Simon Coveney (Cork South Central, Fine Gael)
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I move:

That Dáil Éireann:

recognises that electricity generating companies in Ireland will make unearned windfall gains of approximately €1.6 billion, based on an average cost of carbon of €25 per tonne, in the years 2008 to 2012 arising from the free allocation of carbon allowances by the Government and the requirement by the electricity regulator to include the cost of carbon in electricity pricing; and

recognises that the Government to date has refused to claw back this money for the benefit of consumers, the economy or the environment;

in view of the ongoing deterioration in the economy calls on the Government:

to improve competitiveness, bring down inflation and help reduce poverty by cutting the lower rate of value added tax from 13.5% to 12.5%; and

to fund this tax cut by putting a levy on unearned windfall gains of electricity generators.

I wish to share my time with Deputies Bruton, Varadkar and O'Donnell, by agreement.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Is that agreed? Agreed. I welcome the Minister of State at the Department of Community, Rural and Gaeltacht Affairs, Deputy Curran. This is my first opportunity as Acting Chairman to welcome him to the House and to wish him well in his new position.

Simon Coveney (Cork South Central, Fine Gael)
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While I welcome the Minister of State, it is unfortunate we are not joined by the Minister for Finance or the Minister for Communications, Energy and Natural Resources to ensure that this motion is taken seriously. I assume, however, they will be informed of our arguments before they have the opportunity to respond.

Fine Gael is moving this motion in an attempt to introduce new thinking into the policy debate on the energy sector and the economy as a whole. We are proposing that the Government recycle the proceeds from carbon charges on electricity bills, which are paid for by the consumer, into the economy and to consumers so as to cut the cost of living and boost competitiveness. We believe the most appropriate way to recycle the proceeds of carbon charges on electricity to consumers is to cut the 13.5% rate of VAT to 12.5%. To do this, a special windfall levy on unearned gains will need to be introduced for electricity generating companies by virtue of the new carbon emissions regime that applies from January 2008 to December 2012.

Consideration is needed on two issues in this proposal and I ask the Government to consider them on their individual merits as well as jointly. I will speak further on the Government's response to the motion in my conclusion. The first issue is whether the State should recoup money from electricity generators. This money is being earned by charging consumers for the cost of carbon, despite the fact that generators have received an allocation of carbon allowances from the Government that will allow them to emit carbon for free during the period from 2008 to 2012. Is it appropriate that consumers are being charged substantial amounts of extra money for something that is costing energy generators nothing? This is essentially a carbon tax which is being levied by energy generators on top of their existing profits. There have been a number of informal murmurs about introducing a carbon tax during the lifetime of this Government, yet such a tax is already required by the energy regulator with the result that energy generators are earning undeserved profits off the backs of consumers and businesses.

The second issue concerns how, if the money is recouped by the State, we can spend it to best effect in view of the current economic climate, inflationary pressures and environmental responsibilities. We have a number of options in that regard. We could spend the money on a carbon fund, put it into the Exchequer, given that we will need increased revenue streams before the end of the year, or use it to implement targeted tax cuts. I will speak about Fine Gael's preference for the money presently.

I will now deal with the issue of why it is right to impose a windfall levy on power generators. From 1 January this year, electricity generators have been required to have what is called a carbon allowance for every tonne of carbon they emit into the atmosphere. From 2013, companies will have to purchase these carbon allowances on the open market through an auction system that will be in place across the European Union. However, during an interim period lasting from now until the end of 2013, the Government has allocated generators the vast majority of their carbon allowances for free. As part of a welcome policy to attach a cost or price to carbon, the new all-island electricity regulatory system requires power generators, including the ESB and Viridian, to charge for the value of carbon allowances used in producing electricity from fossil fuels. The Commission for Energy Regulation is required to insist that every electricity bill includes an additional charge to take account of the cost of carbon. These additional carbon charges are passed directly to domestic and business consumers.

The regulator estimates that electricity in the Republic is now approximately 10% more expensive than it would be if the cost of carbon was not factored into the price. The claim that energy is becoming more expensive solely due to the international price of oil is, therefore, not true. The price of oil clearly has a substantial impact but every household in the country is also paying a charge which adds 10% to the electricity bill because the regulator requires energy companies to factor in the cost of carbon.

Assuming the price of carbon allowances will average €25 per tonne between now and 2012, which is a very conservative estimate, generators could make unearned gains of almost €1.6 billion over this period, or €315 million per year, without Government action to recoup the windfall. If, as is likely, the cost of carbon increases, that figure could be substantially higher, resulting in even more fuel price inflation. While it is right that the price of electricity produced from fossil fuels reflects its full environmental cost, including the cost of greenhouse gas emissions, Fine Gael believes that it is wrong that power generators, whether publicly or privately owned, can make unearned windfall gains at the expense of consumers.

The single electricity market committee, which is the regulatory body for the all-island electricity market, concluded last March that action to recover the windfall gains from the full pass through of carbon allowances would be a matter for the Government rather than for the regulators but that the recovery of windfall gains could deliver benefits for consumers. We are proposing that the Government should claw back these unearned gains from power generators through a special windfall levy which would be determined each year by reference to the market value of the carbon allowances used up in the course of power generation or sold by companies on the open market. As stated, based on a €25 per tonne price for carbon, this levy could deliver an additional €315 million to the Exchequer revenue per annum. Over five years, it could yield almost €1.6 billion.

Many people will ask whether the levy, if introduced, will impact adversely on the price of electricity. That would not be the case and it has been confirmed by the regulator. The price of carbon has been factored into the price of electricity. We are, therefore, only recouping money that is being paid by consumers to electricity generators. This money is additional to that which they earn in respect of the cost of generation and the set price they are allowed to charge by the regulator and into which a profit margin is factored.

The second matter to which our motion refers is how a windfall levy could be spent and why we propose to cut the 13.5% rate of VAT to 12.5%. Members do not need me to tell them that the Irish economy is threatened by recession. Due to the collapse of the house building sector and a sustained loss of export cost competitiveness, jobs are being lost and business confidence is at a ten-year low. High rates of consumer price inflation, as a result of global energy and food price rises and domestic policy failures in regulation, competition and public sector management, are making for very difficult social partnership talks. The major questions revolve around how we can turn things around and what we can do domestically to reduce inflationary pressures, improve competitiveness and put a definite policy in place to help to get the economy back on track.

We believe that reducing the 13.5% rate of VAT to 12.5% will have a positive impact on the economy in general and on hard pressed homeowners who are struggling to meet rising bills. This is the most appropriate way to recycle the proceeds of windfall gains to consumers, for a number of reasons. Reducing the rate of VAT would: support overall competitiveness by reducing inflation — by an estimated 0.2% this year; give a direct stimulus to the domestic economy — the 13.5% rate applies mainly to domestically provided, labour-intensive services; give a direct boost to the flagging construction and housing sector — of the total €39.6 billion in spending that is expected to be taxed at the 13.5% rate this year, almost €26 billion relates to construction; help the competitiveness of the tourism sector, in the context of accommodation, car hire etc.; cut fuel poverty by reducing home heating bills; and reduce the income gap — low income households would benefit more than higher income households because they spend more of their income on services taxed at this rate.

The Department of Finance estimates the cost of reducing the 13.5% rate of VAT to 12.5% at €396 million in a full year. Taking into account buoyancy — that is, the additional spending and economic activity resulting from the tax cut — we estimate that the net cost for 2008 would be approximately €300 million. The latter would be comfortably covered by the levy we propose to introduce.

The Government's response to the motion is surprising. The first three paragraphs of its amendment have absolutely nothing to do with the motion. These paragraphs refer to the Government's long-term strategy, as set out in the energy policy framework. The latter is welcome but it has nothing to do with the motion. The second paragraph in the amendment refers to the need for Sustainable Energy Ireland to deliver on a range of domestic schemes. Again, this is welcome but it has nothing to do with the matter under discussion. The third paragraph calls on the Minister for Transport to introduce a new transport action plan that will prioritise sustainable transport. The latter is needed but it also has nothing to do with the subject matter of the motion.

The fourth paragraph of the amendment refers to fuel poverty. What we are proposing would contribute to addressing issues relating to fuel poverty by reducing the fuel bills of households and businesses. The amendment also refers to the ESB's €22 billion strategic framework up to 2020. There may be a concern that the introduction of our proposed levy might have an impact on the ESB's plans to invest in the future. However, we must ask who should be asked to pay for the ESB's future capital investment programme. Should it be households, through a stealth carbon tax, or should the company be obliged to make its case, in the context of normal margins, to the Commission for Energy Regulation when seeking price increases.

If we are going to introduce a carbon tax, we should be honest about it. We should tell people what they are paying and why they are paying it. The stealth tax to which I refer is paid to energy generators, not the Government. It will be spent in the way the ESB, Viridian or whomever else is making gains they would not otherwise make want it to be spent.

Our proposal is well thought out and costed. It is being introduced in other countries such as Spain and it is being considered in the UK. Ireland, Spain and the UK have similar energy markets. The Government states that it is considering the proposal but that it is complex. While we wait and do nothing, consumers pay 10% extra on their energy bills and that money goes to the ESB. There is a sense of urgency in the context of trying to address the real problems we face with increases in energy bills. Let us take back some of the money to which I refer — this would not impose a cost on anyone — and use it to reduce costs for households and businesses.

Richard Bruton (Dublin North Central, Fine Gael)
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I congratulate Deputy Coveney on introducing this timely motion. The economy is facing some tough challenges and we need to box clever as a result. What is proposed in the motion would present us with an opportunity to box clever and to reduce costs across the board, for families and businesses and in labour-intensive areas. We must put out a signal to the effect that even though times are difficult, there is scope to introduce reforms that deliver effective responses to some of the challenges we face.

The Government's amendment to the motion refers to continuing "to implement the stability oriented fiscal policies that have underpinned the success of their Irish economy over the last decade". That is enough to make a cat laugh. The figures released by the Exchequer earlier today indicate how lacking a stability-oriented fiscal policy has been in the past seven years. The harsh truth, as shown by the figures to which I refer, is that we have seen a surplus of €2 billion that was built up in 2006 being turned into a deficit of €8 billion to date this year. Why do we have a deficit? It is largely because the Government insisted on spending current, day-to-day money that the economy was simply not generating.

The Government increased its spending in the past two years at a rate 65% faster than the rate of growth in the economy and it paid no heed to the need for value for money. In addition, inefficiencies did not come under scrutiny. It was simply a case of spending the money because there was an election on the way. We are now paying the price for this behaviour. Effectively, the Government sabotaged the capacity of the economy to deal with tougher times. Earlier today, the Minister for Finance could not commit to upholding the envelope relating to investment in capital projects — €9.1 billion for this year and the same amount for next year — set out in the national development plan, NDP. This is happening because of the failure to control public spending.

What is happening is not news to the Government. The Minister for Communications, Energy and Natural Resources, Deputy Ryan, will be aware of that from his time in opposition. The precondition relating to the delivery of the NDP is that current day-to-day spending will remain within the capacity for growth of the economy. This precondition was ignored and in the past two years alone, an additional €4 billion has been spent. That would go a long way towards guaranteeing that we could invest in our national development plan projects for next year. That sort of thinking did not commend itself to the Government, which had so embraced the property boom that it felt it could ramp up public spending programmes without regard to the fact that the basis was unsustainable. Revenue from the property boom was plainly unsustainable but the Government ramped up its public spending programme and we are now paying the consequences, which is the tragedy.

We must now consider how we can box clever, finding the capacity even in tougher times to release resources and protect frontline services so we do not have what we have always had in this country, the vulnerable and weak making room when money is short. The way to do this is consideration of issues that can make a difference.

Deputy Varadkar published, on behalf of our party, a way of looking at quangos, for example. The Government created 250 extra quangos in the past decade, which are not working. Even today we debated the establishment of the Dublin Transport Authority, another quango, which I do not believe will deliver the reform expected. If the reform was not evident when power resided with the Department of Transport, I do not believe the Dublin Transport Authority will deliver it. It will not deliver the reforms as the very same mistake is being made as happened with the HSE. It is being written into the legislation that the existing players, such as Dublin Bus and CIE, are guaranteed to go on as always. We cannot reform and produce agencies that will be results-delivered when those guarantees are given out. It is a contradiction. This agency will have no accountability.

That is the trouble with the Government's approach. It outsources government and does not focus on its own needs, which are to squeeze inefficiencies out so it can protect vital matters like frontline services and the national development plan.

This motion addresses a specific problem, which is that while the property boom went on, the Government lost sight of the key element of the economy, the survival of the trading sector. We have slumped in competitiveness rankings under this Government in the past six years by 17 places. We have had five consecutive years during which we have lost export market share. Productivity growth has halved in this economy in the past six years.

During this time the Government increased its prices by 45% and manufacturers had to take a 23% cut in their prices. The Government is living in a different world from that of people out there trying to compete, export, build a future and create sound jobs in the export market economy. This motion tries to bring a little reality into that, indicating that the ESB and other generators are not entitled to rip off the consumers and pocket money due to them. This money must be put back in to allow those competing at the coalface, families trying to pay their weekly bills in the face of rising food prices and mortgage payments, some relief and a chance to survive this really tough period.

This is the type of thinking we need to see from Government, which considers how to reform the large public service we have created and release the talent therein. The trouble is we have constrained talented people in our public service in a system that is failing both them and the people they attempt to serve.

I heard the Taoiseach today stating the ESB must have this money so it can have an investment programme. Why should it have consumers' money so it can have an investment programme? It is expected to compete in the open market as an efficient utility. Data from the National Competitiveness Council indicates productivity in our utilities is less than half that of the EU as a whole and only a third that of the USA. We should not turn to a utility that is not delivering productivity and say it can rifle the consumers' pocket so it can invest. We should indicate it is obliged to perform to international benchmarks. It is not a highly geared company and it can look to its internal resources to find investment. If it had been doing so, we would not find ourselves with the most expensive electricity company in Europe. Our electricity prices are the most expensive and in the past six years, they have been rising at the second most rapid rate in the EU.

Companies producing in the public sector which have monopolies must wake up to the fact that they cannot lean on the consumer for money to prop them up, be it through a carbon levy or another method. They must compete and show they can perform to the standards of international benchmarks. That must be the message to come out in policy if we are to get through this difficult time without hurting those who are vulnerable and depend on public services. That is the thinking we are trying to drive.

I do not intend to unduly delay the House but I will reiterate what Deputy Coveney stated. Since January 2008, the electricity consumer has been paying a carbon tax on electricity and the ESB and other electricity generators are pocketing it. That is not in the interests of householders or the long-term competitiveness of our economy.

The proposal we are making retains the incentive for consumers and producers to switch from high carbon-using activities, a crucial element. At the same time, it prevents the householder and the ordinary family from being ripped off. This is a timely motion which I hope is accepted by the Government.

Leo Varadkar (Dublin West, Fine Gael)
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I wish to share time with Deputy Kieran O'Donnell so perhaps the Acting Chairman will advise when I have spoken for seven and a half or eight minutes.

Charlie O'Connor (Dublin South West, Fianna Fail)
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I certainly will.

Leo Varadkar (Dublin West, Fine Gael)
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I congratulate the Minister of State, Deputy John Curran, on his appointment. He represents a neighbouring constituency and I have been a student of his work over the years. I have learned much from what he has done and he is very much an impressive all-rounder. He has my sincere congratulations in that regard.

I add my voice to Deputy Coveney's disappointment that there are not more people on the Government side to speak about the economy, the environment and energy policy, which is what this motion is about. I commend Deputy Coveney on this motion and particularly the policy proposals being brought forward with regard to the windfall tax and the composite reduction in VAT.

The proposal, in summary, imposes a windfall profit tax on the profits of electricity generators who have been given free carbon allowances under the emissions trading system. It does not involve, as mentioned before, any price increases on energy, as these are set by the regulator who has confirmed there would be no price increase as a result of this windfall tax. Crucially for Fine Gael, the revenue from this windfall tax and any future green taxes would go back to taxpayers in the form of tax reductions, be they through VAT cuts — as in this case — or reductions in other taxation. That will be a major difference from the policy of the parties opposite as we have more debate on the need for carbon taxes and other types of green tax.

To speak with my enterprise, trade and employment hat on, this proposal would be beneficial to the economy. It would bring about a downward pressure on inflation, although I accept it would only bring the CPI down by 0.2%. More importantly, a VAT cut would send a very clear message to those who set prices that the Government is reducing VAT and they should not increase prices. In particular, it would set an expectation among consumers that they would at least see prices stabilise and not increase in those areas.

The Taoiseach addressed us earlier and reminded us that when VAT was reduced from 21% to 20% some years ago, the cut was reversed subsequently because retailers and other price setters did not pass on the reduced price to the consumers. We passed legislation and we now have the National Consumer Agency and Consumer Protection Act, which specifically enables that organisation to be given responsibility for monitoring VAT and excise reductions and ensuring they are passed on to the consumer. I am disappointed the Taoiseach is unaware of that and if he is aware of it, I am disappointed he does not understand that this power could be used. This relates to the various issues we have arisen in terms of rising prices.

Tax stimulus has already been mentioned with regard to reducing VAT by 1%, which would be beneficial to the tourism sector in particular. That area is starting to hurt this year and will hurt even more next year. It would also apply to the construction sector, which would certainly benefit from some stimulus. It would help stabilise prices with regard to home heating oil, gas and coal. I take this opportunity to reiterate my call for public support for this proposal from the Irish Business and Employers Confederation, IBEC, the Irish Small and Medium Enterprise Association, ISME, Chambers Ireland and some of the other business associations that favour this but have yet to publicly support it.

I feel an opportunity was lost when the emissions trading system was established. Perhaps a Europe-wide carbon tax would have been preferable to the trading system but, unfortunately, it is what we are stuck with. We will speak more on carbon taxes, particularly green taxes, in future. The key principle for Fine Gael regarding carbon taxes and green taxes is that any revenues raised through them must be returned to the taxpayer in other tax reductions. We will not allow carbon taxes and environmental taxes to become stealth taxes and will insist that they be genuinely revenue neutral. The proceeds of such taxes should not be spent on Ministers' pet projects, particularly those of Green Party Ministers who have shown their ability to spend millions of euro on ridiculous advertising campaigns on which not even Fianna Fáil Ministers would have the neck to waste money. This is a fundamental principle of Fine Gael. We are not prepared to see revenues gained through carbon taxes fall through the sieve of public spending, where the Government wastes money and causes deficits.

It is still the view of Fine Gael that reducing taxes can stimulate growth. In the past, when this country was in a bad economic situation and experiencing a deficit, we used significant cuts in corporation tax and income tax to stimulate the economy. I do not think we should forget this lesson. Reducing VAT, particularly in the construction sector, could be an economic stimulus and increase revenues. Obviously things are more complex than this but a lesson was learned by Ireland 20 years ago that reductions in taxation can stimulate the economy and we should not forget it.

The Government's amendment is very disappointing and I would almost prefer if it had voted down the motion rather than put forward this type of rubbish amendment. As Deputy Coveney said, the first five or six sections of the Government's amendment have nothing to do with the motion. I suppose they were copied and pasted from a previous amendment. It is strange that the emissions trading system is referred to as complex; it is not complex if one understands it. I would have hoped that the person who wrote this amendment, or someone in the Minister's office, understood it. Anything is complex if one does not understand it and this is, frankly, a stupid thing to put in an amendment.

The amendment also states that negotiations are currently taking place at EU level which will remove the possibility of free allowances post-2012. This is addressed clearly in our motion and policy. After 2012, when credits are auctioned, this would be used for VAT. Mention is made of a small impact on prices but VAT reductions would bring downward pressure on inflation.

I commend this motion to the House for four reasons. It is fair that electricity producers pay a tax on windfall profits. It is socially just because it will bring down the cost of home heating oil, coal and gas. It is environmentally sound for the reasons that have been argued and it is economically beneficial. Any one of these reasons is enough to recommend the motion and all four together should prove enough for the Members opposite to support it.

Kieran O'Donnell (Limerick East, Fine Gael)
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I congratulate the Minister for Finance, Deputy Lenihan, and the Minister of State at the Department of Community, Rural and Gaeltacht Affairs, Deputy Curran, on their appointments. I also congratulate Deputy Coveney on bringing this motion before the House.

This is a straightforward issue of policy and nothing complicated is being proposed. Windfall profits are earned by electricity generators when they incur no costs and this amounts to a hidden subsidy. This is costing the taxpayer and we propose a simple measure. Between now and 2012 the various electricity generators will not pay carbon tax and we propose that the VAT rate be reduced from 13.5% to 12.5%. This would be brought about by charging generators a levy based on their use of carbon allowances at the market rate.

A result of this would be a reduction in inflation. Earlier today we discussed the fact that the Irish inflation rate is above the EU average and almost 50% greater than the rate of our major trading partner, the UK. Some 45% of non-mortgage inflation in the past seven years was caused by Government regulated areas. This is an opportunity and a straightforward policy choice. We propose that in a market economy businesses should not be subsidised by the Government.

The Taoiseach today suggested that it was likely a VAT reduction would be absorbed by retailers and not passed on to consumers. My colleague, Deputy Varadkar, pointed out that, through the National Consumer Agency, legislation exists to ensure a VAT reduction would be passed on. In Government regulated areas like gas and electricity, it is very evident that the effects of a reduction in VAT from 13.5% to 12.5% would be visible.

The Taoiseach also said it is important point out that the revenues available to the ESB and others are factored into their capital programmes for providing alternative energy sources. This is a point on which we fundamentally disagree with the Government. We believe that, like any other private enterprise, these companies should not base capital projects on Government subsidies. They should be based on money raised in the market in the form of equity or through the leverage of debt. These are fundamental points on which we differ.

Our motion comes against the backdrop of today's Exchequer returns which showed a shortfall of €1.2 billion in tax receipts for the first five months of the year. The Exchequer deficit is €3.6 billion compared to a surplus of €260 million this time last year. Up to April this year, tax revenue was €700 million behind the target and a further €430 million shortfall was incurred in May. VAT alone is behind by €600 million in the year to date. What we are suggesting in this motion will stimulate the economy, lower inflation by 0.2% and provide €200 extra per annum per household. This is a straightforward measure and the Minister might reflect on it.

Why give 10% of a carbon tax to a private body that, effectively, incurs no cost? Is this a good use of the Exchequer and taxpayers' money? We suggest that up to 2012 the Government give the taxpayer the benefit of the windfall taxes that various private energy generators receive. It can be passed on in the form of reduced costs through a reduction in VAT from 13.5% to 12.5%.

The VAT rate of 13.5% applies to construction and at the moment this sector is experiencing difficulties. People on lower wages are struggling with energy costs associated with the ESB, gas and coal. This is also the case across a range of areas, including restaurants. It is important that when the reduction in VAT comes about the Government ensures, through the use of agencies such as the National Consumer Agency, that it is passed on to consumers.

I support this straightforward motion. The measures contained in it will provide stimulus to the economy and reduce the rate of inflation. It is critical, if we are to remain competitive, that the pay talks we are facing prove to be fruitful and sustainable. The only way we can achieve this is to bring down our inflation rate. This will provide an extra €200 per annum to hard-pressed taxpayers and low income earners. Overall, it is a policy decision that will make use of windfall gains for which electricity generating companies are not paying. Effectively, they are getting carbon allowances free up to 2012.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I move amendment No. 1:

To delete all words after "Dáil Éireann" and substitute the following:

"recognises:

that the Government has a long-term strategy, as set out in the Energy Policy Framework 2007-2020 and in the programme for Government, to reduce our dependence on imported and finite fossil fuel sources through delivering greater energy efficiency and increasing our use of renewable resources in the electricity, heat and transport sectors;

that the actions to deliver this long-term strategy in relation to the energy sector include the delivery by SEI of a range of schemes to enable domestic, commercial and industrial consumers to reduce their dependence on fossil fuels;

that the Minister for Transport has concluded the consultation phase on a paper on a sustainable travel and transport action plan that is due for completion shortly;

that the social welfare fuel allowance programmes are aimed at those on lower incomes that are most vulnerable to fuel poverty;

that the ESB has put in place a new €22 billion strategic framework up to 2020 that will see a major investment in renewable energy, a halving of its carbon emissions within 12 years, and the achievement of zero net carbon emissions by 2035;

that the issue of windfall gains to electricity generating companies that arise as a result of the free allocation of carbon allowances under the European Union's emissions trading scheme is a complex one that faces all EU member states;

that this issue is subject to ongoing examination by the Department of Finance and the Department of Communications, Energy and Natural Resources;

that negotiations are currently taking place at EU level which will remove the possibility of free allowances after 2012; and

that a one percentage point reduction in the reduced VAT rate would cost the Exchequer €396 million in a full year and have little impact on prices;

in view of the ongoing challenges in relation to the economy, calls on the Government:

to continue to implement the stability-oriented fiscal policies that have underpinned the success of the Irish economy over the last decade; and within that context, to bring forward whatever policies are necessary to promote future economic success at the appropriate time within the annual budget cycle."

I propose to share time with Deputies undisclosed.

John Cregan (Limerick West, Fianna Fail)
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Is that agreed? Agreed.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I thank the Chair for his indulgence.

I am glad we are having this debate on taxation and energy, an important and topical subject. In this debate we must put our current economic position and challenges in context. Since 1997, the rate of economic growth in Ireland has averaged 7.25% per annum. This has facilitated a transformation of the Irish economic landscape. The total number of people at work has risen by some 800,000, helping to propel average per capita incomes in Ireland above those enjoyed in many other developed economies. Unemployment has fallen from 10% in 1997 to about 4.5% last year.

However, the economic environment has clearly become more challenging in recent months. At the time of the last budget a number of risks to the outlook were identified and these have subsequently materialised. Most of these developments are on the external side and thus beyond our control, including the prospect of lower growth in most of our major trading partner countries, the appreciation of the euro against both the dollar and sterling, more persistent international financial market difficulties and higher prices for many commodities, such as oil and food. These global developments play a key role in shaping Ireland's economic horizon as we are highly integrated into the global economy. On the domestic front, the residential house building sector is undergoing a sharp slowdown following a prolonged catch-up period. While we may experience a year or two of fairly low completion levels, it is reasonable to expect over the medium term that annual completions will return to sustainable levels, which will remain high by international standards, reflecting the strong underlying demand for housing in Ireland.

On foot of all of these developments, a period of well below-trend growth is in prospect. The consensus among economic commentators is that the rate of GDP growth this year will be about 2%. Some are taking a more pessimistic view. What is clear is that the short-term prospects are more challenging than we have become accustomed to in recent years. Beyond next year, however, there are grounds for optimism. Once the economy absorbs the housing shock and the international climate improves, the outlook is for a recovery in our economic growth rate. This is not just my view. Many other economic commentators share this view. If we respond appropriately we can expect a recovery towards trend by 2010.

With regard to public finances, there can be no denying that our fiscal position has changed from that envisaged at budget time. It is important, however, to point out that the current situation is manageable given the strong position of public finances. It is equally important to stress that despite the underlying strength of the public finances, the Government is determined there will be no unnecessary loosening of fiscal policy. We need to control current spending to keep it in line with resources and it is crucial that Departments adhere to the significant levels of current day-to-day expenditure provided for their activities this year. Energy, investment and taxation policy must be framed in this context.

Energy policy is key to future economic growth. Government energy policy is based on the energy policy framework and the programme for Government. These set out the three pillars of policy: security of supply, price competitiveness and environmental sustainability. Within that overall context, we must adapt our actions to take account of international developments. There have been a number of significant developments which must inform our energy policy into the future. Chief among these is the continuing high price of fossil fuels, especially oil, and the challenge posed by climate change. These must be addressed in the context of the wider economic and competitive needs of the economy and with consideration of emerging budgetary realities.

These factors highlight the need to promote renewable and environmentally sustainable energy sources across all areas from power generation to transport. The energy policy framework sets out numerous measures and targets designed to deliver security of supply, sustainability and competitiveness over the period to 2020. My colleague, the Minister for Communications, Energy and Natural Resources, when he speaks tomorrow morning, will describe in greater detail the progress being made on energy policy commitments and actions.

The motion refers specifically to the fact the ESB has put in place a new €22 billion strategic framework for the period to 2020 that will involve a major investment in renewable energy, a halving of its carbon emissions within 12 years, and the achievement of zero net carbon emissions by 2035. These are ambitious targets. While Deputy O'Donnell mentioned that various private interests will benefit, it is a fact that 70% of the free carbon credits are allocated to the ESB. It is not a private undertaking but one that belongs to the taxpayer. The Government is committed under the strategic plan to provide for a massive shift from the existing generation system to a new system.

Kieran O'Donnell (Limerick East, Fine Gael)
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Should it not do that by way of——

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy O'Donnell spoke eloquently about the need to attract private finance and the need to have equity investment in these projects——

Kieran O'Donnell (Limerick East, Fine Gael)
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And leverage.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Please allow the Minister to continue.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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——but the reality has been, since the foundation of the State, that private equity did not always come forward. The Deputy's predecessor party, which was very sparing when it came to public expenditure, saw in the 1920s that it must make an exception to that rule, and established the Shannon hydroelectric scheme. There is nothing new in providing finance from the taxpayer to ensure the necessary infrastructure is put in place.

Kieran O'Donnell (Limerick East, Fine Gael)
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It is coming directly by way of revenue. The Minister is missing the point.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Allow the Minister to continue without interruption.

Kieran O'Donnell (Limerick East, Fine Gael)
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The Minister has missed the point.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am not disturbed.

The motion refers to the issue of carbon-related windfall gains, which was raised by Deputies O'Donnell and Varadkar. The issue of windfall gains to electricity generating companies that arise as a result of the free allocation of carbon allowances under the EU's emissions trading scheme is complex and is faced not only by Ireland, but by all EU member states. The issue is subject to ongoing examination by the Department of Finance and the Department of Communications, Energy and Natural Resources under Deputy Eamon Ryan. This will take account of all implications and, in particular, the need to be certain about the effectiveness of any initiative. One difficulty we face in this regard is that only one EU member state has introduced measures to deal with this issue, and these are now subject to appeal and legal challenge.

Simon Coveney (Cork South Central, Fine Gael)
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That is because only three countries have similar markets.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Moreover, from 2013 it is proposed that allowances will be auctioned and this issue will no longer arise. However, it remains a matter for consideration for the next number of years.

Ireland has a low burden of taxation in respect of labour and capital, a policy the Government is intent on maintaining. It has stood us well up to now and I have no doubt it will continue to provide a sound basis for our economic well-being, allowing Ireland to remain an attractive location for investment. Our approach to indirect taxation has been to provide for a broad but balanced application of VAT. Reducing the lower VAT rate of 13.5% by one percentage point, as proposed in the motion, would result in significant losses to the Exchequer to the tune of approximately €396 million in a full year, or more than €200 million in the balance of this year. That is a substantial amount of revenue to hazard in a year in which revenue receipts have been well below the usual amounts.

Simon Coveney (Cork South Central, Fine Gael)
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The Government will get it back.

Kieran O'Donnell (Limerick East, Fine Gael)
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The Government is getting it back from the electricity producers.

Leo Varadkar (Dublin West, Fine Gael)
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It is a simple calculation.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Allow the Minister to continue without interruption.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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This is the doctrine of the self-financing tax cut, which various prominent political personalities, to whom Deputy Varadkar refers occasionally in his contributions, have had resort to in the past.

Even if the reduction was passed on in full to consumers, the impact on the consumer price index would be only 0.18%. The question arises, and was discussed earlier in this debate, as to whether a reduction in VAT would be passed on to the consumer. The argument is put forward that such a reduction would not only increase our competitiveness but would reduce inflation and poverty. Speaking from experience, this proposition is highly optimistic. In 2001, our standard rate of VAT was reduced from 21% to 20%, but the expected benefits for the consumer did not materialise. The reduction in VAT was not passed on to the consumer and, one year later, the Government wisely reversed the reduction.

Kieran O'Donnell (Limerick East, Fine Gael)
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Does that mean the Government is abdicating its responsibility?

Leo Varadkar (Dublin West, Fine Gael)
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The Government has legislation.

Simon Coveney (Cork South Central, Fine Gael)
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There is also a regulated price and it must be passed on.

Charlie O'Connor (Dublin South West, Fianna Fail)
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The Minister's time has concluded.

Seán Fleming (Laois-Offaly, Fianna Fail)
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I look forward to debating the motion tabled by the Fine Gael Party, but I can condense it — Fine Gael wants to increase capital taxes and reduce VAT. It is nice to know there is new policy from the Fine Gael Party on increasing taxation. It is a pity it did not tell the electorate about its policies 12 months ago. Had it done so and revealed that it had these stealth taxes up its sleeve——

Kieran O'Donnell (Limerick East, Fine Gael)
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Our proposal would reduce taxation.

Seán Fleming (Laois-Offaly, Fianna Fail)
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——depending on the economic situation, there would have been a different outcome to the last election, with Fine Gael being more disadvantaged than was the case.

Kieran O'Donnell (Limerick East, Fine Gael)
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Deputy Fleming is getting the situation incorrectly. The rate would go down rather than up.

Simon Coveney (Cork South Central, Fine Gael)
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Does Deputy Fleming not understand the details of the proposal? Are they too complex?

Charlie O'Connor (Dublin South West, Fianna Fail)
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Allow Deputy Fleming without interruption.

Seán Fleming (Laois-Offaly, Fianna Fail)
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I am surprised Fine Gael wants to introduce a special——

Leo Varadkar (Dublin West, Fine Gael)
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We could do some drawings for him.

Kieran O'Donnell (Limerick East, Fine Gael)
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Some 13.5% minus 12.5% is 1%.

Leo Varadkar (Dublin West, Fine Gael)
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We will use the picture version next time.

Seán Fleming (Laois-Offaly, Fianna Fail)
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——capital gains tax on electricity generation. This is camouflaged by proposing a reduction in VAT from 13.5% to 12.5%.

Simon Coveney (Cork South Central, Fine Gael)
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The Deputy should speak with the regulator and get some facts instead of talking nonsense.

Seán Fleming (Laois-Offaly, Fianna Fail)
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I will revert to Fine Gael's comments on the Irish experience. Such a measure was tried a number of years ago. In the 2001 budget, the then Minister for Finance, Charlie McCreevy, reduced the top rate from 21% to 20%.

Kieran O'Donnell (Limerick East, Fine Gael)
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The Minister has told the House this.

Charlie O'Connor (Dublin South West, Fianna Fail)
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The Deputy is entitled to speak without interruption.

Seán Fleming (Laois-Offaly, Fianna Fail)
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At the time, people on the other side of the House stated the reduction would reduce inflation and prices, the benefits being passed on to customers by retailers and producers. We all know this did not occur. The following year, the Minister decided to reverse the decision because the reduction did not have the intended effect. He gave the Opposition the benefit of the doubt and, seven years later, it is surprising its Members have not learned a lesson. They have short memories.

Apart from wanting to introduce a new capital gains tax, Fine Gael is proposing to reduce VAT from 13.5% to 12.5%. Its Members know full well that not one cent of the reduction would be passed on to consumers.

Simon Coveney (Cork South Central, Fine Gael)
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Electricity and gas are regulated prices.

Seán Fleming (Laois-Offaly, Fianna Fail)
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To its credit, Fine Gael has had a slogan for the past year or so, that is, "Rip-off Ireland". Given that its tax reduction proposal is a front, the benefits of which Fine Gael Deputies know in their hearts would not be passed on, the slogan is now resting in peace.

Simon Coveney (Cork South Central, Fine Gael)
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The Deputy is an embarrassment.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Despite espousing the slogan successfully for several years, Fine Gael is walking away from it.

Kieran O'Donnell (Limerick East, Fine Gael)
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Has the Deputy read the motion?

Seán Fleming (Laois-Offaly, Fianna Fail)
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The Deputies opposite know the reduction will not be passed on.

Charlie O'Connor (Dublin South West, Fianna Fail)
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The Deputy is entitled to speak without interruption.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Had this policy of capital taxes on electricity generators been proposed by Sinn Féin, we would have put it down as the usual stuff expected from that party, but I am surprised it is Fine Gael's motion. If its Deputies paid attention to what was occurring in the country, they would know the ESB has put in place a new €22 billion strategy up to 2020. This will see a major investment in renewable energy, lead to a halving of the ESB's carbon emissions within 12 years and achieve a net carbon-zero effect by 2035. I am surprised the Fine Gael response is to impose a capital tax.

Leo Varadkar (Dublin West, Fine Gael)
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Does Deputy Fleming know what a capital tax is? I can see why Fianna Fáil's accounts were so dodgy when he was its financial controller.

Seán Fleming (Laois-Offaly, Fianna Fail)
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European finance Ministers, who met recently, understand the situation. While there are inflationary pressures, I cannot excuse Fine Gael's knee-jerk reaction of attempting to introduce new taxes when the economy is starting to get into difficulty.

Kieran O'Donnell (Limerick East, Fine Gael)
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What new taxes?

Simon Coveney (Cork South Central, Fine Gael)
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On whom?

Kieran O'Donnell (Limerick East, Fine Gael)
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He should qualify his statement. What new taxes are being proposed?

Seán Fleming (Laois-Offaly, Fianna Fail)
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Were Fine Gael allowed, this would be the essence of what it would try to do.

Simon Coveney (Cork South Central, Fine Gael)
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The Deputy is speaking nonsense.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Deputy Fleming without interruption.

Simon Coveney (Cork South Central, Fine Gael)
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He should read the motion before rising to speak.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Fine Gael would fund this tax cut by placing a levy on windfall gains of electricity. In my terminology, this levy would be taxation.

Simon Coveney (Cork South Central, Fine Gael)
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Does the Deputy know what a windfall is? He should ask the Minister for Finance.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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From what I read, Fine Gael is proposing a self-financing tax.

Seán Fleming (Laois-Offaly, Fianna Fail)
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It would be a levy.

Simon Coveney (Cork South Central, Fine Gael)
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It is a levy on something being gained for free.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Fine Gael does not have the guts to specify the level of the levy, be it 10%, 20%, 40% or 60%. When Fine Gael was last in Government——

Simon Coveney (Cork South Central, Fine Gael)
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Is it not self-explanatory? The levy depends on the price of carbon.

Seán Fleming (Laois-Offaly, Fianna Fail)
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——it was happy with 60% tax rates. Income tax and PRSI were more than 60%.

Simon Coveney (Cork South Central, Fine Gael)
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The Deputy did not take the time to examine the detail of the motion and he is disrespecting the House by waffling.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Are we returning to the high-tax Fine Gael policies by placing a levy on electricity generators? Why did Fine Gael not call for 60%?

Simon Coveney (Cork South Central, Fine Gael)
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The Deputy does not understand the motion.

Seán Fleming (Laois-Offaly, Fianna Fail)
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I understand it well.

Simon Coveney (Cork South Central, Fine Gael)
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He does not.

Charlie O'Connor (Dublin South West, Fianna Fail)
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Deputy Coveney should allow Deputy Fleming without interruption.

Simon Coveney (Cork South Central, Fine Gael)
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He is an embarrassment.

Seán Fleming (Laois-Offaly, Fianna Fail)
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The Exchequer returns are less than projected in the budget, but the difficulties were signalled at the time.

Kieran O'Donnell (Limerick East, Fine Gael)
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Such as what?

Seán Fleming (Laois-Offaly, Fianna Fail)
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Of the issues that have arisen, most stem from outside the economy and are not within our control.

Simon Coveney (Cork South Central, Fine Gael)
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This bit is.

Seán Fleming (Laois-Offaly, Fianna Fail)
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The exchange rates between the euro, the dollar and the pound are beyond our control, but we highlighted that they would be of concern.

Kieran O'Donnell (Limerick East, Fine Gael)
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The Deputy can do something about it.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Despite difficulties, the OECD predicts a growth rate of approximately 1.5%——

Leo Varadkar (Dublin West, Fine Gael)
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The worst rate since the 1980s.

Seán Fleming (Laois-Offaly, Fianna Fail)
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——and more than 3% next year, a significant improvement on the situation and pessimistic projections. Given the financial returns of the first couple of months of the year, it is wrong to propose a mini-budget before the summer recess. In recent years, the Government has been responsible in its activities via its annual Estimates and taxation and budgetary policy. As it should continue to be responsible, I do not subscribe to the idea of introducing new taxes and mini-budgets. We used to do so when Fine Gael was last in Government. Fortunately, we have moved away from that and I am happy to see——

Simon Coveney (Cork South Central, Fine Gael)
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It is time-sensitive. With every month that passes, householders pay an extra 10%.

Kieran O'Donnell (Limerick East, Fine Gael)
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The Minister will introduce new taxes and a mini-budget shortly.

Charlie O'Connor (Dublin South West, Fianna Fail)
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I have asked Members to allow Deputy Fleming to speak without interruption nine times. He has two minutes left and is entitled to finish without interruption.

Seán Fleming (Laois-Offaly, Fianna Fail)
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More important than the knee-jerk reaction of the Opposition is that carbon allowances will be auctioned on a commercial basis. The provision of a free quota, as it were, need not be paid for. The situation is reminiscent of Fine Gael asking for a levy to be placed on farmers who got free milk quotas when they were introduced. This is the concept in the motion.

Simon Coveney (Cork South Central, Fine Gael)
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What is Deputy Fleming talking about?

Seán Fleming (Laois-Offaly, Fianna Fail)
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Fine Gael wants to introduce a levy on carbon quotas allocated to power generators. This logic is extraordinary.

Simon Coveney (Cork South Central, Fine Gael)
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Even the Minister cannot help laughing, the Deputy's comments are so farcical.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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We are all creatures of EU law.

Seán Fleming (Laois-Offaly, Fianna Fail)
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The essence of Government energy policy, as set out in the programme for Government, is——

Simon Coveney (Cork South Central, Fine Gael)
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Farmers are not a State company.

Seán Fleming (Laois-Offaly, Fianna Fail)
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——to ensure security of supply and price competitiveness. We would not have the latter were we to introduce levies willy-nilly. Fine Gael's proposal does not even outline the percentage. I would have had more respect for the Deputies' motion had they considered it and outlined the percentage, be it 60%, 50% or 75%. Before the debate concludes, perhaps they will inform the House what level they envisage.

Simon Coveney (Cork South Central, Fine Gael)
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It depends on the cost of carbon. Deputy Fleming does not understand.

Seán Fleming (Laois-Offaly, Fianna Fail)
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Our policy will be more environmentally sustainable in the long run. Major negotiations on carbon credits are occurring at EU level.

Máire Hoctor (Tipperary North, Fianna Fail)
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In addressing this motion regarding taxation and energy matters, it is important that we consider a number of factors, including Ireland's economic performance to date——

Simon Coveney (Cork South Central, Fine Gael)
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Is the Minister going to explain that? It is not working.

Máire Hoctor (Tipperary North, Fianna Fail)
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——the current economic challenges and the best means by which we can face these future challenges, which is the intention of this motion.

Richard Bruton (Dublin North Central, Fine Gael)
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The chuckle brothers.

Máire Hoctor (Tipperary North, Fianna Fail)
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Our economic performance to date illustrates the success of the policies previous Governments have pursued. The economic statistics illustrate the success of these policies. Our debt-GDP ratio is extremely low and will be approximately 26% at year end compared to 65% in 1997. When account is taken of the National Pensions Reserve Fund, this figure stands at 14% of GDP.

Since 1997, we have achieved an average economic growth rate of over 6%, more than twice the EU average. We have radically reduced personal, business and capital tax rates, encouraging enterprise and improving real take home pay. Unemployment has fallen dramatically and we have been effectively a full employment economy at a time of strong population growth and net inwardmigration. Our policies promote enterprise. The total number employed now stands at almost 2 million. Approximately 500,000 more people are at work compared to 1997. This is an increase of over a third and compares to employment growth of less than 10% in the EU15.

This performance was exceptional by any standard but we must now take account of the international economic developments which have a crucial bearing on prospects for the Irish economy. Given the climate of uncertainty which characterises the global economy at present, I wish to speak about the environment.

With regard to the European economy, the EU Commission in its latest assessment has revised downwards its projections for growth this year. Another important international economic development has been the pick-up in inflation over the past year or so. Until recently, emerging market economies imparted a deflationary stimulus to Europe and the US, mainly through the provision of cheaper manufactured goods. More recently, however, growth in these economies has put pressure on energy and food prices. Additional global demand for various foodstuffs has also put pressure on prices, while the diversion of agricultural land to bio-fuel production has restricted supply. The result has been food price inflation which, when combined with higher energy price inflation, has imparted an inflationary stimulus to developed economies.

On the domestic front, an adjustment towards more sustainable levels of new house building is under way, which will have a restraining influence on growth in the near term. This is a labour intensive sector and, therefore, employment growth is expected to slow this year. In the December budget, the previous Minister for Finance implemented a number of measures designed to support the housing market, most notably reform of the stamp duty regime. The purpose of these changes was to restore confidence to the market in order to ensure an orderly transition to more sustainable levels of output in this sector.

This Government recognised the pressures from a decline in the new house market that would occur in 2008 and, therefore, used fiscal policy to provide support for the economy. This year, current spending will rise by approximately 8%, with an even larger increase in capital expenditure. This measure has provided some support, but, unfortunately, overall economic performance has been deteriorating. The end of May Exchequer returns published today show a continuing deterioration in the economic situation with the tax take below profile. The House will recall that, at budget time, an Exchequer deficit of €4,866 million was projected for this year. At the end of April, the Department of Finance stated that the overall tax receipts for the first four months of the year were €736 million, or 5.3%, behind target. As the Minister indicated at that time, that shortfall is not expected to be recouped. While income tax receipts are on target, there has been a drop in capital gains tax, stamp duty, VAT and capital acquisitions tax.

Today, the OECD economic outlook is forecasting a GDP growth rate of 1.5% for Ireland, picking up to 3.25% next year. There is no doubt that the fiscal position has weakened from that envisaged at budget time and that many of the downside risks I outlined at that time have been realised. Our economic fundamentals are sound and if we adopt a prudent approach to public spending, we are well placed to weather this international economic storm. There are several reasons that we can weather it. Some of these factors are demographic, but many of them are related to positive Government actions taken over previous decades and years.

In meeting these challenges our population is young and dynamic, while the labour force is flexible and increasingly well educated. As part of the national development plan we are investing in infrastructure to bring Ireland's public capital stock more in line with that of other developed countries. This year, capital spending will rise by 12% and will remain at high levels for many years to come. We are deepening the skills pool through investing in education at all levels within the framework of the NDP. Fourth level education is receiving special attention, which is appropriate given the premium on knowledge creation in a globalised economy.

We are implementing sound fiscal policies to maintain a low burden of taxation on both capital and labour and to keep public indebtedness low. We are maintaining an efficient regulatory environment which does not add to the burden on firms. All of these factors will support productivity growth, raise participation rates and enhance the productive capacity of our economy.

Research and development are the keys to a more knowledge-intensive economy aimed at providing a sustainable long-term basis for growth in employment and incomes. The research and development tax credit scheme is an important part of the overall strategy to encourage the undertaking of more research and development in this country.

Practical measures to help protect the environment are necessary to have a real impact on it. With regard to measures to deal with pressures on food and fuel, in considering these proposals to radically change VAT rates we must remember that taxation is normally considered as part of the overall budgetary process. This reduces the risk of rash proposals which lead to unanticipated difficulties, namely, in terms of secondary economic effects and also negative effects on society and the environment.

The Fine Gael proposal to change the reduced rate of VAT from 13.5% to 12.5% is unlikely to achieve its aim due to the likelihood that any reduction in the VAT rate would be absorbed by retailers and wholesalers and would not be passed on to consumers. Another factor is that because these high fuel and food prices are an international phenomenon, it is not possible for Ireland to act alone. We must take action in conjunction with our European partners to ensure that we can maximise our potential to reduce prices to those who can least afford to pay the increases.

I take this opportunity to firmly set out the tax position in Ireland. We do not charge VAT on food. We have some of the lowest taxation on fuel, especially in comparison to our competitors. We are below the average price for both the EU27 and EU15. VAT content of auto diesel and other fuels used in the course of business is a deductible tax credit so that VAT may be reclaimed by hauliers, fishermen and other businesses.

There is no sound economic rationale for reducing VAT or issuing VAT reductions, especially as both of these price benefits will be taken either by wholesalers or producers, leaving the public subsidising an unsustainable fuel level from public funds. This is very much in line with position taken by most of our EU colleagues.

I look forward to voting in the correct manner on the motion, in support of the Government and, more important, to voting "Yes" to the Lisbon treaty which will place us at the heart of the EU. It is only there that we will be able to take the effective action in conjunction with our fellow member states to ensure that sustainable long-term solutions can be found to the international difficulties that face us regarding the high prices of commodities.

Joan Burton (Dublin West, Labour)
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I wish to share time with Deputy Martin Ferris and with Deputy Liz McManus tomorrow morning.

Fine Gael are to be complimented on raising this issue which is very complex. We must tease out the purpose of the motion and what its impact might be, especially regarding carbon emissions. There is a cross-party agreement about the need to reduce these because of their impact on the planet but also because, from last year, those carbon emissions will cost this country more and more each year if we do nothing about them.

When the then Minister for Finance, Charlie McCreevy, last cut VAT in 2001, he reduced the top rate from 21% to 20%. However, the rate of VAT had to be raised again from 20% to 21% in the following budget, because the decrease was not passed on to consumers. The difficulty with this motion is that it focuses on the generation of funds using carbon emissions and the emissions trading scheme, but who benefits and are these people just beneficiaries? Unfortunately, if the VAT rate is reduced from 13.5% to 12.5%, there is no mechanism suggested in the Fine Gael motion whereby the benefit of that reduction is guaranteed to be passed on to consumers. This applies to those filling their tanks with oil or diesel and those buying the limited range of products and services which are taxed at 13.5%.

The €1.6 billion windfall to electricity generators arising from the highly flawed and complex EU emissions trading system is a red herring. Unlike actors in the private sector, the ESB did not receive a full carbon credit allocation for its needs. It will have to buy credits from abroad or else pay a fine. It is not clear when this system will begin. Under the current regulatory system the bulk of that cost will be passed to end users and ordinary consumers and there is no guarantee that ordinary consumers will benefit from the reduction.

This motion does not impact on the other major carbon emitters, especially the cement industry. I understand the difficulty of those who framed the motion as the second largest carbon emitter is the cement sector, which is a private industry. CRH plc is the dominant player in the industry in terms of carbon trading. There is no indication of what impact there would be on it as a major carbon emitter. The ESB is owned by the taxpayer and from his or her point of view it is a question of moving money around. As the ESB could face potentially large fines which the taxpayer would have to fund, the public purse might be used to fund for the apparent saving in a different way over a short time. The energy regulator has agreed to electricity price increases because of the increasing cost of power generation.

CRH plc received a free allocation of carbon credits from the Government. Its allocation represents a greater proportion of carbon credits than it needs and it is the biggest emitter of carbon dioxide. The proposed reduction in the VAT rate from 13.5% to 12.5% applies to a limited range of goods and services. Ironically — I do not know if this was in the minds of those who framed the motion — the producers of concrete and concrete blocks would be among the major beneficiaries of this reduction. This does not apply to paving and other types of masonry, which are taxed at the 21% VAT rate. The reduction would apply to the core business of concrete producers. The reductions would not necessarily affect those in the housing industry who concentrate on more environmentally friendly production, which leaves the motion with unresolved problems.

The Exchequer figures released today paint a dire picture for the new Minister for Finance. The deficit for the first five months of 2008 is running at €3.6 billion, whereas this time last year there was a surplus of over €200 million. The worsening position for the first five months of this year amounts to a swing of €3.8 billion in one year, which is a serious position for the economy and we should examine the motion in that context. The Labour Party cannot support the motion as set out here as it lacks definition and seeks to change a specific tax rate in a narrow rather than a comprehensive way. Given the state of the Exchequer returns which we heard of today, what is needed is a comprehensive package to address the varying needs of the economy. The outcome of simply changing a narrow VAT rate as suggested is not certain.

The wording of the Fine Gael motion seeks especially to address the rising cost of fuel facing motorists at the fuel pump with the problems of others, including pensioners who face the possibility of fuel poverty. However, the difficulty with reducing the VAT rate from 13.5% to 12.5% is an altogether uncertain outcome. The only previous occasion on which a VAT reduction was attempted was in 2001 by the then Minister for Finance, Mr. Charlie McCreevy. The following year when the economic situation worsened Mr. McCreevy was forced to raise the rate again as suppliers, wholesalers and retailers absolutely refused to pass on the benefit of the VAT reduction to the intended beneficiaries, namely, the people who bear the VAT, the ordinary families and those not otherwise registered for VAT. Those in business pass on VAT to the end user. This issue needs to be addressed and teased out.

This is a very difficult time for the economy. It behoves us all as politicians to treat seriously these issues and the looming Government deficit and to advance responsible policy positions. These positions need to be strategic, take account of short and medium-term needs and must be clearly targeted. We must be certain of the outcome of the impact of these positions. This proposal is, unfortunately, short term in nature; the period covered runs to 2012. If the medium and long-term outlook for the economy continues to remain as negative as today, what will replace this proposal when we reach 2012 and these proposals disappear?

There are two Irish economies, the construction sector and the rest. The notion that the rest of the economy need not be taken into account in this motion is wrong. The Labour Party said previously much work needs to be done by the construction industry to meet commitments in the national development programme. Schools endure sub-standard accommodation in prefabs. There are issues with public transport provision. If there was, for example, a definitive investment in public transport with 300 extra buses for Dublin city, or investment in the extra transport required for the rest of the country, there would be a stimulus to the economy, but there would also be a potentially significant reduction in carbon emissions. This, in turn, would reduce the penalties due to be imposed on Ireland by the European Union. The Labour Party will not support the motion for this reason.

Martin Ferris (Kerry North, Sinn Fein)
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I thank Deputy Burton for sharing time. Sinn Féin does not support the free allocation of carbon allowances to energy generating companies and others. In allocating these allowances free of charge, the Government undermined the ability of the measure to function as originally envisaged. While these companies were allocated carbon allowances free of charge, they are required by the electricity regulator to include the cost of carbon in electricity pricing. This is something the Government should have considered at the time it was allocating the allowances. My party's position on this issue has been shown to be correct.

lf the regulator's requirement has the effect of increasing costs for households, it is reasonable for the Government to impose a levy on what will, as this motion states, be a windfall profit. The only concern I have regarding the Fine Gael proposal is whether it might have the unintended effect of further pushing up electricity costs for consumers. Sinn Féin has argued that revenue generated from carbon taxes or levies should, as far as possible, be recycled for use in promoting energy efficiency. If revenue is raised by way of a levy on electricity generators, consideration must be given to using part of this revenue to alleviate the plight of those experiencing fuel poverty. This is of paramount importance. Low and average income households consume a greater proportion of their income on daily necessities such as food, heating, housing and transport. The poor spend twice as much on fuel as a proportion of their incomes.

Sinn Féin has put forward several proposals to tackle fuel poverty. We proposed the introduction of a new scheme, based on the residential renewable energy grant scheme, specifically for low-income households. Under the scheme, anyone entitled to fuel allowance or with an entitlement under the free energy scheme would be eligible for a grant to cover the full cost of installation of sustainable heating alternatives. We also proposed a substantial expansion of the warmer homes scheme. Positive discrimination must be directed to the less well-off in society as a priority. The impact of rising prices on low-income families is a matter of serious concern. In the case of fuel and food, these rising costs are pushing people into poverty. We must look at how these can be addressed while also examining how tax policy impacts on those on low incomes.

This debate raises important questions about consumption taxes and the proportion of the overall tax take which is raised by way of such taxes. The unfair impact of high indirect taxes on low and average-income earners is a major concern for Sinn Féin. We have repeatedly pointed out that indirect taxes such as VAT are inherently regressive as they are paid at a fixed amount or fixed percentage of a price and, therefore, do not take into account the ability of the taxpayer to pay the tax. These types of taxes hit low-income earners hardest. This is a significant concern because almost one third of the overall tax take is raised through VAT and more than 13% by way of excise duties. In 2006, a Combat Poverty Agency report found that indirect tax payments for the lowest-income households amounted to more than one fifth of income, while the corresponding figure for the wealthiest households was just over 9%. Thus, those on low and average incomes end up paying more than their fair share of taxation through income tax and high indirect taxes. This anomaly must be tackled.

Changes in the tax base over the last decade, including cuts in income taxes which have benefited the well-off and increases in indirect taxes which disproportionately impact those on low incomes, have meant a lower tax burden for those on high incomes and a corresponding greater tax burden for those on lower incomes. Moreover, changes in the tax base saw the Exchequer become overdependent on consumption taxes and thus open to a sharp contraction in revenue as consumer spending slows. We are now beginning to see the impact of this on Exchequer revenues. The indications are that consumer spending will continue to slow and that the consequences of this for the Exchequer are likely to impact on public services.

While there are some anti-regressive features built into the current consumption tax system, such as the non-taxing of children's clothes and footwear and the reduced VAT rate on food and fuel, the full scope for introducing new anti-regressive and pro-energy efficiency measures should be examined. A review of the tax system must include a consideration of how the burden of indirect taxes such as VAT can be reduced, given the impact these have on the less well-off. Is this issue being examined by the Commission on Taxation?

While the Fine Gael motion includes some interesting suggestions, I am not convinced by the linking of the proposed cut in VAT with the proposed levy on unearned windfall gains from electricity generators. While reducing VAT is one measure the Government can take to reduced inflationary pressures, we must look at other factors which contribute to inflation. These include user fees and service charges for public services.

The Government must change its approach to the management of the economy. There is a clear need for a hands-on approach to tackling the economic challenges we now face. The public finances have deteriorated dramatically in recent months. The Government failed to ensure they remained healthy. The economy was allowed to become unsustainable as growth in the last five years was driven by domestic consumption rather than by exports or trade. In addition, the unsustainable construction sector was fuelled by the greed of the banking system. We are now beginning to pay the price for failing to ensure the economy was built on solid and sustainable foundations.

One of the challenges in terms of economic management is that tax revenue is well below projections. In the first four months of 2008, some €927 million less in tax revenue was collected than in the same period in 2007. This amounts to an alarming reduction of 6.5% in tax revenues. Sinn Féin calls on the Minister for Finance, Deputy Brian Lenihan, to state clearly that he will not proceed with the tax cuts proposed in the programme for Government. Above all, we ask him to outline how he intends to ensure public finances are adequate to pay for essential public services. Infrastructure delivery must be prioritised and tightening public finances should not be used as an excuse to postpone key infrastructural projects. If necessary, borrowing should be used to finance these projects, which will play a significant part in ensuring future competitiveness.

There has also been a failure by the Government and relevant Ministers to ensure education and training are targeted at workers in vulnerable sectors of the economy. In addition, there has been a failure to increase the numbers of workers participating in upskilling. Nothing has been done specifically to address the plight of vulnerable construction sector workers, either to protect their jobs or to ensure they are enabled to access alternative employment. There must be action from the Government to tackle inflationary pressures, to ensure jobs losses are minimised and job creation maximised and to put the economy back on a stable and competitive footing.