The incentive rate is being abolished in recognition of the fact that the relief has served its stated purpose of releasing development land. The measure also introduces new arrangements for dealing with losses which ensures that where profits were taxed at 20%, losses cannot be relieved at 41%. Any such loss will now be converted into a tax credit valued at 20% of the loss and can be offset sideways against income tax which would otherwise be payable on the person's other income.

Section 7 extends the period during which applications for certification can be made to the mid-Shannon tourism infrastructure scheme board from one year to two years so that the latest date for the submission of applications is 31May 2010. Second, to cater for any projects that may avail of the new date for the submission of applications for approval, the period within which expenditure must be incurred for capital allowances is being extended from 31 May 2011 and will now end on 31 May 2013. It is my understanding that a number of significant projects are in the pipeline which have not yet been submitted formally to the board for approval. A feature of the projects identified is that they are nearly all being promoted by experienced tourism operators who have the capacity to create sustainable businesses with a clear customer focus, rather than being solely driven by investors. If the existing deadline for submission of projects to the board for certification is retained, none of these projects will be able to proceed.

Section 8 amends sections 268 and 316 of the Taxes Consolidation Act 1997 in respect of expenditure incurred on the construction or refurbishment of certain health-related facilities in order to provide for the termination of these capital allowances schemes and for transitional measures for pipeline projects. The facilities covered by this section are registered nursing homes, convalescent homes, qualifying hospitals and mental health centres.

The amendments to section 268 provide that certain schemes that were previously open-ended with regard to incurring qualifying expenditure for capital allowances purposes now have a termination date of 31 December 2009, unless certain qualifying criteria are met. The amendment to section 316 ensures that in respect of these types of facilities, the normal rule about capital expenditure being incurred when it is payable is disregarded and, instead, expenditure is treated as incurred when it is properly attributable to construction or refurbishment work that has actually been carried out.

Section 9 increases the rate of tax that applies to interest on deposit accounts and income from certain other savings products. The normal rate of tax is increased from 23% to 25% with effect from 8 April. For more long-term savings products, the rate of tax which applies is increased from 26% to 28%, also with effect from 8 April. Although the rates are increased by 2%, it remains the case that this income is not subject to the income levy.

Section 10 increases by two percentage points the rate of exit tax on life assurance policies and other investment funds, with effect from 8 April. Products previously taxable at 23% are now taxed at 25%, and those previously taxed at 26% are now taxed at 28%. As an anti-avoidance measure, where the investment is held in a personal portfolio investment undertaking or a personal portfolio life policy, the tax rate that applies with effect from 8 April is the standard rate plus an additional 28 percentage points. Likewise, where such a payment is made in respect of a foreign life policy or an offshore fund and is not correctly included in the investor's tax return, the rate of tax that applies with effect from 8 April is at the investor's marginal rate plus an additional 25 percentage points.

Section 11, in tandem with arrangements made in section 6, abolishes the effective 20% rate applied to trading profits from dealing in residential development land with effect from l January 2009. An accounting period that straddles that date is treated for this purpose as two accounting periods. Profits or gains on dealing in residential development land will now be charged at the general rate of corporation tax that applies to dealing in land, which is 25%.

Section 11 also introduces the new section 644C to the Taxes Consolidation Act 1997. This section restricts the allowance of losses on residential land incurred before 1 January 2009 and carried forward to accounting periods beginning on or after that date to allowance on a value basis. This is to ensure that the effect of the tax treatment of trading losses is commensurate with the effect of the increase in the tax rate on trading income from 20% to 25%.

Section 12 is a technical amendment to ensure that, where an Irish resident company makes a gain on the disposal of shares deriving their value from exploration or exploitation rights, the gain will not be exempt from tax under what is known as the "participation exemption". By closing off a potential loophole, this measure means that such shares are treated the same as shares deriving their value from land or minerals in the State.

Section 13 provides for a new scheme of tax relief for capital expenditure incurred by companies on intangible assets, as announced in the supplementary budget. A new section 291A is being included in part 9, chapter 2, of the Taxes Consolidation Act 1997 for this purpose. The scheme provides for capital allowances against taxable income on capital expenditure incurred by companies on the provision of intangible assets for the purposes of a trade. The scheme applies to intangible assets which are recognised as such under generally accepted accounting practice and which are included in the specified categories listed in the new section.

Allowances provided under the scheme will reflect the standard accounting treatment of intangible assets and will be based on the amount charged to the profit and loss account of the company for the accounting period in respect of the amortisation or depreciation of the specified intangible asset. However, companies can opt instead for a fixed write-down period of 15 years at a rate of 7% per annum and 2% in the final year. The allowances currently available for capital expenditure on the provision of computer software under section 291 of the Taxes Consolidation Act are being retained and the new scheme does not therefore apply to computer software. As patent rights and know-how are being included in the new scheme, the existing reliefs for capital expenditure on patent rights and know-how are being discontinued for companies, but with provision for companies to opt for these reliefs for a further two-year period. The new scheme applies to expenditure incurred by a company after 7 May 2009.

Section 14 increases the rate of capital gains tax from 22% to 25%. This change applies with effect from 8 April 2009. Sections 15 and 16 confirm the supplementary budget increases as follows: in mineral oil tax of 5 cent per litre, inclusive of VAT on auto-diesel; and in excise duty of 25 cent on a packet of 20 cigarettes, inclusive of VAT, with a pro rata increase on other tobacco products.

Section 17 provides the necessary legislative change for my decision, announced on 25 February, to exempt small peripheral airports from the air travel tax. It amends the definition of "airport" used for the air travel tax to exclude from the scope of the tax airports from which fewer than 50,000 persons departed on aircraft in the previous calendar year.

With regard to section 18, the Finance (No. 2) Act 2008 introduced an unjust enrichment provision in respect of VRT to limit the repayment of VRT claims by dealers, primarily to the amount that a dealer would pass on to the first registered owner of a vehicle who, in effect, would have paid the VRT. This section amends the formula that is used for the calculation of a repayment of VRT on a pro rata basis, where the first registered owner of a vehicle which is eligible for the repayment of VRT has disposed of the vehicle prior to the date of repayment. It is a technical amendment.

Section 19 is an interpretation section for the stamp duty provisions of the Bill. Section 20 provides for a new exchange of houses scheme, under which a person selling a new residential property can take a second-hand residence in exchange or part-exchange and will not have to pay the stamp duty on the second-hand property until he or she either sells on the second-hand property or, in any event, by 31 December 2010, when the scheme ends. The purpose of the scheme is to give impetus to the residential property market by freeing up the overhang of completed but unsold new property, with consequential impact on employment.

Section 21 is a technical follow-up from section 13 which deals with intangible assets. The definition of intellectual property has been amended in the Stamp Duties Consolidation Act 1999 to align it broadly with a similar definition being inserted into the Taxes Consolidation Act 1997 by section 13 of this Finance Bill. It should be noted that this change applies to instruments executed after 7 May 2009.

Section 22 provides for an increase from 2% to 3% in the existing levy on non-life insurance products. The non-life insurance levy does not apply to voluntary health insurance, re-insurance, marine, aviation and transport insurance, export credit insurance and certain dental contracts. The section also provides for a new 1% levy on life insurance premiums.

Section 23 provides for an increase in the rate of capital acquisitions tax from 22% to 25%, and for a reduction by approximately 20% in the thresholds below which a gift or inheritance can be taken free of tax. Although this is the first time that the CAT tax-free thresholds have been reduced, I consider this reduction is justified in light of recent economic conditions. The tax-free thresholds remain generous. They now stand at €424,000 for gifts and inheritances from parents to children, €42,400 for gifts and inheritances between siblings, from aunts and uncles to nieces and nephews, from grandparents to grandchildren, and €21,700 for gifts and inheritances not subject between individuals not covered by the first two categories. The changes to the rate of capital acquisitions tax and to the tax-free thresholds both apply from 8 April 2009.

The rates of deposit interest retention tax, capital gains tax and capital acquisitions tax are all now 25%. This is part of the Government's base broadening measures and ensuring that all forms of income contribute to the fiscal correction. The increases in the taxation of capital and savings will ease the taxes which would otherwise have to be imposed on labour and consumption.

Section 24 is an interpretation section. Section 25 reduces the statutory rate of interest applied by Revenue to delayed payments of taxation and to underpayments by taxpayers engaged in business activities. The current daily rates will be reduced by approximately 20%, giving respective annualised equivalents of some 8% and 10%, from 1 July 2009.

Section 26 covers miscellaneous technical amendments in relation to tax. These proposed amendments to the Taxes Consolidation Act 1997, the Stamp Duty Consolidation Act 1999 and the Finance Act (No.2) 2008 correct some minor drafting changes and cross references which were overlooked during the drafting of the original legislation.

There is still a small number of matters under consideration that I may bring forward on Committee Stage. I will, of course, also give consideration to any constructive suggestions put forward during our debate today and tomorrow.

See this speech in context