Willie O'Dea (Limerick City, Fianna Fail)

I have spoken on many finance Bills down through the years but this is possibly the shortest, physically, on which I have spoken, which reflects the fact that it is a pretty small initiative. Nevertheless, I wish it well.

On the day the jobs initiative was announced I welcomed the move by the Minister for Finance on research and development tax credits, a reform long overdue. I reiterate that welcome. There is tremendous tax competition to attract investment in intellectual property, research and development and so on. By and large, we have done well as a country in attracting that type of investment, as the figures for the past five years will show. Unless we keep up with our competitors we risk falling behind. While I welcome what the Minister has done I am bound to mention a number of pressing issues, including that of the base year. Research and development tax credit is claimed by reference to the increase in expenditure on research and development over the base year 2003. This has created problems for a number of firms who invested fairly substantially in 2003. On the outsourcing cap, one is allowed to outsource 5% of one's expenditure on research and development. That is too small. I made representations on the matter to Deputy Lenihan when he was Minister for Finance which, I regret to say, were unsuccessful. However, the case is no less valid now.

The difficulty that arises is not the quality but the amount of research done outside business by research and third level institutes. The amount in this regard far exceeds what is done in-house, as people in the business will testify. Also, an increase in the cap from 5% to 25%, as recommended by some experts, would encourage further links between industry and the research and third level institutes. Many Government policies scattered throughout the programme for Government are designed to encourage such links. Retaining the cap at 5% flies in the face of what the Government is attempting to do to encouraging linkage, with which I agree. The programme for Government also includes the specific commitment that companies with research and development expenditure of under €100,000 would be allowed tax credits for the entire expenditure rather than tax credits by reference to the base year. I sincerely hope the Minister for Finance will be able to incorporate these urgently required changes in the next budget.

On value added tax, on the surface it would appear it is a good idea in principle to target VAT relief at a particular sector. This is better than the initial approach suggested in the programme for Government, namely, a 1% cut across the board for all activities covered by the 13.5% rate. Nevertheless, the question that arises is whether the VAT rate reduction will be passed on. The evidence in this regard is, to say the least, a little sketchy. I recall the former UK Government, to stimulate the economy and create employment, introduced fairly substantial cuts in value added tax but because the concomitant benefits were not realised the public finances ended up in an even worse mess, resulting in the cuts having to be reversed. The Government has said in a number of statements that it intends to review the situation at the end of this year to ascertain if the reductions have been passed on. If not, the relief may be withdrawn. I regret that I do not find that credible. If the Government were serious about this it would introduce the reduced rate for the balance of this year and indicate its preparedness to continue it in the next and following budget provided the benefits were being passed on. If the benefits of this reduction are not passed on, all we will have is a raid-pilfering of private pension funds to enrich restaurateurs, hoteliers, fast food outlets and various others who have benefited from the reduction.

Despite that many services are covered by the reduction, many others are not, including services directly related to the tourist industry, which I accept is a job rich industry and it is right for us to focus on it. For example, one of the services covered by the 13.5% rate is "short term hiring of cars, caravans, mobile homes, tour guide services" which are fairly integral to encouraging tourism. Perhaps the Minister will when replying clarify if these services are covered by the VAT reduction. General repair and maintenance services are also subject to VAT at 13.5%. As such, electricians, mechanics, carpenters and so on remain liable to the 13.5% rate. I do not know what would be the cost of extending the reduction to cover these services but it could perhaps be balanced by reducing the VAT rate by 3%-3.5% rather 4%, in particular in view of the growth of the black economy.

Also subject to the 13.5% VAT rate are "fuel for power and heating, coal, peat, timber, electricity, gas and heating oil." There is no relief in this area despite the reality of fuel poverty. I recently read an article in a newspaper in relation to the reduction in the VAT rate to 9%. It was estimated that in respect of a meal and two drinks costing €100 one would save €3 as a result of this reduction. I do not know if that would encourage people to go to restaurants. The relief would be better concentrated on people who are suffering the effects of fuel poverty and who are struggling to survive week to week.

I hope these measures will be successful because it is in the interests of the country that they are. However, I am concerned about the method by which the finance is being raised. This direct attack on private pension funds is akin to something the Mugabe regime in Zimbabwe would try to do, expropriation of private property. As I said on the last occasion, the number of people aged over 65 years in this country will treble in the next 50 years. How are we to provide for them? Traditionally, we have encouraged people to help provide for themselves through the provision of generous tax reliefs. The cost of annuities has gone through the roof, returns have disimproved and there is a constant threat of withdrawal of tax relief hanging like the Sword of Damocles over people who invest in private pensions, on top of which the Minister has now imposed this levy. Also, various legislative changes introduced by this and the previous Government restrict the sums one can provide for. The whole direction of the levy is towards creating a disincentive to people to provide for themselves, when there has never been a greater need for people to provide for themselves.

The Taoiseach said in the House yesterday, and the Minister for Finance has said on previous occasions, that representatives of the pensions industry made this offer to the Government. They suggested to the Government that it impose a levy of, I think, 0.5% on the basis that tax relief for pension provision would not be interfered with. I listened to the Taoiseach and that is clearly what he said. Do I take it that it is the Government's intention, because it is bringing in this levy, not to interfere with the present tax regime for contributions to private pension schemes? I would like the Minister to address this in his response. When these people from the pensions industry approached the Government, not only did the Minister take them at their word but he said he would do even better for them. Instead of a levy of 0.5%, he made it 0.6%. He gave them more than they were looking for. According to the Taoiseach, there was a clear understanding that this was a quid pro quo for not interfering with the tax relief on pension contributions. I doubt if that will be the case. Having read the IMF/EU deal and seen what the Government will have to do on the taxation front and having read the programme for Government which talks about tax shelters and so on I very much doubt if that will be the case.

I do not doubt the Minister's bona fides. I am sure he had visits from people in the pensions industry who made the suggestion to him. If the people from the pensions industry, whoever they were, thought they were doing something for their members by approaching the Government with such a suggestion they are even more foolish than the returns they have managed to get for pensioners in recent years would suggest. We need an incentive to people to provide for themselves, because the State will not be able to provide for them in future years. We need an incentive and not another disincentive.

With regard to defined benefit schemes, people who have retired and for whom an annuity has been purchased out of the pension fund will not be caught by the levy. It is the people for whom the pension is provided directly from the fund who will be caught. This is another anomaly. A person under the age of 60 who can afford to retire early can transfer his or her pension to an approved retirement fund, which will not be caught at all. That is another potential loophole.

The Government says it is up to the trustees of defined benefit schemes to decide how to finance the levy and where they will find the money. However, as much as 80% of defined benefit schemes are already in deficit and are in no position to absorb this charge. This means either that contributions will increase for the people who are still paying them or employers will pay more. There is an irony here. If employers must pay more the cost of employment will increase. This may lead to job losses, as a result of an initiative that is supposed to create jobs.

The most likely outcome is that beneficiaries will have to pay directly. Benefits will be cut. We are talking about people who, because of the devastation wrought on pension funds by the downturn, in many instances have had indexation taken out their defined benefit pensions. By agreement, trustees abandoned indexation. Members of this House are beneficiaries of a defined benefit pension scheme, which is indexed. I can imagine the reaction of Members if the Minister for Finance or the Taoiseach announced the abolition of indexation and left us at the mercy of future inflation. Many of these people are in precisely that situation. Many of them are elderly, vulnerable and living on fixed incomes.

It has been suggested that funding a pension of €10,000, which is at the upper end of what people might expect, requires capital of €150,000. A levy of 0.6% of €150,000 would amount to €900, or a 9% reduction of a pension of €10,000. People in pensions business tell me that the figure needed to generate a pension of €10,000 is closer to €200,000. That would put the levy up to a 12% reduction in the pension, every year for the next four years, of elderly people on fixed incomes. That does not seem to be very fair.

Most of the discussion of this issue has focused on defined benefit schemes. The amount of capital accumulated in defined contribution schemes has been devastated by what happened in the markets in recent years. They will be further devastated by the Government reaching its hand in and taking a portion of the capital retained over the next four years. Many schemes will have to close down. It is written into the legislation that if a scheme closes down its trustees will not be caught for the levy at all.

I do not think the Government envisaged people being advised to shift their pension funds overseas. Under EU rules they would be immune from the Government levy. I am told certain gentlemen are in town at present going to different businesses extolling the attractions of Malta as a possible location. Pension funds can be moved offshore, where they will be out of the ambit of the levy. We may find that the levy will be applicable to people who cannot afford to move offshore and whose schemes do not provide for early retirement and do not close down.

I agree with the point made by the Minister for Finance and others regarding public sector pensions. There has been a levy on them. Public service pensioners have a reasonable expectation that there will be enough tax revenue to pay their pensions. It is very different for private pension schemes.

I listened to the Minister's assurance regarding deposits. Private pensions are another form of saving. They are exactly equivalent to deposits. The proposed levy is a retrospective tax on saved income. There is, therefore, no reason in principle that cannot be extended to deposits.

Those people from the pensions industry who went to the Government had no right to offer their members' capital to the Government. They merely administer pension schemes. They do not own the money. They had no right to offer it to the Government or anybody else.

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