Martin Mansergh (Tipperary South, Fianna Fail)

This Bill has been brought forward in light of the unprecedented economic challenges now facing our country. The world economy is in deep recession, a recession which has no parallel in modern times, and which is linked to a serious crisis in the international financial markets that has had profound effects around the world.

Industrial production in the United States fell by approximately 8% in December. In Germany, it fell by 12% in 2008. In the United Kingdom, industrial production dropped by approximately 9%. The economy of Japan, which relies heavily on exports, is in acute difficulties. Many of the 2004 European Union accession countries of central and eastern Europe, which enjoyed high growth, are equally exposed to the global downturn.

Unemployment is also increasing. In the US, the rate has increased to 7.6% of the workforce with approximately 600,000 people losing their jobs in the month of January alone. In the euro area, average unemployment is now 8%.

As a small trading nation, Ireland is heavily exposed to those international developments. In 2008, our GDP declined by approximately 1.4%. In 2009, GDP is projected to contract by4%, which would be the sharpest decline in activity on record. A further reduction in activity is forecast for 2010.

The rise in unemployment, which is affecting people throughout the country, underlines the serious social impact of what is happening. No one can ignore those developments. The Government has had to take clear and decisive action in the national interest, and needs to go on doing so for as long as is necessary. The economic sea change has had a very negative impact on the budgetary arithmetic. We have seen an exponential increase in the budget deficit and in Government borrowing that must be reined in.

The Government must borrow €18 billion this year at far steeper interest rates to finance capital spending and also to meet the current budget deficit. The national debt is likely to rise to more than 45% of GNP, and spending on interest costs will come to €4.5 billion, or 12% of total tax revenue in 2009. In short, Ireland is fighting to recover its economic stability in the face of an exceptional combination of circumstances. The economic independence we have enjoyed through times that were often very challenging in other ways could be at risk if we further put off the decisions that need to be made now. Painful decisions must be implemented as a matter of urgency. Otherwise, the public finances and the level of public debt will become unsustainable, and control will pass out of our hands.

The stabilisation pact agreed with the social partners pointed to the urgent need to manage the public finances over five years through a combination of tax and expenditure measures, with an expenditure adjustment of the order of €2 billion required immediately in 2009. The need to eliminate the current budget deficit by 2013 has been set out in the fiscal plan submitted to the European Commission.

Regrettably, it was not possible to reach agreement in the social partnership framework on the details of the required measures in the time available, and the unions were not in a position to agree to the pension-related deduction for public service workers. The Government therefore had to take action in the national interest and without delay. I understand perfectly the difficulties of the trade unions and the reaction of their members but I believe social partnership, which I have always strongly defended, not least in this House, still has an important role to play in resolving our difficulties.

This Bill provides for measures to reduce or control public expenditure. These are the pension-related deduction on the total earnings of all public servants to realise €1,160 million in 2009 and €1,350 million in a full year. The deduction applies at 3% on the first €15,000, 6% on the next €5,000 and 10% on the remainder, which amounts to 7.5% on average; the reduction in fees for certain professional services to realise savings of €67 million in 2009 and €80 million in a full year; the changes in the early child care supplement to reduce the payment from €1,104 to €996 per annum and to set a new age limit for payment of five years, to realise savings of €51 million in 2009 and €77 million in a full year; and the deferral of certain payments under the farm waste management scheme.

I do not accept the argument that the pension-related deduction to be paid by the non-commercial public sector is "unfair", because it singles out the public sector from the rest of the workforce. A number of sectors within the economy have to make a contribution to the adjustment measures, which are now so urgently required. It is not just about the public service. The ambit of the Bill is wider than that, and that should be acknowledged. Measures past and to come relating to a broadening of the tax base and the raising of further revenue and also further substantial economies in expenditure will all be needed to redress the situation.

Having said that, the public service pay and pensions bill has to be part of the measures taken, given its relative size, and of the overall balance. Public servants have significant pension benefits. Those benefits are higher than for many in the private sector and those benefits are secure, particularly when viewed against the recent severe loss in value suffered by many private sector pension plans. In light of that and the overall budgetary position, the Bill proposes that all public servants serving on or appointed after 1 March 2009 will have an additional pension-related deduction from their annual pay with effect from 1 March 2009.

My Government colleagues and I, who naturally are included in this, as are Oireachtas Members, are well aware of the important role played by the public service and are conscious of the natural concerns of public servants regarding this measure. However, the situation requires that we all have to be prepared to contribute, particularly those in established positions with the benefit of job security.

The claim has been widely made that the pension deduction falls too heavily on the lower paid, but this is not the case. The deduction is progressive, as people on higher incomes will continue to pay proportionately more than those on lower incomes. For example, taking account of all taxes and other mandatory stoppages such as income tax, PRSI, standard pension contribution, the health and income levies and the new pension-related deduction, an unmarried public servant earning €20,000 a year — and no full-time employee earns less — will pay 11% of his gross income in total deductions when the new deduction is introduced. An equivalent public servant earning €100,000 a year will pay total deductions of 43%. It is claimed the deduction should not apply to non-pensionable pay. However, it must do so to achieve the public expenditure savings the country needs at this time. No additional pension benefits arise from the deduction and it does not alter the pensionability of these elements of pay.

A number of specific issues are worth addressing. I will explain the integration system whereby pensions are calculated for public service employees insured for full PRSI who are members of public service pension schemes. The Commission on Public Service Pensions made recommendations on the treatment of part-time employees and employees on lower levels of pay. With effect from 20 December 2001, the pension system for part-time employees was modified to a pro rata basis by reference to the remuneration of whole-time employees. This has the effect of improving the benefits payable to part-time employees who are fully insured. With effect from 1 January 2004, a new system of calculating pensions for employees insured for full PRSI was introduced. This delivers increased pensions to members of public service pension schemes whose full-time salary is less than three and one third times the contributory State pension, CSP. Currently, this amounts to some €40,000.

The new integration formula takes into account the value of the CSP in calculating occupational pensions. The method of calculating a pension for public service employees who qualify for benefits on or after 1 January 2004 is as follows: (a) for that part of the employee's pensionable remuneration which is less than or equal to three and one third times the current rate of CSP, one two hundredths of pensionable remuneration multiplied by the number of years of reckonable service plus (b) for any part of the employee's pensionable remuneration which exceeds three and one third times CSP, one eightieth of pensionable remuneration multiplied by the number of years of reckonable service. The maximum number of years of reckonable service is 40. The new formula is used in all cases of retirement on or after 1 January 2004. In addition, pensions in course of payment on 1 January 2004 were revised by reference to the new formula in cases where this produced an improvement for the pensioner.

The revised system improved the position for people on lower rates of pay and ensured every person who meets the requirements of the pension scheme will receive an occupational pension, regardless of income. A good example is someone on low pay with a full 40 years service. Under the previous system, he or she might have received little or no occupational benefit but he or she will now receive two fifths or 20% of his or her final salary as an occupational pension benefit, in addition to his or her State pension. The new integration system ensures every person who meets the eligibility criteria of the pension scheme receives an occupational pension, regardless of income, and this will not change following the introduction of the Bill.

With respect to other claims that public servants can receive, on retirement, benefits that are worth less than the contributions they will make, there are considerable in-service benefits. If a public servant dies in-service, his or her family receives a death gratuity, which is a minimum of one year's pay. In addition, a pension may be paid to the public servant's spouse and dependent children, where the public servant was a member of the spouses and children scheme. These valuable features of public service employment are rarely mentioned. Public servants also receive a pension lump sum, which is a tax free payment made on retirement that equals three eightieths of the final salary of the retiring officer for each year of service. Someone retiring with 40 years service and a final salary of €50,000 would receive €75,000.

It has been said that those earning €30,000 would pay a higher percentage of their salary than those earning €45,000. It must be understood this is due to the operation of tax relief. If one takes a wider view and looks at the overall picture, a person on €45,000 pays 29% to the State in tax, levies and the pension deduction, while a colleague on €30,000 only pays 21% in total. The overall system is progressive and this is as it should be. It is important the figures are stated clearly. For someone earning €20,000 a year, the net reduction in take home pay as a result of the Bill is €11 per week. For someone on €50,000, which is close to the average salary in the public service, the reduction is €38 per week. It is recognised that these are real changes and that it will not be an easy adjustment for any of us, but this necessary adjustment has to be seen in the context of the situation facing our national finances and the economy.

The Government has taken the decision that this deduction is not related to the scale and extent of one's public service pension benefits, which are, in any event, unique to each individual. The value or expected value of these is a direct function of length of service, grade and pay scale and is indirectly related to personal familial circumstances, age and career expectations. It would not be sensible to attempt to quantify or cost these for the public service, and then try to relate the deduction to this quantification.

Many people working in other sectors of the economy have had to face pay cuts, shorter working weeks and, unfortunately, redundancy. Those still at work, many of whom had made pension provision, have seen the value of their pension reduced because of the devastating effects experienced by investments in equity markets. Against that background, it is reasonable that the Government and those in a position of secure, pensionable employment and with Government guaranteed pensions, make their contributions towards addressing both today's difficulties and the long-term sustainability challenges facing public service pensions.

I will refer to the Bill's provisions. The Bill includes recitals, which follow the Long Title, and link its provisions to the current economic and financial challenges facing the State. Section 1 of the Bill defines "public service body" as the Civil Service, the Garda Síochána, the Permanent Defence Force, local authorities, the Health Service Executive, the Central Bank and Financial Services Authority of Ireland and vocational educational committees. The definition encompasses primary and secondary schools, third level institutions, and the non-commercial semi-State bodies where a public service pension scheme exists or may be made.

"Public servants" are defined as office holders or employees of public service bodies. Members of either House of the Oireachtas, members of the European Parliament, and qualifying office holders such as Ministers, the Attorney General, the Ceann Comhairle, the Leas-Cheann Comhairle, the Cathaoirleach and Ministers of State are also covered by the Bill. Under the Constitution, the President and members of the Judiciary cannot be included in this measure. "Remuneration" is defined as total earnings, including allowances, overtime or any other like payment, payable by or on behalf of a public service body to a public servant for his or her services as a public servant. This definition draws on the definitions in the Taxes Consolidation Act 1997. Under these definitions, the deduction shall be made from the remuneration accruing from 1 March 2009 at the rates decided — a 3% deduction on the first €15,000, 6% on the next €5,000, and 10% on the remainder. The deduction will not be paid by those with no entitlement to a public service pension. In this context, three conditions broadly apply. A person must be a public servant, must be working in a public service body and must be a member of a public service pension scheme or analogous arrangement.

Section 4 provides that regulations are to be made relating to the deduction and collection arrangements and the deductions are to be paid into the Exchequer in accordance with the directions of the Minister.

Section 5 provides that public servants, except the Permanent Defence Force which has particular terms and conditions, who have less than two years service on 1 March 2009 may before 1 April 2009 terminate their employment without giving notice, if they do not wish to make the deduction. Deductions are to be repaid to those who leave the public service with no preserved pension benefit, that is, with fewer than two years service. The Bill provides that no additional pension benefit is conferred by the deduction. The Minister for Finance has power under section 8 to exempt certain groups from the deduction or to modify its extent if he is satisfied they are materially distinguished by some particular aspect of their employment terms from others subject to the deduction.

The Government has decided that not only public service employees should contribute to tackling the serious problem of the deterioration in the public finances through a deduction from their remuneration, in that professionals providing services to the Government should also contribute their fair share through an 8% reduction in fees. A twin track approach will be taken to secure this reduction. To secure value for money, administrative steps will be taken by Departments and public bodies that engage the services of professionals through a public procurement process or that engage professional services on a scale of fees. For professionals such as those engaged under the General Medical Services, GMS, scheme who traditionally have had their fees and contracts determined through negotiation, this legislation provides for a separate process for reducing their fees.

All Departments and public bodies under their aegis will be written to and instructed to revise the scale of fees for legal services downward by 8% from 1 March. The Departments will also be required to review the notice and change provisions of all contracts for all professional services to give notice of a reduction in fees for services of an amount equivalent to 8% from 1 March. Professionals who are unhappy with this approach will be given the option of withdrawing from their contracts and ending their provision of services.

Sections 9 to 11 provide for a process of consultation, which will allow the Minister for Health and Children or any other Minister to determine payments for professional services in the case of contracts of indefinite duration, such as those under the GMS. In the interests of fairness, the relevant Minister will be required to take account of the opinions of the professionals involved, their contracts, expenses and obligations and the exceptionally serious situation facing the public finances.

The reduction of 8% in professional fees will be secured administratively for other professional services engaged on a scale of fees or on foot of a public procurement process to secure best value for money. Departments and public bodies under their aegis will be required to review the notice and change provisions of all contracts for all professional services to give notice of a reduction in fees for services of an amount equivalent to 8% from 1 March. Professionals who are unhappy with this approach will be given the option of withdrawing from their contracts and ending the provision of services.

The savings will be made by reducing the Voted allocation for the Departments and bodies concerned in the Revised Estimates Volume when it is published. I trust that all professionals who have and continue to enjoy the benefit of a substantial contribution to their incomes from taxpayer funds will fully co-operate with the steps being taken by the Government in the exceptional situation in which we find ourselves.

Section 12 facilitates the payment of grants under the scheme of investment aid for farm waste management on a phased basis.

An annual review of the operation of the measures in the Bill is provided for in section 13. This will involve consideration of whether the Bill's provisions continue to be necessary and the making of findings as the Minister believes appropriate. A report of the review will be laid before each House of the Oireachtas. It is considered wise to make this provision when introducing measures applying to some 330,000 people.

Section 15 was introduced on Committee Stage in the Dáil. This "removal of doubts" provision is similar to a provision in the Public Service Superannuation (Miscellaneous Provisions) Act 2004 and provides an avenue for dispute resolution in respect of whether a person comes within the scope of that Act. The consultation referred to could, for example, be with another Minister or the Attorney General.

The Taxes Consolidation Act 1997 and the Income Tax (Employments) (Consolidated) Regulations 2001 will be amended by section 16 to ensure the tax deductibility of the payment. Public servants paying the new pension contribution will be treated for tax purposes in the same way as those making pension contributions in the private sector. Contributions will be deducted from gross pay by employers before income tax, PRSI and health levies are calculated. As such, pension contributions will be effectively relieved of tax at the marginal rate. Public servants making additional voluntary contributions or other pension contributions will not be brought above the relevant Revenue limits as a result of the deduction.

The Government decided the new pension-related deduction would apply to local authority staff. It was also agreed that, to realise savings to the Exchequer, it is necessary to amend the Local Government Fund legislation. Section 4 of the Local Government Act 1998 requires that the Exchequer contribution to the fund be increased annually in line with inflation. Accordingly, section 17 of the Bill repeals section 4 of the 1998 Act and introduces a new provision under which the annual allocation is agreed between the Ministers for the Environment, Heritage and Local Government and Finance.

It is proposed under section 18 to amend the social welfare legislation that is the statutory basis for the early child care supplement, ECS, to provide for a reduction in the age limit for eligibility for the payment from five and a half years to five years and a reduction in the annual sum from €1,104 to €996. These changes will result in savings of some €77 million in a full year.

When the ECS was first introduced in 2006, the age limit for eligibility was set at six years, the age at which school attendance becomes compulsory. This was a generous approach, but most children start school between the ages of four and five years. Given that the payment is specifically targeted towards parents caring for preschool children, it is considered the payment will continue to meet its target and to represent an important direct support for those parents.

Following the enactment of this legislation and the imposition of the pension-related deduction, the Minister for Finance will make the necessary savings each year by bringing the proceeds to account as appropriations-in-aid for departmental Votes. The net Exchequer grants for the health and education sectors and the Local Government Fund will be reduced by the amount of the contribution, with the proceeds of the deduction remaining with the relevant bodies and agencies. The funding of these sectors will remain unchanged. For 2009, the changes will be made in the forthcoming Revised Estimates Volume.

The Bill asks public servants, professionals and other members of the community to contribute to the required expenditure measures. It must be seen in a context in which all of those who are able to do so must shoulder some of the burden of solving the current national difficulties. I commend the Bill to the House.