Tuesday, 14 February 2012
Finance Bill 2012: Second Stage
Michael McGrath (Cork South Central, Fianna Fail)
I thank the Minister for his Second Stage speech. He had quite an amount to get through. I am pleased to see we have been joined by some colleagues. Perhaps the low attendance is due to the day that is in it. We must acknowledge that there is not much romance in the Finance Bill.
It is more than two months since the Minister introduced his first budget. A good deal has taken place in the meantime. The Government has been forced into several U-turns in respect of various elements of the budget, including cuts to certain people on disability allowance and to disadvantaged schools, although we do not know yet where that issue will end up ultimately. There was controversy surrounding the issuing of letters from the Revenue to pensioners regarding their tax affairs. The Government authorised the payment of €1.25 billion to unsecured, unguaranteed bondholders of Anglo Irish Bank. The growth outlook for 2012 has been revised downwards by several bodies in the past six weeks.
The criticisms levelled at the budget in December are as valid today as they were at the time. No significant changes have been made to address its fundamentally regressive nature. The pious talk from the Labour Party in opposition about closing legacy property reliefs, reaping huge dividends for the taxpayer, has disappeared quietly. Instead, the centrepiece of the Government strategy was to take the relatively soft option of increasing VAT by 2%, despite the clear evidence of weaknesses in the domestic economy. The 440,000 people on the live register or the 100,000 families in difficulty with their mortgage will find little in the Government’s actions that will instil them with hope.
The year 2012 will be a very challenging year for the State. Fianna Fáil welcomes the fact that the Government has achieved its targets under the EU-IMF programme in 2011, on the back of the budget introduced by the late Brian Lenihan. However, there is a long road yet to travel with regard to the fiscal and economic renewal. I note the publication today of the revised memorandum of understanding with the EU and IMF and we look forward to studying that over the next couple of days. While we must meet the targets under the EU-IMF programme in order to continue to secure a funding stream, this should not be treated merely as a box-ticking exercise. The measures will only be successful to the extent to which the domestic economy is stimulated and the live register falls. On that front, progress has been much more modest to date. There is no room for complacency. The budget targets were based on GDP growth of 1.3% in 2012 and most forecasts are now below 0.5%, with the strong growth in exports experienced in recent years slowing down considerably due to the challenging international climate. Many of the achievements of the first year are preparatory in nature and much of the real hard work has yet to be done. The mortgage crisis has deepened and there has been little or no Government action to date. The Government is clearly long-fingering more contentious issues, such as the sale of State assets.
We are currently studying the jobs action plan announced yesterday. The trend in unemployment is worrying, with 42% of claimants being long-term unemployed, up from 36% at end of 2010. The number of people under 25 on the live register is falling while the number over 25 is increasing. We sincerely hope that the plan announced yesterday achieves its objective and we will work constructively with the Government on the various measures proposed. In the economic and fiscal outlook published with the budget, the Government projected employment would grow by approximately 62,000 between 2011 and 2015. These numbers are well below the Government’s projections the previous April, when 102,000 net new jobs were projected. The new target of 100,000 by 2016 does not represent a significant advance on earlier targets, although it was presented as if there was something new on offer. There are positive elements in the Finance Bill laid before us today and I believe it can be greatly improved on Committee Stage if the Minister is genuinely open-minded to positive amendments from all sides.
In recent weeks, there have been some positive developments in respect of the Greek debt crisis and the ECB is now taking a more interventionist approach, with a €450 billion three-year lending programme to banks at favourable interest rates completed last month and up to €1 trillion in a similar programme likely to be undertaken at the end of this month. Fianna Fáil has committed to supporting the fiscal compact, though we will continue to pursue the need for greater clarity in regard to the application of the principles agreed as they relate to Ireland. In addition we will seek to have an expansion of the ECB’s role from its current limited focus on price stability.
At this remove, it is possible to undertake a clearer assessment of the impact of budget measures in their totality. An examination by the ESRI’s Tim Callan, Claire Keane and John Walsh showed that unlike the 2009-2011 budgets, the 2012 budget hit lowest income groups hardest. They said:
Looking at the impact of the 2012 budget, it is clear that the greatest reduction in income is for those on the lowest incomes - a fall of between 2% and 2.5% for the poorest 40% of households. This compares with a fall of close to 1% for the next 40% of households, and of O.8% for the top 20%.
They posed the rhetorical question as to how the measures in budget 2012 affect the overall impact of policy changes from October 2008 up to and including the present budget. Their answer in this regard is quite stark:
[The cumulative impact] over this four year period shows a strongly progressive pattern, with the lowest income group losing about 2% and the highest losing by 11%. The scale of the progressive impact of earlier budgets, which raised income tax, abolished the ceiling on PRSI payments, and introduced the universal social charge is much greater than the regressive impact of Budget 2012. The net effect over the whole period is therefore strongly progressive.
We live in a world where the economic outlook can change rapidly. The budget day forecast was for 2012 GDP growth of 1.3% and a general Government deficit of 8.6% of GDP. Since the start of the year, there have been six significant downward revisions of GDP forecast by various bodies in respect of the Irish economy. The median forecast is now 0.5%, which is 0.8% below the Department of Finance figures. According to the medium-term fiscal statement, if growth is 1% below forecast, which was set at 1.6% at that time, the outturn would be a general Government deficit of 9.1%. If growth was 2% below forecast, the deficit would widen to 9.7% in 2012. We are, therefore, at risk of missing the 8.6% limit set down by ECOFIN in December 2010. The mid-year Exchequer returns will be a particularly important signpost as to the progress being made. I sincerely hope we meet and exceed our targets, but just as with the question of a second bailout, only time will tell.
I would like to deal with a number of specific measures contained in the budget. I already commented on some of these on budget day and others are only now getting greater focus and attention. At the time of the budget, I pointed out that the VAT increase has a disproportionate impact on low and middle income families. I noted in particular the ESRI paper published last July, which demonstrated that those hardest hit by a VAT increase are households in the lowest 10% income bracket, households in rural areas and one-parent families. I cited the example of car sales in particular, and indicated that the increase would add approximately €300 to the cost of a typical family car. On the face of it the 6.5% increase in new car sales last month is good news, but when we look behind the figures we see there is more to that story. The 6.5% increase is against January 2011, which was exceptionally cold and when the country was covered in snow for the first two weeks of the month. I heard Bill Cullen, a man who would very much have his finger on the pulse, warning at the weekend that we should not be fooled by January’s car sales figures. He suggested that car sales would be down to around 75,000 in 2012. This is confirmed by comments made by SIMI director general, Alan Nolan, who said, “Despite the strong start, we are still fairly cautious about the outlook for the year, predicting a fall of approximately 15% in new car sales for the full year.” We now have the fifth highest standard rate of VAT in the EU, some 3.6% above the EU average. The Minister’s figures factor in VAT receipts of approximately €10 billion for the year 2012. It will be March or April before we get the first indication as to whether that is on track, but it is worth reiterating that the Government has taken a significant gamble in respect of consumer spending and the impact the VAT increase will have.
With regard to the universal social charge, I am glad the Minister made changes that will exempt many part-time, casual and seasonal workers from the charge. As I said on budget day, this is a modest change to a charge Fine Gael and Labour protested against from the Opposition benches last year. The Government has hyped up this change considerably, but it is worth at most only €4 a week to those who benefit and of no benefit at all to those earning in excess of €10,000. One should also consider the impact of the adjustments made to the basis of assessment for jobseeker’s, which changed from a six day week to a five day week, which will impact negatively on some of those who would benefit from the change made to the universal social charge. It would appear from reading the review of the universal social charge published recently by the Department that there is unlikely to be substantial change in the years ahead. In fact, the change announced in the budget, whereby the tax will now be levied on a cumulative basis, means that the Government will claw back €45 million this year, €11 million more than the cost of the amendment which exempts those earning less than €10,000.
As noted in the budget, an increased levy applies to all health insurance renewals and new contracts entered into since 1 January. That is provided for in section 91. The increase is massive, at €80 for adults and €29 for children. The amount of the levy will increase to over €500 million in 2012. To put this in context, three years ago, in 2009, the levy amounted to €197 million, increasing to €317 million in 2010 and in 2011 it was €346 million. That is now projected to go to over €500 million in 2012.
As our health spokesperson has pointed out on many occasions, we are now witnessing the steady disintegration of the private health insurance system. In 2008, 51.5% of the population had private health insurance cover. The latest figures, from last September, show that coverage is now at 47.4%. As Members of this House we appreciate the value that ordinary families place on keeping their private health insurance. In many cases they put it ahead of other essential items and yet the numbers are falling and will continue to fall, based on present policies. Some 5,000 to 6,000 people are cancelling their health insurance policies every month and the distortions in the market mean that VHI lost 130,000 customers in the 12 months to September 2011, and no doubt the trend has accelerated further since.
We were told the increase in the levy will not directly result in increased premiums but the reality is that when combined with increased charges for private beds in public hospitals, private medical insurers are continuing to hit subscribers with increased premia. Aviva announced an increase of 14%, effective from March; VHI is increasing the premia of all its plans in March this year by amounts ranging from 6% to 12.5%; and Quinn is also increasing rates by 6%. That is on top of significant increases in 2011.
The Government parties claim to be progressing towards a system of universal health insurance but the current system is in a state of crisis. This will have a real impact on the public finances as well, as people relinquishing private health insurance inevitably add to the cost of operating the public health system. Health insurers are now actively designing their products in a manner that discourages older people and discriminates in favour of younger people. This is done, for example, by excluding treatments such as hip replacements from the procedures covered. Although they are sticking to the letter of the law on community rating, they are, in effect, seeking to segment the market and consequently charge much higher premia to older people. The budget and the provisions of the Finance Bill do nothing to alleviate this trend but make the position worse. Legislation to provide for risk equalisation is urgently needed and the longer the Minister’s colleague, the Minister for Health, Deputy Reilly, delays on the matter, the greater the burden that will ultimately be placed on the taxpayer.
The multinational sector is enormously important for Ireland and it supports approximately 250,000 jobs. As the domestic sector went into reverse in 2008, multinationals have had an important stabilising impact on the economy. The benefit of a special assignment relief programme is clear. Providing an incentive regime for mobile talent clearly improves the attractiveness of a location when a company is deciding where to invest. Bringing in “project champions” who have familiarity with key business processes and who can supplement local talent will often be instrumental in getting new projects off the ground. We support well-designed, carefully targeted measures that will help in strengthening the multinational sector. It is noteworthy that the scheme as proposed has come in for a degree of criticism. Some commentators believe it is too broad and will be open to abuse while others feel that it will not have sufficient appeal and will have a minimal impact. I will try to provide a balanced assessment of the scheme, as well as suggesting some amendments which will improve its practical operation.
The criteria on which a scheme like this should be judged are its ability to boost employment without an unacceptable loss of revenue to the State from creative use of its terms. The Labour Party in opposition made a big play on the need for new tax incentives to be tested to ensure they achieve the desired impact. To quote from the Labour submission on the review of tax reliefs in 2005, it stated:
The presumption should be that, in most cases, reliefs will either be unnecessary for development, redundant, give rise to excessive dead weight, or potentially distorting, unless a strong case can be made to the contrary. There ought to be a strong burden of justification on those seeking to promote or maintain special investment tax reliefs.
These are laudable notions but it would appear that these principles were not applied in this case.
When I debated the issue with the Minister of State, Deputy Brian Hayes, on “Morning Ireland” last week, he suggested that up to €5 million in tax relief would be forgone under the scheme but there is no clear evidence as to how many additional jobs would be directly created. As I understand it, the incentive will be demand-led and it is not possible to say what the tax expenditure will be in 2012 or subsequently arising from this measure. Every incentive that is offered is always stretched to the maximum definition by companies and individuals at the encouragement of their expert tax advisers. We need to be conscious of this and review its operation to ensure that the scheme operates as it is intended. It should deliver practical results with new jobs for the country.
I suggest that the benefit would be as linked, in so far as possible, to measurable new investment and the creation of jobs. As it is currently designed, it would appear that a financial services firm could bring an executive to work here under the terms of the scheme and no new real jobs would have to be created. One could have the bizarre scenario where a multinational could bring in an executive to wind down a business in Ireland and benefit from the incentive included in this Bill.
I accept that there is merit in the argument that once a multinational commits to sending one of its senior executives to a country under such a scheme and incurs the related expense, there is an expectation that they would drive greater local profitability and growth. The local pool of talent also gets exposure to additional technical and management expertise so there will be indirect benefits, although I would like to have seen a more precise set of conditions attaching to the scheme to link it to new job creation. The requirement that an individual be resident outside Ireland for a minimum of five years before taking up the scheme and also that the person be domiciled outside the country means that it will be difficult if not impossible for Irish emigrants to return home under the terms of the scheme. In government, Fianna Fáil established the Global Irish Network, which now comprises more than 300 of the most influential Irish and Irish-connected individuals abroad. The network is made up of people from a wide range of activities and draws together people from almost 40 countries. It provides Ireland with international expertise to tap into as we build the economic recovery. It is a pity that members of the network who are Irish domiciled and may wish to avail of the scheme to return here and contribute to our economic recovery will not be eligible for participation. While being conscious of the need to ensure that the scheme is operated in a way that minimises the opportunity for abuse, I would ask the Minister to consider relaxing the requirements in this regard.
It is worth noting that despite the emphasis the Minister has placed on it, the idea of incentivising foreign executives to locate in Ireland as a means of supporting our multinational sector is not a new one, and this scheme replaces the existing programme. There is undoubtedly a link between having an attractive regime for new hires and the decisions of multinationals in terms of where to locate investment. We compete with many countries who offer incentives of this kind. For example, Malta applies a flat rate of 15% tax on income above €75,000, the Netherlands offers a 30% reduction in taxable remuneration for up to eight years and Spain and Portugal also offer attractive rates of 24% and 20% respectively.
A practical difficulty which could arise is the requirement that the executive working under the scheme cannot spend more than 30 days working outside the State in any given year. We do not want a scheme allowing people to take up tax residency in Ireland in order to be able to avail of the incentive while in practice carrying out the work outside the State. However, the nature of setting up new projects often requires considerable travel, possibly to oversee migration of a process to Ireland, and it may be appropriate to relax this restriction in order to improve its practical application.
It is an oft-repeated claim that Ireland’s economic recovery will be export-led. In this regard the tax system should be sufficiently flexible to encourage Irish companies to send employees overseas to open new markets. A foreign earnings deduction scheme existed prior to 2003 and applied to all countries, except the UK. There is a clear logic an incentive such as this, as it recognises the hard slog often undertaken to win export markets, and particularly the unsociable requirement to spend long periods abroad knocking on doors and trying to attract new customers. The case for a major focus on indigenous Irish export-oriented businesses is clearly seen from a simple statistic that was highlighted by the Irish Exporters Association. Indigenous export businesses create one job for every €102,000 in sales, whereas multinational-owned export businesses create one job for every €790,000 in sales. Essentially, this suggests that indigenous export businesses can create jobs eight times more rapidly. At a time of limited economic growth, it is right for us to target resources in the area that would yield the most economic benefit. I agree that the terms of the scheme are appropriate. Relief is available to individuals where foreign work days exceed 60 days in a 12-month period. The relief operates by reducing the individual’s taxable income in proportion to his or her foreign work days compared to his or her total work days.
The breadth of the scheme appears to be quite narrow in nature, as it focuses on Brazil, Russia, India, China - the BRIC countries - and South Africa. I acknowledge that we need to expand our trade with these emerging economies. I was concerned to hear reports that Irish exports to China decreased by 13%, year-on-year, in the third quarter of 2011. I was also worried to hear that just 15% of Irish exports to China come from indigenous Irish firms. It would be reasonable to extend the scheme to Middle Eastern and South American countries that show significant potential for growth. The explanatory memorandum that accompanies this Bill indicates that the Minister would prefer not to go down this route until he has seen how the scheme operated in its initial phase. In light of the underdeveloped nature of trade links between indigenous Irish firms and Middle Eastern markets, I suggest we have nothing to lose by legislating for a wider list of countries to which this scheme will apply.
The maximum deduction against employment income is €35,000 per annum, which is equivalent to a maximum tax saving of approximately €14,000. This compares unfavourably to the maximum deduction under the special assignee relief programme scheme, which can lead to a saving of over €60,000 per annum. It should be recognised that the value of the relief is just €1.5 million per annum. While it is a good first step, I suggest that the Minister has some distance further to travel. I hope he will accept amendments in this regard during our Committee Stage debate. The scheme could be made more attractive by applying the relief at source rather than by means of an end of year refund mechanism, or at least in respect of the minimum number of days.
When Governments honour their promises, it should be acknowledged. The Government has honoured its promise to change the rate of mortgage interest relief that applies to those who bought property for the first time between 2004 and 2008. I have articulated our views on that in the past. I am criticising the Government’s proposal because it is untargeted. If the Government genuinely wishes to assist people who are in real mortgage distress, a more targeted initiative to benefit such people would yield a better outcome. The Keane report, which was published by this Government, also recommended that a change of this nature should not be made:
The Group examined the proposal to increase mortgage interest relief .... but it was considered that this change should not be recommended. The proposal would give increased relief in an indiscriminate manner as it would give benefits to all who took out mortgages in the relevant years, regardless of their economic circumstances.
The Minister has acknowledged that when a provision like this is introduced, some people will lose out. A person who bought a property between 2004 and 2008 and is in quite a good financial position will benefit nonetheless. A person who bought a property in 2003 or 2009 and has since lost his or her job will get nothing under this measure even though he or she will also be in negative equity.
There is a contrast between what the Government is doing in this case and what it is doing in the area of mortgage interest supplement, which is targeted at those who are most in need. The Government has cut the budget in the latter case by approximately €22 million and increased the minimum contribution that couples have to make from €24 per week to €35 per week. My criticism of the Government’s mortgage interest relief proposal is that it is untargeted. We all know that the mortgage situation is continuing to deteriorate. At a time when limited resources are available to tackle this problem, the measures we are taking should be focused as precisely as possible on exactly where the problem lies. That is our view on this issue. The proposed personal insolvency Bill is likely to meander its way through the Dáil this year. It might not be operational for another 12 months. I welcome the roll-out of some of the measures in the Keane report. I urge the Minister to make a comprehensive statement on what is happening. He needs to pull together the various strands of activity that are happening across Departments and agencies to tackle the mortgage crisis. We should have another debate on that issue. I encourage the Minister to make a detailed statement in that regard.
I wish to speak about the issues being faced by people who would like to move home to take up an employment opportunity in another part of the country, but are restricted from doing so as a result of negative equity. The choices facing families in this situation are extremely difficult. They cannot sell their houses and instead have to try to rent them out. They may face a number of additional financial challenges in such circumstances. They may have to give up their mortgage interest relief, pay tax on any rent above the allowable interest deduction of 75%, pay the €200 non-principal private residence tax, pay the Private Residential Tenancies Board registration charge and, potentially, face the loss of their tracker mortgage. Like other Deputies, I have received representations on this issue from people who are trapped in such situations. They want to move to pursue opportunities elsewhere in the country, but they are locked in a negative equity trap, in effect. If they move out and rent their properties, they will be hit with financial penalties. We need to examine the matter and produce innovative proposals that recognise the realities people are facing. We should introduce greater flexibility to how the definition of “principal private residence” is applied to people in that circumstance.
I urge the Minister to act on the issue of interest rates being applied by the banks. When we debated mortgage interest rates in the past, the Minister acknowledged that the real issue is the spread of rates. Some State-supported banks are charging variable rates of 3% on mortgages, while others are charging 5.19%. That is an untenable situation. I recently wrote to all the financial institutions to establish their policies on considering applications from people who want to switch their mortgages from one institution to another. The responses I received were disappointing. It confirmed my belief that many people who are locked into high standard or variable rate mortgages simply have no alternative and are unable to switch to a more competitive rate with another provider. I ask the Minister to examine that issue.
I welcome the measures in the Bill relating to research and development tax credits. Some criticisms of them have been made by tax practitioners. I urge the Minister to examine them constructively. We can go further on that issue.
I am aware that the Minister recently met representatives of the Irish Brokers Association, who proposed that limited early access to pension funds by individuals should be facilitated to allow them to deal with life-changing events and real financial crises, such as redundancies, first-time home purchases, critical illnesses and personal indebtedness issues. It is within the capacity of this House to construct a scheme that would protect the integrity of pension schemes while allowing early access to pension funds in certain limited circumstances. That would enable people to deal with major issues in their lives.
I look forward to having a constructive debate with the Minister. We will propose a set of amendments on Committee Stage with a view to improving the Bill. That is ultimately what we want to do. I look forward to debating each amendment with the Minister in the weeks ahead.