Seán Haughey (Dublin North Central, Fianna Fail)

I thank the Senators for their comments and I will try to address each of them as best I can in a moment but, first, I would like to outline for the House the economic context in which this Bill is being presented. This debate is taking place against the backdrop of a dramatically changed economic environment. We see the recent effects of developments in the international financial system and the impact that this is having on the global economy and its prospects. The majority of our trading partners are in or are on the verge of recession and this clearly has an impact on developments here.

On the domestic front, the contraction in the new house building sector, which will continue into next year, has significantly weakened economic growth. This has also been associated with a deterioration in consumer sentiment and weakness in the labour market, as evident from the very sharp rise in the numbers on the live register. On foot of these developments, the economy will contract this year, a fact borne out by national accounts data published recently. Moreover, as the Minister for Finance indicated in the Dáil recently, activity looks set to contract by approximately 3% to 4% next year.

However, despite this poor short-term economic outlook we still retain several of the structural achievements of the past decade with more than 600,000 more people now in employment than in 1998 and a doubling of export levels over the past decade. Our main economic focus now must be the restoration of international cost competitiveness. It is imperative that we are in a position to take advantage of the global recovery whenever it emerges. Maintaining public capital investment at high levels relative to national income, boosting productivity and ensuring credibility and sustainability in the public finances will all be helpful in this regard.

As a number of Senators have noted, yesterday the Government published a framework for sustainable economic renewal, Building Ireland's Smart Economy. The Taoiseach set out clearly the importance of this initiative and how it will provide this country with a platform on which to build for the future when there will be a new economic order where we need to be positioned to take full advantage of the opportunities that will be presented.

The measures contained in the Finance Bill will assist greatly as we aim to become the world's leading location for business innovation. The Bill supports research and development, which is crucial as we develop a critical mass of companies, Irish and international, at the forefront of innovation, creating the products and services of tomorrow.

The Government envisages Ireland as a country where entrepreneurs from anywhere in the world will want to come because it provides the best environment for the commercialisation of innovative, leading-edge products and services and a key to achieving this will be ensuring that we have the best tax regime.

The framework for sustainable economic renewal sets out a number of priorities and actions that we will be taking in the short and medium term and creates a focused structure within which future initiatives and actions will be taken. Building Ireland's Smart Economy is a framework that points to Ireland's successful future if we are to do the right things.

We must address the current economic challenges facing the Irish economy by stabilising the public finances, by improving competitiveness, supporting those who become unemployed and supporting Irish business and multinational companies. We must invest heavily in research and development and incentivise multinational companies to locate more research and development capacity in Ireland. This House has heard today how the Bill before it encourages such investment and we must ensure the commercialisation and retention of ideas that flow from that investment.

It is important that we support high-value innovation of products and services that will create hundreds of thriving Irish companies and associated employment and implement a new green deal to move us away from fossil fuel-based energy production though investment in renewable energy to promote the green enterprise sector and the creation of green-collar jobs. We must also continue to develop a first-class infrastructure that will improve quality of life and increase the competitiveness of Irish business.

In each of these areas, we aim to build on our specific strengths and address the threats to our future economic performance. As the Taoiseach stated yesterday, this framework should not be seen as an instant solution to all our problems. Many of the factors that will determine the timing and pace of the recovery, such as exchange and interest rates, are beyond our control. There are no magic bullets that can allow us to avoid the consequences of the international recession but we refuse to simply weather the perfect storm of negative international economic factors. We should not lose sight of the fact that while we must confront challenging economic circumstances, there are also great opportunities on the horizon.

A transformation of the Irish economy is necessary for sustained growth and increasing levels of future national welfare. Innovation is the key. Ireland must move up the value chain and assert itself not only as an open enterprise economy with a positive environment for foreign and direct investment but also as an open entrepreneurial economy with significant comparative advantages. I remind the Senators again that this Bill contributes in a significant manner to that development process.

A key feature of the smart economy is building the innovation or ideas component of the economy through the utilisation of the knowledge, skills and creativity of people and their ability and effectiveness in translating ideas into valuable processes, products and services. The framework we published yesterday sets out the strategic direction we wish to take to manage the transition of a new model of sustainable economic growth. It does not seek to outline all the reforms or measures that will be required across the economy. Instead, it sets out a clear direction the Government intends to pursue and some of the specific actions we will take in the short term to help get us there.

Senator Twomey also raised the issue of the social partners. As the Taoiseach noted yesterday, and I accept, this was indeed in Dublin Castle where we will engage intensively with the social partners in the coming weeks on how we can develop and implement this framework beginning with the need to devise a credible timeframe in which to close the gap in the public finances. The end of year Exchequer returns will inform the discussion with the social partners, which the Government views as a problem solving process.

The Government believes all of the people involved in that process have the country's interest at heart. More and more people will lose jobs if we do not face up to the challenges and overcome them. At the meeting on Tuesday with the social partners, we agreed that we will work together with a specific focus on agreeing, by the end of January, an approach to manage those challenges we now face.

To reiterate the Taoiseach's point from yesterday, there are those who seem to decry the idea of a shared purpose and a common endeavour. Social partnership has always had its critics but the Government is committed to that process and to engagement on the basis of mutual dependence and respect, which has always brought about problem solving. Those who expect to have their needs and ideas considered as part of the national recovery effort have a duty to participate responsibly in that process.

Regarding the issue of Anglo Irish Bank raised by a number of Senators, including Senators O'Toole, Fitzgerald and Butler, the precise details of the matter are being investigated by the Financial Regulator but it is apparent that the conduct created an issue in terms of transparency. Two board members, including the chairman, have resigned as a result and Mr. Donal O'Connor has been appointed as chairman of the bank. These changes will not interrupt the substantial progress which has been made with Anglo Irish Bank regarding recapitalisation. Anglo Irish Bank remains covered by the Irish Government's guarantee and therefore its depositors and creditors are assured of the security of their funds.

The Financial Regulator has indicated that it became aware, following an inspection earlier this year, of matters surrounding loans from Anglo Irish Bank to Sean FitzPatrick. While it did not appear that anything illegal took place in regard to these loans, the Financial Regulator was of the view that the practices surrounding these loans were not appropriate. A review of the matter is also being carried out by the board of Anglo Irish Bank, which now includes two public interest directors, Alan Dukes and Frank Daly. The Minister for Finance will engage further with the Financial Regulator on these matters.

The Secretary General of the Department of Finance was advised on Wednesday evening that representatives of the board wished to meet early yesterday morning to advise us of the position. We had also been aware that in recent days the regulator was conducting a review of related matters.

As regards financial stability, I want to reiterate that the Government will continue to take all necessary measures to ensure that systemically relevant institutions, such as Anglo Irish Bank, remain sound and viable.

Senator Ryan spoke about the income levy. As the Senator is aware, the levy was introduced to restabilise revenues. As has been stated on a number of occasions, the income levy is progressive. A rate of 1% applies to gross income up to €100,100 per annum or €1,925 per week, and a rate of 2% will apply to income above that amount. The Bill provides that a further 1% will be payable on income in excess of €250,120 per annum or €4,810 per week.

All social welfare recipients will be excluded from the levy. There are a number of similar payments made by Departments and agencies other than the Department of Social and Family Affairs, as well as similar payments from other states, and these too will be excluded from the levy. Those with an entitlement to the medical card will also be exempt from income levy. An exemption threshold of €18,304 per annum is being set to exclude those on low incomes from the levy.

An age related exemption for persons aged 65 years and over is being introduced. These thresholds will be €20,000 per annum with a provision for double that limit for a married couple.

As previously stated, the income levy is progressive. It does not apply to low incomes or social welfare payments. In short, this means the vulnerable and elderly are protected while those best able to pay will pay the most.

I am glad the Senator also raised the issue of VAT. The standard VAT rate was increased in the budget by 0.5% as part of a general package of revenue-raising measures to fund key public services. Already, we are borrowing 10% of all day-to-day public services expenditure. That is unsustainable and we faced difficult choices in bringing forward corrective measures. Each percentage point reduction in our standard VAT rate would cost €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points, as has been done in the United Kingdom, would cost approximately €1.125 billion in a full year.

Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, telecommunications and adult clothing. The effect of the 0.5% increase in the standard rate is that the price of goods and services, which apply at this rate, will increase by 0.41%. This equates to an increase of 8 cent on a good costing €20, or 41 cent on a good costing €100. It must be also recognised that around half the value of goods and services purchased in the State are not subject to the standard rate of VAT and therefore are unaffected by the change in the standard rate.

The reduction in the UK standard VAT rate will have an impact on the price differential on goods between the North and the South. I would point out that the UK has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on these items. Consequently, there will be no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%. It is important to recognise that the weakening of sterling has had a more significant impact than any VAT changes on relative price differentials between North and South of the Border.

As a small open economy, many of our standard rated goods are imported, and cutting the VAT rate could benefit the economies from which we import more than our own. In other words, while it might help the consumer, it would not be the most effective way of helping our own economy. There are means other than reducing VAT of stimulating the economy. The Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP, which is twice the average in the EU.

I thank the Senators, particularly Senators Hanafin, Walsh and Butler, for their support of the Bill and their endorsement of the measures the Government has taken and continues to take to deal with the exceptional economic position in which we find ourselves. I particularly appreciate their comments on the framework for sustainable economic renewal. As Senator Hanafin and Senator Walsh said, we have a low tax economy here. The advances we have made in recent years have put us in a position of having one of the lowest tax regimes in Europe.

In an international context, the most recent data available from the OECD show that, in 2007, Ireland had the lowest tax wedge in the EU and one of the lowest in the OECD for single people, married one-earner couples with two children and married two-earner couples with two children earning the average wage or 167% of the average wage in the case of married two-earner couples. It is likely that this situation will continue in 2008 and 2009. A low tax wedge makes it easier for employers to take on new employees. In fact, for the seventh consecutive year, when cash benefits are taken into account, married one-earner families face a negative tax burden, receiving more money in cash transfers from the State than they pay out in income tax and social security contributions. While the Finance Bill includes a small increase in tax to restabilise revenues we, through the advances made in recent years, are in a very good position to absorb it. I reiterate that the Government has put the minimum wage outside the tax net. A total of 36% of workers do not pay any tax. I agree with Senator Hanafin that this Government cares for the less well off.

I disagree with Senator Donohoe's comments that income tax should not have been reduced in the past number of years. The Senator seems to have forgotten that reducing income tax means that average workers have more money in their pockets. These measures have increased the take-home pay of everyone in Ireland and have resulted in our being able to remove the minimum wage earners from the tax net altogether. They have also reduced the cost on employers of taking on employees. This Government is committed to a low tax burden on workers. We wish to keep people in jobs and to reduce their tax burden where possible. Ireland has one of the lowest tax burdens in the entire OECD.

I agree with Senator Walsh that the changes made to mortgage interest relief were a positive development. The Minister for Finance has managed, without any cost to the Exchequer, to refocus the relief on those who need it most. Senators will be aware of the changes being made to mortgage interest relief in the Bill. The rate is being increased for first time buyers from 20% to 25% in the first and second years of their mortgage and to 22.5% in the third to fifth years. It will remain at 20% in the sixth and seventh years. The rate for non-first time buyers is being reduced from 20% to 15%. As the Minister said, this ensures a fairer system and helps buyers with the biggest financial exposure and those facing falling property values.

Senator Quinn said that small companies must be supported. I agree this is important. The Minister for Finance made the point in his Budget Statement that the Government is committed, despite the need for increased taxes, to maintain and enhance pro-employment business tax relief. The budget introduced a three year exemption from corporation tax on trading profits and chargeable gains for new companies commencing to trade next year. The detailed provisions of this measure are set out in the Bill. New companies commencing to trade in 2009 will benefit from tax exemption, which will be granted by reducing to nil the corporation tax relating to the profits of a new trade and the chargeable gains on the disposal of any assets used for the purposes of a new trade.

Senator Ouinn also mentioned the increased yield that arose as a result of a reduction in the capital gains tax rate to 20%. However, a substantial portion of the increased yield arose as a result of the abolition of roll-over relief which effectively resulted in a permanent deferral of the tax that would normally be due. In other words, the reduced capital gains tax rate was levied on a wider tax base through the reduction of reliefs from this tax.

With regard to Senator Doherty's suggestion to increase the PAYE credit by 5%, this would cost approximately €130 million in 2009. This is the first year since 2002 that the employee tax credit has not been increased. Since 2004, all the main personal tax credits have been substantially increased. The combined value of the main personal tax credits has increased by 43%. These increases are ahead of both projected wage growth and the consumer price index from 2004 to end 2009, which are both projected to be about 20% on a cumulative basis. As a result of the increase in credits in recent years we are now in a position where a single person can earn up to €18,300 before paying any income tax. In addition, this ensures that minimum wage earners are well outside the liability for tax. The comparable figure for a married one-earner couple with children is €31,950 and a married two-earner couple is €36,600.

I must also disagree with Senator Doherty's contention that the changes introduced to the arrangements for the payment of preliminary corporation taxation impose undue pressures on struggling companies. These new arrangements will impact on only large companies, of which there are approximately 2,500, and they will have no impact on 95% of companies in the State. The arrangements we are introducing are common across the OECD and, in fact, are less onerous than the quarterly payment arrangements in some of our international competitor countries. It is recognised that for all of these companies, the fact that the Minister is bringing forward by five months the payment date for more or less half of their preliminary corporation tax, represents an opportunity cost in terms of the alternative use to which they might put those funds. However, I do not consider this to be onerous because the change involves only large companies paying half of their preliminary tax five months earlier than previously. If, for example, a company has a profit of €8 million after deductions and allowances and a corporation tax bill of €1 million, the opportunity cost will be about €10,000 — that is, just an eighth of 1% of their taxable profits.

Senator Doherty made reference to the changes to the research and development tax credit scheme which have been broadly welcomed by industry. Apart from the generous increase from 20% to 25% in the rate of the research and development tax credit, further significant enhancements to the scheme are included in the Finance Bill which will benefit companies generally, including small companies and those in the start-up phase. He also expressed concerns about the time limit on companies making a claim in respect of a tax credit. The Bill provides that such claims must be made within 12 months from the end of the accounting period in which research and development expenditure giving rise to the tax credit was incurred and applies to claims made on or after 1 January 2009. In general, this is a reasonable requirement for the future.

In conclusion, it is gratifying to hear Senator Ryan welcome the cycle to work scheme. The scheme will encourage people away from car use, thereby reducing greenhouse gases and traffic congestion while also contributing to the health of those who participate. Although described as "a piece of the jigsaw", it is only by putting in place such pieces that we can hope to achieve the "bigger picture". I thank Senators for their contributions and hope I have, on behalf of the Minister for Finance, addressed the main points they raised. As always in the Seanad, this has been a constructive debate. I commend the Bill to the House.