Willie O'Dea (Limerick East, Fianna Fail)

I sincerely thank Senators for their comments and will try to address each of them as best I can.

First, however, I want to outline to the House the economic context of the legislation. The Bill is being presented against the backdrop of more modest growth in the Irish economy. As is well known, this reflects the significant reduction in house-building activity we are currently going through in terms of adjusting towards more sustainable levels of activity in this sector. In addition, it also reflects a more challenging international economic climate. On foot of these developments, the budget day forecasts envisaged that GNP would grow by 2.8% this year. Others have taken differing views with the range for growth extending from 2% to 4%. Regardless of where one is on this scale, this represents a slowdown compared to recent years, but is still a healthy rate of growth compared with our major trading partners.

The more modest economic growth which is in prospect for this year will have implications for the public finances and for the labour market. I would like to briefly elaborate on those. In terms of the fiscal situation, it is clear that our overall public finances remain strong. We have carefully managed the public finances over the last decade and have delivered general Government surpluses in ten of the past 11 years. General Government debt is forecast to be about 26% of GDP at the end of 2008, one of the lowest ratios in the euro area. When account is taken of the build-up of assets in the National Pension Reserve Fund, the debt-to-GDP ratio, net of those assets, is estimated to be around 14% at the end of 2008, which is a historic low.

This year, the budget is based on a general Government borrowing requirement of 0.9% of GDP. Thus, we are planning for some modest borrowing which is prudent as it will allow us to implement the National Development Plan which will, in turn, enhance our productive capacity and thereby lay the foundations for future improvements in living standards.

Tax revenues are projected to grow by the order of 3.5% for this year. Taxes to the end of February were €516 million or 6.4% below expectations and 8.3% down on end-February 2007. While it is too early to draw any firm conclusions from the first two months' data, the weakness — in particular, in capital gains tax — is of concern. The Department of Finance monitors tax receipts and expenditure on an ongoing basis and as more data become available during the year, any significant changes to the expected Exchequer position in 2008 will be signalled and presented at the end of each quarter.

Turning to the labour market, the rate of employment growth is expected to slow this year. This is a reflection of lower levels of output in the new house construction sector, which is a labour-intensive sector. Overall employment growth is expected to remain positive, however, and a net increase in employment of 24,000 or 1.1% is expected. The strong labour market performance in the final quarter of last year, when employment rose at an annual rate of 3.2%, supports this assessment. While some increase in the unemployment rate appears likely — we are currently seeing this in terms of live register developments — it is expected to remain below the European average.

In terms of wider economic developments, while short-term prospects are undoubtedly more challenging than we have become accustomed to in recent years, it is important to emphasise that our medium-term prospects remain favourable. This is not just the Government's view, it is the view of most economic commentators. Our population is young and dynamic, while the labour force is flexible and increasingly well educated. Sound fiscal policies have enabled us to reduce the burden of taxation on both capital and labour, and to keep public indebtedness low. We also have an efficient regulatory environment. Our markets are flexible, adaptable and responsive to change.

Moreover, as part of the National Development Plan we are investing in infrastructure in order to bring Ireland's public capital stock more in line with that of other developed countries. Within the framework of the NDP, capital spending as a percentage of national income will remain at high levels — both by international standards and as a percentage of national income — for many years to come. We are deepening the skills pool through investing in education at all levels, within the NDP framework. The skills level of the population will become an even more important factor driving living standards in an increasingly globalised economy.

All of these factors will support productivity growth, boost competitiveness and enhance the productive capacity of our economy. In addition, once short-term difficulties are overcome there are grounds for optimism regarding housing market developments. This is because the underlying demand for housing remains relatively high, supported by a relatively young population, continued inward migration together with a relatively low per capita housing stock. It is estimated that the underlying medium-term demand for housing is around 60,000 units per annum. This level of activity is equivalent to levels prevailing at the beginning of this decade, which is still fairly high in both historical and international terms. In these circumstances, once confidence is restored to the market, therefore, the medium-term prospects are reasonably solid. In this regard, the stamp duty measures contained in the Bill the Tánaiste announced at budget time should underpin this confidence.

It must be also recognised that other parts of construction continue to perform well, especially spending on infrastructure under the continued roll-out of the NDP. Outside construction, other sectors of the economy are performing well. Services exports have recorded annual growth rates of around 10% in each of the past five years, with exports of financial services, computer and business services recording particularly strong growth. As a result, services exports now account for nearly two-fifths of total exports and Ireland is now the fifth largest exporter of commercial services in the world — an astounding figure for an economy of our size. The shifting of resources into internationally traded, high value-added services reflects the next phase of development for the Irish economy. In an increasingly globalised economy, internationally traded services will become the main source of highly-skilled, high-paying employment and this is where Ireland's competitive advantage will be. With the exception of the new house building sector, the headwinds into which our economy is now facing are external in origin. We cannot change these; instead, we must build on our strengths in order that we are in a position to benefit from the global recovery when this emerges.

Full implementation of the programme of investment in infrastructure and education under the NDP is an important first step. Maintaining flexibility, prudent management of the public finances and the promotion of a pro-business environment with a low burden of taxation are also crucial. A shared sense of understanding, as embodied in the consensus approach to policy formation, is important too.

The benefits of this approach are clear and the facts speak for themselves. Since 1997 the economy has grown at an average annual rate of more than 7%, one of the best economic performances in the world. Annual employment growth has averaged 4% since 1997, with the number of people at work rising by nearly 700,000 over this period. Immigration has replaced emigration. Economic success has enabled us to improve public services without putting a strain on the public finances. Our ratio of public debt to GDP remains one of the lowest in the euro area. We have developed a substantial export sector, particularly in knowledge-intensive sectors such as IT, chemicals and financial services. In summary, therefore, it is clear that this Government is best placed to address short-term economic challenges and that the economy is doing so from a position of strength. The fundamentals of the Irish economy are strong as a result of key policies implemented by this Government.

I will now address a number of points that have been raised by Senators. Senator Twomey said the Government was introducing new tax incentive schemes without any appropriate cost-benefit analysis study. This is simply not true. In budget 2006, the Tánaiste made it clear that any proposals for the introduction of new special incentive reliefs should, as far as appropriate, be time-limited and be subject to an assessment of costs and benefits prior to their introduction. Since then, the mid-Shannon scheme was subject to an independent cost-benefit analysis before it was introduced, and the film relief scheme was subjected to an independent cost-benefit analysis before it was extended. Therefore, the Senator's assertion that no cost benefit analyses are being conducted is simply not true.

Senator Twomey also raised the issue of the capital gains tax exemption where a parent gives a site to a child to build a house. The Bill provides for an increase in the exemption threshold from €254,000 to €500,000 and this reflects the substantial increase in the value of building sites in urban areas. In rural areas, the problem of acquiring sites in family situations is not as problematic and there are no plans to expand the current provisions. The changes introduced in the Finance Bill can be regarded as pro-family. They allow parents and their children to live close to each other, which will help people in urban areas to secure houses in their home neighbourhoods.

Senator Twomey also alleged that this Bill was doing nothing for business, whereas in fact there are a number of measures which support business. For example, section 24 finalises the legislation, already provided on a temporary basis, for the revised seed capital and business expansion schemes. Having been approved by the European Commission under state aid rules, these schemes will now be available to support innovative enterprise up to the end of 2013. In addition, we are providing a further ten-year look-back period from 2014 onwards.

There also has been a substantial increase in the VAT registration threshold and in the threshold for payment of corporation tax. These measures will simplify the regime for business and make the transaction of business easier. There are a number of other measures in the Finance Bill which benefit businesses. The Finance Bill enhanced the existing research and development tax credit scheme by extending the current base year of 2003 for a further four years to 2013, which is an increase over the current six years. I have already mentioned what will happen after that.

The Finance Bill contains provisions, in section 31, aimed at reducing CO2 emissions from vehicles used for business purposes by directly linking the level and availability of capital allowances to CO2 emissions. This will be done by restricting or removing the amount of tax relief available for high CO2 emission vehicles while increasing the relief for certain low CO2 emission vehicles. This should act as an incentive to business to purchase or lease lower emission vehicles. The changes will also apply to leasing expenses on business vehicles, thus ensuring businesses will get the same benefits as private individuals.

The Bill introduces measures to reduce administrative red tape for companies by negating the requirement to estimate the amount of preliminary tax due in the current year. This is done in two ways: by an increase of €50,000 in the small company tax liability threshold from €150,000 to €200,000, and by companies opting to pay preliminary tax on the basis of 100% of previous year's liability rather than 90% of the current year's liability. The changes cover an additional 550 companies out of an estimated 2,700 companies who do not have the small company option. It is estimated that 97% of companies have the small company option. The new company threshold was increased by €50,000 from €150,000 to €200,000. The Finance Act 2007 relieved these companies of the obligation to pay preliminary tax in their first year of operation.

The Bill introduces a new incentive based on accelerated capital allowances aimed at supporting investment by companies in new energy efficient equipment. It follows from work undertaken by consultants on behalf of Sustainable Energy Ireland which suggests a role for Government intervention in providing supports to businesses to incentivise investment in energy saving technologies. The incentive will assist in improving companies' cost competitiveness and should lead also to a reduction in overall energy demand and help reduce carbon emissions. The incentive is being restricted to companies to contain Exchequer costs while seeking to change behaviour in this area. It should be viewed as a pump-priming exercise. It is proposed to limit its operation to three years. It is hoped that over time companies, business and people generally will see the ongoing value of investing in energy efficient equipment in terms of improved economic returns for them and environmental benefits for society in general.

The Bill also provides for an extension of capital allowances to camping and caravan sites to encourage this sector of tourism. Senator Twomey criticised measures taken in respect of income tax. The tax treatment of employees in Ireland compares favourably with the treatment of employees in all other OECD countries. New data from the OECD which have become available in the past fortnight highlight the low tax burden faced by workers in Ireland. These data indicate that a married, one income couple on average earnings and with two children continues on the lowest average tax rate in the entire OECD. For the sixth consecutive year, when cash benefits from the State are taken into account, such families face a negative tax burden, receiving more money in cash transfers from the State than they pay in income tax and social security contributions.

In addition, for a single person in receipt of the average wage, Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the OECD. A low tax wedge makes it easier for employers to take on new employees. The fact our unemployment rate is one of the lowest in the EU is no coincidence. These figures do not take account of the further improvements made in the budget for 2008.

Senator Quinn mentioned tax reliefs for philanthropy. The Senator will be aware that section 848A of the Taxes Consolidation Act 1997 provides for tax relief at the marginal rate on donations made by individuals or corporate bodies to eligible charities and other approved bodies including first and second level schools and third level institutions, including universities. This is a generous scheme by any standards. Following the introduction of the restriction on the use of tax reliefs by high income individuals in the budget for 2006, the Tánaiste received a number of representations on the inclusion of the donations scheme on the list of reliefs to which the measure applied and carefully considered the arguments put forward. The issue was also discussed in some detail in the Dáil on Committee Stage of the Finance Act 2006. The views of political parties were divided on the issue. The Tánaiste decided that, on balance, the donations scheme should remain on the list.

Removing the scheme from the specified reliefs list would reduce the effectiveness of the restriction, the aim of which is to increase the effective tax rate of those on high incomes towards 20%. Given that the proportion, even of high income individuals, who are affected by the restriction is relatively small, it is expected that the socioeconomic objectives of the donations scheme will still be met. In addition, where relief under the donations scheme has been denied in any one year as a result of the restriction, it can be carried forward to the next year and following years, if necessary.

Senator Twomey also referred to the changes to the scheme of capital allowances and leasing expenses for business cars and sought to link this to Ministers who in some way should be liable for costs in this area. I should clarify that the scheme referred to is a relief for business and has no application to Ministers or private individuals. The scheme is being amended to restrict tax relief for high CO2 emitting vehicles while rewarding business with higher reliefs for purchasing lower cost, lower CO2 emitting vehicles. These are appropriate policy aims. This incentive is aimed at supporting investment by companies in new energy-efficient equipment. It follows from work undertaken by consultants on behalf of Sustainable Energy Ireland, SEI, which suggested a role for Government intervention in providing supports to businesses to incentivise investment in energy-saving technologies. The incentive will assist in improving companies' cost competitiveness and should lead also to a reduction in overall energy demand and help reduce carbon emissions. The incentive is being restricted to companies to contain the Exchequer costs while seeking to change behaviour in this area. It should be viewed in the nature of a "pump-priming" exercise and it is proposed to limit its operation to three years.

The Green Paper on pensions published last year and currently undergoing a period of public consultation sets out the range of challenges facing us in the pensions area including, the advantages and disadvantages of extending the flexible approved retirement fund option available to some and not to others. It has begun the debate on the options we should take over a range of pension related issues. Whatever decisions are taken must be made in an integrated and planned way and not in a piecemeal fashion. This is what the Government, in conjunction with the social partners, intends to do.

Questions were raised in respect of VAT rates in Ireland. Having regard to the claim that Ireland operates a high level of indirect taxes, specifically VAT, I point out that Ireland operates a zero VAT rate and a reduced VAT rate which, in terms of the range of goods and services to which these rates apply, compares favourably with other member states. On Ireland's standard rate of VAT of 21%, I note that the level of the standard rate across the EU ranges from 15% to 25% and averages at a level of 19.5%.

On the increase in the price of oil, the excise yield does not increase as the price of oil increases as excise is set at a nominal amount. On the other hand, the yield from VAT, as VAT is set as a percentage of the price, increases as the prices of fuels increase. It should be borne in mind in this regard, however, that to the extent that spending in the economy is reallocated to petrol and other oil products and away from other VAT liable spending and to the extent that the overall level of economic activity is reduced by higher oil prices, there may be little or no net gain to the Exchequer.

ECOFIN has at various times during the past two years considered increasing oil prices. It has concluded that reducing excise duties on fuels was an inappropriate policy response to increasing oil prices. Excise rates on petrol and auto-diesel in Ireland are around the EU average and are lower than many of our main competitor countries, in particular the UK.

The Tánaiste has used the tax system to promote environmental policies. Measures introduced in recent years include excise relief for bio-fuels of more than €200 million over five years from 2006. This will contribute towards meeting the 5.75% transport fuel market penetration by bio-fuels by 2009 and stimulate activity in the agricultural sector. Other measures are the inclusion of recycling companies in BES seed capital schemes from 2007 and tax relief for corporate investment in renewable energy. The Bill also provides for significant reform of the VRT system to take account of CO2 emissions and introduces tax initiatives for energy efficient equipment. It provides also for a reduction, from 21% to 13.5%, in the VAT rate applicable on certain supplies used for the agricultural production of bio-fuels. In addition to the incentive provided in the bio-fuels excise relief schemes in the budget for 2007, the Tánaiste provided funding for a national top-up of the EU energy crop payment from €45 per hectare to €80 per hectare. This payment is operated by the Department of Agriculture, Fisheries and Food and provides farmers with a further incentive to grow energy crops.

The VAT treatment of goods and services is governed by EU VAT law with which Ireland must comply. As for the VAT rate which applies to defibrillators, under the VAT directive, member states may retain the zero rates on goods and services which were in place on 1 January 1991 but cannot extend the zero rate to new goods and services. The zero VAT rate therefore cannot be applied to defibrillators which are subject to the standard rate. As for the application of reduced VAT rates, such rates may be applied only to those goods and services which are listed in annex III of the VAT directive.

In the case of medical equipment, the VAT directive provides for the reduced VAT rate to be applied to medical equipment for the exclusive personal use of a disabled person. However, it is not possible under EU VAT law to apply a reduced rate to defibrillators for general use. Therefore, the reduced rate cannot be applied to the supply of defibrillators. Exemptions from VAT are also governed by EU law and under the VAT directive we are not permitted to exempt the supply of defibrillators. Therefore, the only rate of VAT that can apply to the supply to defibrillators is the standard VAT rate, which is 21% in Ireland.

Senator Kelly said that we need to focus on high value added sectors such as financial services. The Bill contains a number of measures aimed at supporting financial sectors where Ireland is a market leader such as banking and treasury, funds management and insurance business.

Senator Kelly also referred to privatising hospice care. The Tánaiste was careful in ensuring that the section providing for capital allowances for capital expenditure on specialist palliative care units specified that the pre-approval of any proposed development in this area by the HSE with the consent of the Minister for Health and Children is a prerequisite in order to benefit under the scheme. This means that any proposed development which seeks to avail of the approval of the HSE and the Minister for Health and Children must be in line with the plans and needs assessment of both those organisations for the development of palliative care facilities in the State. By putting this pre-approval in place, we can ensure that existing voluntary services will not be undermined through competition. Senators will be aware that representatives of the Voluntary Hospice Managers Group are in support of this scheme and have publicly made the point that the Opposition has got the wrong end of the stick in its criticism of it. What is intended by this scheme is to ensure that it will help with the planned development of necessary palliative care facilities in the State in order to bridge the gap between supply and demand for these facilities in certain parts of the country.

Senator Kelly mentioned extending tax relief for donations to charitable organisations to tidy town organisations. I point out that a number of tidy town organisations already enjoy charitable tax exempt status, the first of which was approved some 20 years ago.

Senator Boyle mentioned issues around human rights organisations gaining access to the charitable donations scheme. I point out that certain human rights bodies can already avail of the tax exemption provisions of section 209 of the Taxes Consolidation Act 1997. They can also qualify for the donations tax relief scheme under section 848A. However, these sections only cover bodies for the promotion of the Universal Declaration of Human Rights and the implementation of the European Convention for the Protection of Human Rights and Fundamental Freedoms. To qualify under this provision a body must have consultative status with the UN or the Council of Europe. The position is, therefore, that human rights bodies, per se, do not currently qualify for charitable tax exemption status. This is a policy of long standing and relates to issues around their role in political advocacy, which traditionally has not been regarded as a charitable activity.

Senator Boyle raised the issue of the provision that is being introduced to deal with the break up of farm partnerships and suggested that the issue of the break up of married couples and other couples needs to be examined in the future. The Tánaiste and Minister for Finance has mentioned previously that in regard to the tax treatment of cohabiting couples, the Working Group Examining the Treatment of Married, Cohabiting and One-Parent Families under the Tax and Social Welfare Codes, which reported in August 1999, was sympathetic, in principle, to changes in the tax legislation to address the issues raised relating to cohabiting couples and it concluded that the options that it set out should be considered further. However, it acknowledged in regard to the tax treatment of cohabiting couples that a key issue is whether tax law should proceed ahead of changes in the general law.

This Bill introduced a number of measures aimed at assisting the ICT industry. Section 50 enhanced the existing research and development tax credit scheme in the ways I already mentioned. Section 47 reduces administrative red tape for companies by changing the definition of a small company for corporation tax purposes and other purposes. In addition, companies engaged in the ICT sector can avail of the pro-business measures introduced in the Bill. These measures include the availability of capital allowances for business which are aimed at reduce CO2 emissions.

Senator Buttimer referred to Cork Docklands. He criticised the Tánaiste for not including tax incentives for the project in this Bill. The Tánaiste, when introducing Second Stage in the House reiterated his recent comments on the use of tax incentives for the development of Cork Docklands. As the Senators may recall, he stated that the Cork project is at the beginning of a process of evaluation and that we would need to assess how best to devise proposals that would meet with European Commission state aid requirements. He went on to say that the docklands is an exciting project, but at this stage it is still very much a work in progress. He also indicated that an early announcement may not assist in clarifying some of the outstanding issues that have yet to be resolved between the various stakeholders. He said that the Cork Docklands Forum is expected to report by the middle of this year and that he remains open to examining ways in which the tax code can be used creatively to encourage investment and change behaviour.

It should be noted that the Tánaiste appreciates that, due to its unique location and potential, the regeneration of Cork Docklands is both a regional and a national priority. However, it should be borne in mind also that any decision to provide tax incentives for any specific location such as the docklands must take a number of factors into account such as the overall policy context underpinning the provision of tax incentives as previously set out by the Government; the general economic situation in the State; the position of the property market nationally and regionally; and the overall Exchequer position and the amount of taxation that would be foregone though any such incentive.

In regard to sales of alcohol, I assure the House that the Government is as concerned as anyone regarding the availability of alcohol and the problems to which it gives rise. Senators will be aware that the Government alcohol advisory group, recently established by the Minister for Justice, Equality and Law Reform, is examining, among other things, the increase in the number of supermarkets, convenience stores and petrol stations with off-licences, and the manner and conditions of sale of alcohol products in such outlets. The group has invited submissions from the public and is required to report to the Minister for Justice, Equality and Law Reform by 31 March 2008. The group is examining the issue of off-licences. The Tánaiste will therefore await the group's conclusions and make any necessary legislative changes in the Finance Bill next year.

Senator Burke raised the question of the increase in the surcharge from 10% to 20%. I do not have a note on this but I understand it is an incentive measure. If a person sets up a system to avoid paying tax and if the scheme fails, that person is penalised for setting up the scheme in the first place by the imposition of a 10% surcharge, namely being liable for the payment of 10% extra of the tax that is ultimately found to be due. If the person challenges the decision, there will be a change in the balance of proof. The onus in that respect will be on the person, if the tax inspector could have come to his conclusion reasonably. That would makes it difficult for the person to succeed in the event of an appeal. This can be avoided if the person issues a protective notification to the Revenue Commissioners in advance advising of his or her intention, or if he or she does so within 90 days of putting the scheme in place. To encourage people to give such notification, the surcharge has been increased from 10% to 20% in the event of failure to notify the Revenue Commissioners in advance. If a person gives such advanced notification to the Revenue Commissioners, they have an obligation to take a decision on whether this is a tax avoidance mechanism within two years. In other words, a decision must be made in that timescale. The Senator also raised another matter of tax avoidance by first-time buyers——