Brian Lenihan Jnr (Dublin West, Fianna Fail)

Public service pensions have until now been unaffected by the pay reductions. The grace period, under which previous salary levels are to be used to calculate pension entitlements, was due to expire by the end of 2011. This is being extended by two months to prevent a build up of public service retirements in 2011 and to spread the extra pension lump sum costs over a more manageable period in both 2011 and 2012. However, I want to make clear that public servants or officeholders retiring during the grace period will be subject to the pension reduction I am introducing today. Legislation to provide for this reduction will be brought before the Oireachtas later this week. Further details are provided in the summary of budget measures.

Reducing the income of pensioners is an exceptional measure, but these are exceptional times. The Government has to make savings, and pensions costs are a very significant part of public expenditure. Failure to reduce the cost of pension provision could undermine the longer-term viability of the public service pension system. Furthermore, it would be unfair if highly paid pensioners remained unaffected while serving staff on low pay have had their pay reduced.

A new single pension scheme for new entrants, which I announced in last year's budget, will come into effect in 2011. This will bring future public service pensions more in line with private sector provision. Pensions will be based on career average earnings rather than final salary, the pension age will be increased and post-retirement increases will be linked to retail price inflation rather than to pay. This new scheme is a crucial part of the longer-term reform required to put the public finances on a sound basis. The legislation will be published very shortly to ensure that the new scheme can be put into operation for new entrants in 2011.

A Cheann Comhairle, the primary purpose of the tax system is to provide the resources to pay for the services the public expect from the State. Our tax system no longer fulfils that purpose well. The line of least resistance would be to increase the rates, but revenue is generated by economic activity and not by increased tax rates. High tax rates on a narrow base of economic activity may raise far less revenue than lower rates on a much wider base. We cannot have a tax system that damages our potential to grow. That is why the Government has decided in the national recovery plan that two thirds of the required budgetary adjustment over the period from 2011 to 2014 should be through expenditure reductions and one third should be raised by taxation.

Our income tax system, as it stands today, is no longer fit for purpose. At one level, too few income earners pay any income tax. This year, just 8%, earning €75,000 or more, will pay 60% of all income tax while almost 80%, earning €50,000 or less will contribute just 17%. At another level, too many high earners have opportunities to shelter their income from tax. Both of these structural defects must be addressed. Our system is also unduly complex. With four separate charges on income, each rational in its own terms, it contains too many distortions, steps, and discontinuities. Our goal must be to create a system that is rational, sustainable and fair, and that delivers the resources needed for essential public services.

Such a system cannot be created in one budget, but today we take a major step forward in the reform process. In this budget, we will

abolish the income levy and the health levy;

replace both with a single universal social charge, governed by one set of rules on a broad base;

remove the employee PRSI contribution ceiling;

increase the PRSI rate for the self-employed, higher earning public servants and officeholders;

reduce the value of bands and credits by 10% in line with overall reductions in incomes;

tackle excessive reliefs associated with private pension provision;

abolish or restrict many tax reliefs that higher earners use to shelter income unfairly, and

target the remaining reliefs more clearly on employment growth.

By broadening the base at both ends of the income spectrum, the nominal rates of tax can be kept lower while the effective rate can be raised in a way that is fair to all. In the measures I am presenting today, those on the new reduced minimum wage will not be brought into the tax net. The top marginal tax rate will be kept at 52% for all taxpayers.

As I said in the 2010 budget, the universal social charge requires that everyone makes some contribution, however small, to the provision of services. This charge is separate from income tax which is levied proportionately as income increases. The universal social charge does not apply to welfare payments.

The changes made today generally either maintain or enhance the incentive to work relative to social welfare. For a married couple with no children earning €25,000, their net income will fall by 2.8%, or €12 per week. For a similar family with two children, net income will fall by just 1%, or €5 a week. We must always ensure an appropriate balance between the rewards from work and income support from welfare. I believe that in these most difficult of circumstances we have struck the right balance in today's budget.

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