Brian Hayes (Dublin South West, Fine Gael)

As I am sure all Senators are aware, since 2008 Ireland has faced a period of great difficulty, unprecedented in our history. When the Government entered office in March of this year, we were all too aware of the challenges facing us. Tax revenues fell from €47 billion in 2007 to just above €31 billion in 2010, a fall of one third in just three years. Measures are being taken to address this and progress has been made. The fiscal deficit is sizeable and reducing this is a vital part of economic policy. In order to achieve a reduction in this deficit difficult decisions had to be made in this budget.

This Government is committed to a policy of reform. Important measures have been implemented in order to achieve this objective. The Government established the Department of Public Expenditure and Reform under the Minster, Deputy Brendan Howlin. The budgetary process is being completely overhauled. Key changes in that respect will be bolstered by the fiscal responsibility Bill which is due to be published by the end of March 2012. The Government has made a series of announcements in this regard including a medium-term fiscal statement, a medium-term capital investment plan and the public service reform programme. The announcements made by the Government clearly show its commitment to reforming the budgetary process. Previously, this was a more secretive process but it is now being replaced by a better, more transparent system which will, in turn, promote confidence in the system and allow for better economic planning.

Our target for fiscal consolidation is €3.8 billion in 2012, with a deficit of 8.6% of GDP. The adjustment will be broken down as follows: €2.2 billion, or just less than 60%, will be on the expenditure side of the account with the remainder of the adjustment to be implemented through revenue measures. The Minister for Public Expenditure and Reform presented a comprehensive expenditure reportwhich gave details of expenditure reform measures. This method of review has been deemed a success and hence the Government has decided to implement periodical analysis in the future - approximately every three years. In addition, the Minister, Deputy Howlin, has set out expenditure envelopes for each year to 2015. These show the aggregate current spending ceilings within which Government will have to operate. A ceiling will be implemented for Vote groups for 2012 to 2015. The first half of this year saw a rebound in economic activity, with GDP expanding by 1.9% and 1.6% in the first and second quarters, respectively.

I now turn to outlining some of the various measures in budget 2012 and the rationale for each of them. The comprehensive review on expenditure provides the foundation for the measures announced yesterday. This review was undertaken over the last eight months. It was a detailed analysis, for which all Government Departments were assessed and priorities for spending and potential areas for savings were identified. As Senators will be aware, the vast majority of expenditure is focused on three key areas: health care, social protection and education. In light of this it is clear that savings cannot be made without some impact on these sectors and therefore difficult decisions had to be made. A three-pronged method was utilised in the decision making process, to involve fairness, jobs and reform. The burden of recovery must be shared equally and the most vulnerable in society protected.

Yesterday the Government published its policy statement on labour market activation, setting out the strategy to reform labour market activation policy. A total of €20 million will be allocated for a new labour market activation fund. This fund will be specifically aimed at the long-term unemployed. In addition, the Government has already undertaken a number of reforms in the public service and will continue to implement further reforms.

The public sector pay bill will be reduced by approximately €400 million in 2012. This will occur through a reduction in numbers, the 2012 pay cuts and the ongoing pension-related reductions. Against 2008 levels, staff numbers will be reduced by 37,500 by 2015, an extraordinary reduction when one considers the entire public sector in 2008 numbered 320,000. With a targeted reduction by 2015 it will comprise just over 280,000. Some 12% of the entire public sector will be replaced. That is an extraordinary change, bringing enormous challenges to all of us as we work through it.

In the area of social protection it is the aim of the Government to protect the most vulnerable in our society. In light of this the Government has not reduced any weekly rate of social welfare payments. However, the current level of expenditure on social protection is no longer sustainable and adjustments must be made. The measures announced yesterday will save €475 million in the social protection area in 2012.

The health sector is allocated a considerable portion of public sector spending. A sum of €13,644 million has been allocated for health in 2012. This year the programme for Government sets out an ambitious agenda for reform within our health services. The focus of the comprehensive review on health was to reduce negative impacts on frontm line services and implement savings in order to achieve budgetary targets and facilitate real reform of the health service. The focus of the comprehensive review on health was on reducing negative impacts on front-line services, implementing savings to achieve budgetary targets and to facilitate real reform of the health service. A total of €543 million will be achieved in net savings next year through a variety of measures including a reduction in the price of generic drugs.

Education accounts for 17% of total Government expenditure. Investment in education is a priority for the Government. The implementation of the Government's measures in education will provide a saving of €132.3 million in 2012. Although difficult choices must be made to achieve these savings, they are necessary for expenditure targets to be met and to allow new initiatives to be implemented.

Exports have been the main driver of growth in our economy this year. Foreign direct investment, FDI, is a vital component of this. The corporate tax of rate of 12.5% has been fundamental in attracting FDI to this country. Maintaining this rate is imperative. The Government is introducing several additional measures to support trade and create jobs. A special assignee relief programme and a foreign earnings deduction scheme will be introduced.

While export growth has been one of the driving forces for growth, it is not sufficient. The domestic sector is the real driver of job creation. The Government has targeted specific measures for the small and medium-sized enterprises, SME, sector while several measures will be implemented to boost the agrifood sector. The Minister for Finance earlier announced significant reductions in the transfer of property stamp duty. This will also apply to farmland. Retirement relief from capital gains tax will also be modified. Other measures to encourage farm partnerships will also be introduced.

Earlier this year a second reduced rate of VAT was introduced targeting the tourism sector. This, together with the 50% reduction of employers PRSI on jobs earning up to €356 per week, has been successful in boosting the tourism sector and increasing employment. Negotiations are ongoing between the Minister for Transport, Tourism and Sport and the airlines about the abolition of the air travel tax by the Government in return for the restoration of lost routes by the airlines.

Key objectives of this budget are to stimulate growth and to create employment. The property sector is constraining growth in the economy. At the height of the boom, construction-related activity made up 20% of gross domestic product. Now it stands at 5%. The subsequent loss of 165,000 jobs caused by this reduction in activity highlights the negative impact the property bubble had on the economy. New activity in this sector has been almost non-existent. The following measures are being announced to stimulate this sector. From midnight tonight, the stamp duty rate will be reduced from a top rate of 6% to a flat rate of 2% on commercial property transfers. A capital gains tax incentive will also be introduced between midnight tonight and the end of 2013.

The National Asset Management Agency, NAMA, has completed its loan acquisition and is concentrating on the active management of its assets. The Minister for Finance is establishing an advisory group to advise him on NAMA's strategy, as well as how to attract international capital and on the lessons that can be learned from the experience of asset management agencies in other countries. Upward-only rent reviews continue to pose a problem for businesses. We welcome the fact that NAMA has agreed to prepare a code of practice on the matter of upward-only rent reviews, which will bring some certainty to the area. Due to the difficulties of legislating in this area and the consequent compensation for significant multiple retailers, many of which are based outside the State, it was important the Minister for Finance set out the agreement with NAMA on this code of practice for tenants of NAMA properties seeking better deals in rent.

The Government acknowledges the increasing financial difficulties that mortgage arrears are causing to households and established a group to deal with this issue. It will progress with this group's recommendations, together with an assessment of other approaches. The Minister for Finance has made a commitment to have measures speedily introduced to deal with this problem. The rate of mortgage interest relief is to be increased to 30% for first-time buyers who took out mortgages between 2004 and 2008. Any new purchaser buying in 2012 will benefit from relief at 25% while non-first time buyers will benefit from relief at 15% instead of the reduced rates of 15% and 10% proposed by the last Government for 2012. Mortgage interest relief will be abolished from 2018. A property relief surcharge of 5% will be imposed on investors with an annual gross income over €100,000. This and other measures will be detailed in the Finance Bill.

A strong and fully functioning banking sector is fundamental to the economy and credit is vital for the economy to function. Without this, businesses would not be able to expand or even to survive. Restructuring of the sector has taken place, two universal pillar banks have been created from the two largest institutions and SME lending targets have been set for them for the next several years.

The general Government deficit for this year is to be about 10%, less than the 10.6% required by the EU-IMF programme. The deficit target for 2012 is 8.6% of gross domestic product. The European Commission growth forecasts state that, should the eurozone crisis recede, Ireland is among those best placed to grow quickly. However, should the eurozone crisis persist it is important that we reduce our dependence on borrowing.

Fiscal consolidation of €3.8 billion is required to improve the sustainability of the public finances in 2012. The Minister for Public Expenditure and Reform, Deputy Howlin, yesterday set out how the €2.2 billion expenditure consolidation will be implemented in his statement. Accordingly, savings of €1.6 billion have to be achieved by revenue consolidation. As the full year effect of measures already introduced is €600 million, additional new tax measures of €1 billion were announced today by the Minister for Finance.

The Government made commitments on taxation under the programme for Government. These rule out changes in income tax rates, bands or credits. There are no income tax increases in this budget. Indirect taxes have much lesser impact on jobs and economic growth and, therefore, that is where the majority of these budget adjustments have been made.

Under the programme for Government, the Government is committed to limit the standard rate of VAT to 23%. The current budget does not infringe on this commitment. With effect from 1 January 2012, the standard VAT rate will increase to 23%. Increasing indirect taxes rather than direct taxes is becoming more common in Europe. In the past four years, 20 out of the 27 EU member states have increased their VAT rate.

It should also be noted that children's clothes, oral medicines, the majority of food items and other goods and services will remain at the 0% VAT rate. Home heating oil, residential housing, labour-intensive services and general repairs and maintenance will remain at the 13.5% rate. The district heating VAT rate will be reduced from 21% to 13.5% which will bring district heating in line with the majority of energy supplies that are subject to 13.5%.

The Government undertook a review of the universal social charge implemented by the previous Administration. As a result, some changes have been made to the charge. These will mainly affect part-time and seasonal workers in the more labour intensive areas such as the farming and hospitality sectors. In line with this, the exemption level will be increased from €4,004 to €10,036 from 1 January next year. This will benefit about 330,000 people. Incomes above the €10,036 limit will be subject to the current charge. This charge will be collected on a cumulative basis and this will offset the cost.

A number of measures have been introduced, including increasing the current rate of capital acquisitions tax from 25% to 30% and increasing DIRT from 27% to 30%. As a consequence of these and other measures, the rate of tax applying to capital, interest and earnings, through the high earners' restriction, are all aligned at 30%.

The carbon tax introduced in 2010 will be increased by €5 to €20 per tonne on fossil fuels. The increase will apply to petrol and auto-diesel with effect from midnight. As an increase in carbon tax would impact on home heating costs during the winter months, the decision has been made to postpone the increase on other fuels until 1 May 2012. Carbon tax will not be applied to solid fuels at this time.

In last year's budget, changes were made to the pension tax relief system. The pensions sectors will be contributing approximately €750 million in 2012. Earlier this year the Minister for Finance examined possible alternatives but has decided that there will be no changes to the standard rate of relief on pension contributions nor will a move to standard rate tax relief be implemented at this time. However, changes to the incentive regime for supplementary pension provision must be made. This will ensure that the pensions system will be allowed to operate on a sustainable and more equitable basis over the long term.

The Minister also made announcements today in respect of absenteeism. In addition, the Minister for Environment, Community and Local Government, Deputy Hogan, announced a household charge of €100 per dwelling. As protection of the vulnerable is of paramount importance, it is proposed to provide a waiver in respect of this charge for those on mortgage interest supplement and for those residing in certain categories of unfinished housing estates. A provision will also be made to allow payment of this charge in instalments.

The framing of budget 2012 involved the making of many difficult decisions and choices. These were necessary in order for us to return to a path of sustainable growth. This is achievable but will take time. The budget was designed with protection of the most vulnerable to the forefront. Accordingly, the Government left untouched the primary social welfare rates. The level at which the universal social charge is applied has been increased and this will provide assistance mainly to low paid or seasonal workers. Jobseeker's allowance, State pensions, family income supplement, carers' entitlements and disability allowances and support for special needs assistants in our schools and the pupil-teacher ratio in the primary sector will all remain at their current rates.