Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I thank the Ministers and Minister of State for their opening remarks on the summer economic statement and the opportunity to make a contribution to this debate. I welcome the fact that we now have a summer economic statement. It is more meaningful that a spring economic statement by virtue of the fact that it is closer in the time cycle to the budget. I also welcome the reforms that are in the process of being established in respect of how budgets are formed in this budget. Not all of the reforms will be in place for budget 2017 but I hope that a number of the important pillars of those reforms can be in place in respect of the forthcoming budget.

Those reforms can only mean something if we do not have a situation where on the Friday before the budget when the White Paper on receipts and expenditure is published, the Government can pull a rabbit out of a hat. This would undermine the entire process so it is good that, four months out from the budget, we know there is likely fiscal space or available resources of the order of €1 billion. I hope that if there are any changes to that over the next number of months, the House is made aware of them and we can have a more informed debate because there have been massive swings very late in the day in recent budgets in respect of the level of resources available to the Government of the day.

I must mention the shadow hanging over this debate and, indeed, the future of our economy, namely, the referendum taking place in the UK today. Fianna Fáil very much hopes that the decision is for the UK to remain within the EU but we must acknowledge that if a contrary decision is made by the British people, it will have very profound consequences for our economy. This is an issue to which we will return later in the day during Oral Questions to the Minister for Finance.

We very much welcome that the economic recovery is broadening. It is a strong recovery that is employment-rich but there are major pressures in the economy that need to be acknowledged. I am glad that the Minister for Public Expenditure and Reform acknowledged the crisis we are dealing with in housing. Not only is that the social challenge of our time for people caught up in the housing emergency, it is also a key economic issue. The lack of affordable housing could hinder our economic development. It needs to be recognised as an economic issue as well being principally a social issue for those directly affected by it.

The two main issues that received attention in the coverage of the publication of the statement during the week were the increase in the available fiscal space and how it will be deployed between tax and expenditure and the decision to create a rainy day fund with an allocation of €1 billion per annum from 2019 after we have reached a balanced budget. At first glance, the fiscal space for the next five years has increased substantially from €8.6 billion to €11.3 billion but much of that increase relates not to any shift in the fundamentals of the economy or a change in external factors but rather to a decision by the Government in April 2016 to approve a change to Ireland's medium-term budgetary objective such that we will now be constrained by a deficit target in structural terms of 0.5% compared with the previous balanced budget target in the context of our medium-term objective. While many will welcome the greater flexibility this brings, it is not without risk and this should be acknowledged. Ultimately, all borrowing is deferred taxation and it is our firm view that we should aim to continue to outperform the deficit target, run a balanced budget as quickly as possible and establish the rainy day fund.

Within the overall annual budget of approximately €70 billion, there are plenty of choices for Government and policy-makers to decide upon. One that will receive considerable attention is what happens with income tax and USC. We have a different perspective from the Government on the question of USC. Fianna Fáil policy remains that we should progressively reduce the burden of USC on all income earners. Our ultimate objective is to remove it from all income up to €80,000 per annum and that surplus income would remain liable to USC. It comes down to the fundamental choices we have to face as a country because we cannot have everything. We cannot have as many gardaí on the streets to protect and defend communities as we would like. We cannot have the high quality education system we would like to have at primary, second and third level if we make choices to deprive ourselves of so much revenue. The Fianna Fáil objective is an ambitious one of reducing and eliminating the USC on income up to €80,000. In our view, it is achievable providing economic growth remains strong. We want to ensure that public services are prioritised and that children who are on waiting lists for a year or more, even to have an assessment of need carried out, have some prospect of getting that done and that once the assessment is carried out, they will have access to intervention services. It will come down to choices. We do not believe the abolition of the USC in the lifetime of this Government is achievable or desirable in light of the pressures that have clearly been built up on public services. The question of how tax cuts and the proposed abolition of USC over time will be funded is crucial.

One issue that needs to be highlighted is that part of the mechanism for funding that is the non-indexation of the taxation system which does not come without a cost for individuals. That should be acknowledged. According to replies I have received, the gain to the Exchequer from not indexing the tax bands and credits next year will be in the order of €380 million. By contrast, the projected amount of tax relief the Government is planning to provide is in the order of €330 million. In very simple terms, this means taxes will effectively go up in real terms by about €50 million in 2017 when account is taken of the loss to taxpayers of freezing bands and credits.

There are other taxation commitments made by Government apart from the changes to the USC. Presumably there will be a further move in terms of the earned income tax credit for the self-employed. A very welcome step was made in that direction in the last budget. I imagine the Government will go another way towards introducing parity between self-employed and PAYE workers. There is a commitment on capital gains tax so the €330 million will not go that far. Of course, there is the option of raising additional revenue. I believe the Government is looking strongly at the issue of a sugar tax of some kind, which may provide additional choices.

We welcome that a rainy day fund will be established. It is an issue we proposed prior to the election but we are concerned at the manner in which it may be implemented. I welcome the Minister's commitment to consult the House and have a debate on this issue and that he is open to ideas on how it can be structured and on what the trigger mechanisms will be for deploying the resources that will over time be built up in the rainy day fund. It needs to be ring-fenced, placed at arm's length and the trigger for accessing it needs to be clear. It should be counter-cyclical as the Minister for State, Deputy Eoghan Murphy, has said. The Minister of State, Deputy Eoghan Murphy, Deputy Pearse Doherty and I sat through the banking inquiry and that point about the mistake of pro-cyclical fiscal policy was made time and again. It needs to be changed in the future in terms of the economic governance of the country. That is one of the key reasons this fund is necessary and should not develop into a slush fund of any kind for the Government of the day. The criteria under which it can be deployed need to be clearly defined. It should be deployed when certain economic conditions are met in a downturn - for example, an increase in the unemployment rate of 1% would be one suggested trigger.

We also believe that a sensible approach would be to link payments into the fund to some volatile element of the State's revenue base - the obvious one is corporation tax. June's Exchequer figures show that the State took in €774 million more in taxes in the first five months of the year than the Government expected. The figures for the period up to the end of May were announced at the beginning of June and 63% of the out performance came from corporation tax receipts mirroring the performance last year when over €2 billion above what was anticipated for corporation tax receipts was received.

Fianna Fáil very much welcomes these strong Exchequer figures. However, the risk associated with treating corporation tax receipts as permanent can be seen from the fact that the top ten multinationals account for about a quarter of the overall corporation tax revenue and the top 50 multinationals pay about half of all corporation tax. There is a dependency and volatility there which needs to be recognised. The risk of building up permanent expenditure commitments on the back of that volatile revenue base has to be considered by Government. Should international trading conditions deteriorate, this revenue stream will inevitably come under pressure. There are many changes in the international tax environment. Those changes and the behaviour and response of multinational corporations have contributed to the increase corporation tax revenue that we are benefitting from as a country.

The economic statement makes considerable play on the need for a supportive business environment. This is something with which we concur, however, delivery of this commitment is what matters. Fianna Fáil has very much put the issue of equal tax treatment with the PAYE sector for the self-employed on the political agenda. We welcome the Government's commitment to deal with that issue in the forthcoming budget and presumably in the following budget to bring the tax credit up to the full €1,650.

I made the point previously that the extension of capital gains tax relief announced in the last budget was inadequate as it restricted the benefit to the first €1 million of gains. In contrast, the UK has a far simpler, clearer and more attractive relief which applies to a flat 10% rate to entrepreneurial gains of up to £10 million. This limit has increased threefold since the relief was first introduced. The reality is that given the mobile nature of much of the investment, we are competing for that investment with our nearest neighbour and other jurisdictions.

The summer economic statement is largely silent on the question of other issues that impact on family finances and on the viability of many businesses. The only mention of mortgages is a vague commitment to take action on mortgage arrears and while this is welcome, it does not address the ongoing problem of scandalously high variable rates. Fianna Fáil has been consistently campaigning on this issue and we look forward to the Committee Stage debate on the Central Bank (Variable Rate Mortgages) Bill. Hopefully, it will be brought forward to the finance committee early in the autumn. This legislation strikes the right balance between the bank's need to make a profit and the borrower's right to be treated in a fair manner. Under the legislation, the Central Bank will be required to carry out an assessment of the state of the mortgage market and should the Central Bank conclude that a market failure exists, the legislation empowers it with a range of tools to influence standard variable rates being charged. The outcome is what is important in the issue of rates. Some progress has been made to date, which I have acknowledged. I hope there will be more progress before the finance committee has an opportunity to consider the legislation on Committee Stage.

Other items are important for businesses. Interest rates are important, not just for families in terms of personal rates and mortgages but, as Deputy Calleary has pointed out on many occasions, SMEs in Ireland are paying interest rates way above the European norm. The cost of credit, insurance and energy is an issue. I raised the issue of motor insurance during Leaders' Questions earlier today. Insurance costs, which are being reviewed by the Department of Finance, are increasingly a concern for businesses because of the increased costs.

We look forward to the debate on the summer economic statement and to the other reforms in the budgetary process, which are currently being discussed and debated. Hopefully, some of them will be in place for the forthcoming budget and we will certainly play a full and constructive part in that regard.

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