Seanad debates
Wednesday, 10 November 2004
Tax Code: Motion.
4:00 pm
Martin Mansergh (Fianna Fail)
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I move:
That Seanad Éireann,
—urges the Minister for Finance to continue to support a low tax regime;
—accepts that since 1997 the steps taken to lower taxes have been the key to growing employment and growing Government revenue;
—commends the Government for its record tax reductions which continue to have a positive impact on people's lives and the economy;
—notes that since 1997 the average tax rate for nearly all PAYE workers has fallen every year including the last two years — in no case has it increased;
—notes that since the parties in Government formed their first Administration €5 billion has been returned to Irish workers in tax cuts and almost 669,000 income earners are now out of the tax net compared to 380,000 in 1997;
—welcomes the fact that since 2000 we have had the lowest tax wedge in the EU 15 for the average single worker (per OECD);
—commends the Government for ensuring no one on PAYE pays tax at under €246 per week as opposed to €98 per week in 1997-98;
—supports the Government's policy of ensuring those aged 65 and over do not pay tax until they reach €15,500 per annum (single) or €31,000 per annum (married), more than double the level in 1997;
—believes in the forthcoming budget it is essential to keep direct taxes low to maintain Ireland's impressive employment levels;
—rejects proposals to raise taxes and maintains that high taxation leads to high unemployment and low revenue for funding public services and social inclusion;
—notes that business tax rates have been reduced, creating jobs and growth without sacrificing tax revenue in many cases;
—commends the Government for the completion in the reduction of the standard rate of corporation tax to 12.5% in 2003; and
—notes, in particular, that the major reductions in corporation tax were achieved while still increasing our corporation tax base and this has yielded over €5 billion in revenue, up from €2 billion when the rate was 36% in 1997.
I welcome the Minister to the House. There is no doubt the reduction in taxes in the late 1990s prolonged and intensified the period of the Celtic tiger economy. It is also the case that there were minimal tax reductions under the previous Government which cut the standard rate of tax by 1%. It is a striking statistic that since the late 1980s, 13 out of 14 points of income tax reduction were made under Fianna Fáil and all 14 points of income tax reduction at the top rate were made under Fianna Fáil.
This side of the House does not want low tax revenues and a distinction must be drawn between tax rates and tax revenues. Since 1997, with the exception of one year, the increases in revenue have been in double figures, which is a healthy state of affairs. There is no doubt tax reductions have led to vast increases in tax revenue. I remember the debate in the 1980s as to how one would increase capital and corporate taxes. In 1986, some £34 million was collected in capital taxes whereas in 2004, €1.159 billion was collected, an increase of at least 2,000%. The same applies in regard to corporation tax which was at 50% in 1986 when £258 million was collected whereas €6.32 billion is due to be collected this year. We have had similar experiences in more recent times. Since 1997, corporation tax was reduced from 36% to 12.5% and capital gains tax from 40% to 20%.
All this has led to more activity and more employment. It will not be many more years until employment will have doubled from just over 1 million in the mid-1980s. We know from the Exchequer returns that we are probably expecting an extra €1.5 billion, some of this admittedly coming from special investigations. There is little doubt we are raising the extra revenues needed to meet infrastructural and social spending. However, beyond a certain point it would not be wise to attempt to increase spending because we must consider the dangerous effect of inflation, which we had experience of in the context of construction inflation in the late 1990s.
There is a broad consensus in this regard among the main political parties, or I have not detected otherwise. I am not aware of the Labour Party or Fine Gael explicitly committing themselves to increasing any of the main taxes. I am of course aware that the Green Party proposes or insists that there be a carbon tax as the price of entry to Government and that Sinn Féin——
Martin Mansergh (Fianna Fail)
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——which is unlikely to be part of a Government, proposes as policy an increase in all sorts of taxes. However, there is a large measure of consensus that we are pursuing the correct policies.
It is entirely misleading to suggest that 50% or more of taxpayers pay at the high rate because those who are exempt from tax are of course excluded from the figures. The budget booklet last year stated that approximately 669,000 people were exempt from tax, or 35%, a further 31% paid tax at the standard rate and approximately 632,000, or 33%, paid at the higher rate. While these figures may alter at year end, it will not be by much.
It is desirable, and it is the policy of the Government parties, that the proportion of those on the higher rate of tax should be reduced. However, we faced some potential financial difficulties over the past couple of years and the tax rates and bands took some of the strain. We should not apologise for this. The alternatives were that we would borrow or raise the headline rates of tax. Again, I have not heard other parties explicitly put forward alternatives in this regard.
The debate is not confined to parties in this or the other House. For example, the Irish Congress of Trade Unions issued a document suggesting that corporation tax should be significantly raised. Part of its argument was based on the fact that Great Britain attracts significant investment. My answer to this is to point to the case of Northern Ireland, which does not get much investment. Account must be taken of population, geography, etc.
Ireland is a peripheral part of Europe. While the greater London area may well get inward investment with a corporation tax rate of 30%, it does not follow that Ireland would have the same result or experience. In a recent interview, Ireland's largest inward investor, Intel, made clear how much importance it attaches to maintaining the 12.5% corporation tax rate. Any future Government would be wise to pay attention to that fact. I note the leader of the Labour Party said that it is not his party's intention to change that tax rate.
There has been much media coverage and debate, even on the Order of Business, about various tax reliefs and incentives. These fall into three categories. There are ones where many people benefit such as exemptions from capital gains tax for one's home, tax on child benefit, SSIAs and so on. The second category covers high risk incentives including reliefs for business expansion schemes, artists, the film industry and stallions. There are also construction industry related incentives, due to be phased out by 1 July 2006.
Concerns about the tax system are often expressed on the Order of Business. At today's meeting of the Joint Committee on Finance and the Public Service, the chairman of the Revenue Commissioners, Mr. Frank Daly, made many illuminating and clarifying points on the tax system. He informed the committee that there are no indications at this time that Irish domiciled persons who claim non-residence are unable to demonstrate they were outside the State for the requisite 183 days. He continued that awareness of the Revenue Commissioners' general interest and audit programme in this area, together with the financial consequences of non-compliance, motivates these individuals to keep their residence patterns within the rules.
Regarding the case of the 11 individuals with gross incomes exceeding €1 million but who had no net tax liability, Mr. Daly pointed out that they pay no tax due primarily through extensive use of property-based capital allowances. Members will agree that there should be no change in the situation where those are phased out. We now have a buoyant and booming construction sector. However, Mr. Daly pointed out that section 23 relief was introduced in 1981 when the construction industry was in great difficulty. Mr. Daly also pointed to the increase in the effective tax rate of higher earners since 1994.
Let us consider the Fine Gael Party's amendment. One only has to look at the taxation tables to see how the tax burden for people at all income levels has been reduced.
Martin Mansergh (Fianna Fail)
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Corporation tax has been reduced to 12.5% but there has been no decrease in taxation of businesses. The Fine Gael Party is wrong in its claims that the rainbow Government first introduced the 12.5% corporation tax rate.
Brian Hayes (Fine Gael)
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We did all the hard work. The Government followed our example.
Martin Mansergh (Fianna Fail)
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It was announced in May 1997 and yet took several years to be implemented. EU agreement had to be obtained and the Labour Party got cold feet about it in 2000. Members should not make claims that are not strictly justifiable.
John Paul Phelan (Fine Gael)
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The Senator should read his own party's motion.
Martin Mansergh (Fianna Fail)
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I take great pleasure in moving this motion. Whatever may be said on the other side of the House, I do not believe that either of the main Opposition parties will declare any intention of altering the current tax policy.
Liam Fitzgerald (Fianna Fail)
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I second the motion. I welcome the Minister of State at the Department of Enterprise, Trade and Employment, Deputy Michael Ahern, to the House. I apologise that I have not read the amendment to the motion so I will not comment on it.
Liam Fitzgerald (Fianna Fail)
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It is well to be up-front about it.
As Senator Mansergh stated, the Fianna Fáil Party supports the concept of a low-tax economy, not to reduce revenue, but because it is the right way to achieve better quality public services and social inclusion. The irrefutable evidence to support such an approach is set out in the motion. When discussing low taxation, we are discussing one element of economic management. Prudent increases in public spending is another, while social partnership acts as the cohesive force that helps the other elements to work together in harmony.
It is not just the merits of the approach that are important but its results. The primary objective is to bring about a radical improvement in quality of life for all sections of society and ensure their sustainability. The Government's approach has been based on a low-tax regime. Those who promote higher taxes to increase public spending might do well to reflect on the unenviable record of past Governments in that regard.
The evidence, nationally and internationally, of how people's welfare has improved over the past seven years is overwhelming. The recent ESRI overview of the economy confirmed this is one of the fastest growing economies in the developed world. A recent OECD study confirmed that Irish living standards have increased significantly over the past decade. In its recent annual review of the world's top 50 business nations, Forbes noted that, apart from Cyprus, Ireland has the lowest overall tax burden for business, consumers, employers and employees in the EU.
Happy that such a solid foundation has been built over the past seven years, we must now ensure its sustainability. The improvements have spanned every area of public services. I also welcome that every area has a detailed programme set out for the future. These programmes are a recognition by the Government of its long-term responsibilities to the people. It is building on the successful approach of the past seven years. The many initiatives that have already taken place will prove to be of great benefit to the next generation.
A decision to lower taxes has resulted in large increases in Government revenue. As pointed out by Senator Mansergh, it is not low tax for the sake of low revenue. The decision on low taxes has been beneficial in substantially increasing revenue generation. There has been a massive reduction of the national debt. Record amounts of investment have been made to address our infrastructure deficit. The national pensions reserve fund has been established. All these measures are aimed at the future and will significantly reduce the burden to be carried by the next generation of taxpayers. Commenting in its recent 2004 review of the economy, the International Monetary Fund considered Ireland well placed to deal with the impact of population ageing through its sound fiscal position and the high degree of pension funding. That is a very significant comment.
The fruits of prudent management of the economy and public finances are evident in the everyday lives of ordinary people. Since 1997, in excess of 300,000 new jobs have been created and unemployment has been reduced from over 10% to a historically low level of 4.4.%, one of the lowest levels in Europe. Long-term unemployment has been cut by 80%.
Economic growth has averaged nearly 10% per annum over that period. The rate will be approximately 5% in the near future but the average of 10% since 1997 is quite spectacular. Our public finances are acknowledged as among the strongest in Europe. Despite that we have lower tax rates, higher social welfare benefits and an expanded public service. Some would say we should not have that but we do. The Exchequer balance results show the Government is well on course and in surplus to meet its budgetary targets this year.
There are several hallmarks of the Government's successful management including a hands-off approach, for want of better words, and social partnership. They encapsulate much that has been done and is predicted to continue, and are responsible for our success. Local and international commentators acknowledge this fact. Needs are identified, stated and targeted. Significantly, the Government has consistently refused to take the easy but blinkered option to target the funding of these needs through uncontrolled borrowing. We have learned from our own past as well as that of other governments that this approach was a disaster and inevitably led to the boom and bust cycle. Uncontrolled spending almost without exception means more taxes, more borrowing, more dole queues and more hardship for ordinary people. It is a vicious, self-perpetuating circle.
One of the guiding principles underpinning the Government's approach to economic management has been that we must generate resources before we can spend them. That is a fundamental principle and has had extraordinarily beneficial effects because it has encouraged and generated prosperity in every sector of the economy. It has promoted investment and has created and sustained employment.
The social partnership model has harnessed the key human resources comprising workers, employers, the unemployed, farmers and Government to work together in harmony and for the common good. Although there are anomalies in the taxation system, the Minister's predecessor and the Government in the past seven years have made significant progress and introduced significant reforms. One of the independent conclusions of the Organisation for Economic Co-operation and Development is that Ireland has the lowest tax wedge in the European Union for the average single worker. Overall the record of significant achievement in that period speaks loudly for itself and provides a solid foundation for the future.
John Paul Phelan (Fine Gael)
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I presume I get an extra two minutes.
John Paul Phelan (Fine Gael)
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I will take it as ten minutes.
I move amendment No. 1:
To delete all words after "Seanad Éireann" and substitute the following:
—urges the Minister for Finance to take steps to reverse the huge increase in the tax burden imposed on workers and businesses by his predecessor;
—accepts that reductions in the rate of PAYE have been offset by a failure to widen tax bands in recent budgets;
—notes that those on the national minimum wage continue to pay tax, despite repeated promises to the contrary;
—notes that there are now 632,000 persons paying tax at the top rate, representing more than half of all taxpayers, and representing an increase of 55% in the number paying at the top rate of tax since 1997;
—urges the Minister for Finance to end the practice of excessive stealth tax increases;
—condemns the Government for implementing, or failing to prevent the imposition of 32 stealth taxes since 2002;
—condemns the Government for failing to meet the promise, as set out in the programme for Government to 'keep down personal and business taxes', a failure that has eroded our competitiveness and led to the creation of rip-off Ireland;
—notes that Ireland has become the most expensive country in the EU thanks to the failure to limit Government charges, reduce taxes and control inflation;
—notes that it was the rainbow Government that first introduced the 12.5% corporation tax rate and left the Fianna Fáil-PD Administration with an economy growing at a record rate and where 1,000 new jobs were being created every week;
—calls for an end to policies where the gap between rich and poor has widened to record levels; and
—rejects the approach of the Government, which has seen huge increases in spending and insufficient corresponding public sector reform, thus providing little or no improvement in frontline services, particularly in areas such as health.
I welcome the Minister of State to the House. I acknowledge Senator Fitzgerald's statement that he had not read the amendment. His colleague, Senator Mansergh, commented on the amendment but obviously did not read the motion because his remarks scarcely referred to the items contained in it.
John Paul Phelan (Fine Gael)
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The Senator mentioned stallions and tax avoidance measures across the board but said very little about anything contained in the Government's motion. It is a pity we did not hear remarks from the Senator about the contents of the motion.
I am delighted to propose the amendment. When I read the motion I could not believe it. While it is in the nature of Private Members' time for the Government to slap itself on the back and the Opposition to attack, this back-slapping goes beyond the bounds of anything I have seen here. The level of back-slapping in this particular motion is bizarre. I do not know how to put this in politically correct terms but the Leas-Chathaoirleach is of a different generation to mine.
Paddy Burke (Fine Gael)
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Does this have something to do with the amendment?
John Paul Phelan (Fine Gael)
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It does. My mother often said self praise is no praise, and I am sure the Leas-Chathaoirleach's mother said it to him too. There is no praise in this motion for the Government or from the Government's point of view. We can all cite numerous examples of broken promises from this Government since it took office two years ago. In the programme for Government it promised to "keep down personal and business taxes in order to strengthen and maintain the competitive position of the Irish economy." Today we debated competitiveness within the economy. We are all familiar with the recent report showing that Ireland's position in the international competitiveness league had dropped from fourth to 30th within a year or two. This is another example of the Government breaking a promise made in the programme for Government in 2002.
This Government has also introduced stealth taxes and new charges. The burden of tax has been transferred to other areas of charges introduced and increased by the Government. I see the Minister for Finance coming into the House and I welcome him on one of his first visits here since his appointment. These stealth charges are starting to hit home. Last year's budget added €600 to the tax bill of every household. That came on top of €1,200 in the previous year which makes a total of €1,800 directly added to the tax bill of every household since this Government took office. It changed the emphasis and the method of tax collecting but did not reduce the overall burden on the PAYE taxpayer.
I have a list of 31 different charges increased significantly in the past two years, including, motor tax, the drugs refund scheme, Voluntary Health Insurance charges and television licences. Rather than preside over a decrease in PAYE in that time, the Government has presided over an increase, primarily by not adjusting the tax bands in the past two budgets. This is a very sneaky way to get money.
It was obvious to anyone observing from outside that in the run-up to the last election there was a massive splurge of cash to buy votes from the electorate. In the aftermath, the Government had to get the money back and the most obvious, easy but underhand way to do that was not to adjust the tax bands and therefore charge people at much higher rates than it should have done and than it committed to charging before and in the programme for Government.
The failure to widen the tax band is the ultimate form of stealth tax. Half of all income earners will pay at the higher rate in 2004. In its 2002 programme, the Government committed to reducing the figure from 28% to 20%. It made that commitment in the programme for Government two years ago but as with many commitments it made then, it has since reneged on it. The Minister is accelerating away from achieving the commitment given in the programme for Government. If corporation tax is excluded, the total tax take has doubled since 1996. That can be explained by the fact that more people are working now than in 1996——
John Paul Phelan (Fine Gael)
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However, the doubling of the tax take cannot be explained. The reason that figure has changed so much is because new charges and taxes have been introduced that do not immediately come to public attention. One of those is the increase in VAT, which happened a couple of years ago. We have much more income coming into the coffers, but where are we getting the value for money? We are all familiar with the health service and the disaster that exists therein. The new Minister for Health and Children is not really a new Minister as she has been in Cabinet for seven years and she shares an element of collective responsibility for what has gone on before. However, I am prepared to wait and see if she has new ideas and I hope that she does.
In the seven years of this Government, the chance of someone of my age buying a house has completely disappeared. The Government has not only just stood by, it has also imposed extra charges on people who want to buy their own home. It increased VAT by 1%, which had a knock-on effect on everything, including houses. It got rid of the first-time buyer's grant and we now have development charges emerging. In some cases that may be even more than €10,000, while in other cases it is a €10,000 change in the affordability of houses for people who are trying to provide for themselves. The Government is directly responsible for this and it is doing nothing to resolve it.
We are also familiar with the idea of rip-off Ireland. This morning, Senator Leyden tried to adopt the approach that we should stick our heads in the sand and say nothing about it, and then it might not exist. The fact is that it does exist and the Government has a responsibility to act to get rid of rip-off Ireland. Recent Exchequer figures show that the average tax contribution per household looks set to increase in 2004 by €2,800. The cost of living in Ireland is by far the highest in the EU. An average basket of food that costs €100 in Ireland, costs the equivalent of €82 in the UK. Between 2001 and 2002, Ireland overtook the UK and Sweden to become the third most expensive country in the EU for consumer goods and services. By 2003, Ireland was almost on a par with Finland as the most expensive country in the euro zone. We are all familiar with the fact that Dublin has become very expensive and it is now the fourth most expensive capital in the EU.
I have already spoken about the erosion of competitiveness and the drop from fourth to 13th place in the global competitive league compiled by the World Economic Forum. We had this discussion in the House earlier and I do not want to repeat the figures mentioned.
John Paul Phelan (Fine Gael)
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The former Minister for Enterprise, Trade and Employment made a number of interesting comments in her time at that Department. In September 2000, she stated that taxation of work was still too high, and that in an environment where we had 20% capital gains tax and 12.5% tax on corporation profits, we could not have the situation where the only people who paid tax at 40% and 20% were those who worked. She also stated that those on low to medium incomes, meaning those who earned below the minimum wage, should not have to pay tax. That situation is still not resolved, although she has been at Cabinet with her colleagues for the past four years. She now finds herself in a new position, but that has still not been resolved. The people were given a commitment then and that commitment should be honoured by Government.
I want to refer to a comment Senator Mansergh made on the 41 people earning more than €500,000 who were recently exposed for not having paid any tax. How can the Government justify this motion and tell the ordinary PAYE worker what a great job it is doing on tax, while those people continue to pay no tax? The actual figure over the past few years has risen rather than decreased. It is completely unjustifiable and I have great pleasure in proposing the amendment.
Michael Finucane (Fine Gael)
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I want to second the amendment and I welcome the Minister to the House. A columnist has recently called the Minister "Boomtime Brian". I do not know if that will stick like the nickname of the Minister's predecessor who was christened "Champagne Charlie".
Michael Finucane (Fine Gael)
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It is worth bearing in mind what the Minister has inherited. We all know what happened to the economy in 2001. We all know the person who was hailed as the all-conquering hero. If the situation was analysed and we reflected over his seven years in office, we could seriously question his achievements. When it comes to the budget, the projections are carried out by the Department as well as the type of evaluation and proper planning on spending. The projections this year are that the Minister will have a €2 billion surplus, which was not anticipated when the budget was moved last year.
There is a buoyancy in the economy, with a massive increase in tax take as well as a buoyancy in the construction industry where 80,000 units will be built this year, fuelling a big increase in revenue through stamp duty and other taxes. However, it is worth bearing in mind the prediction of the Construction Industry Federation for the next two years, which states that housing output will decrease to 53,000 units each year. That same revenue base will not be there for successive years. It goes back to how the budget is subsequently planned. I wonder whether the Department of Finance is planning budgets and projecting for the year ahead as it always deliberately underestimates the situation. In that case, when the subsequent figures emerge for income tax take, VAT take and the take on other charges, it can be perceived as if the Department has earned credibility as it achieved much more than it projected. That is a deliberate mechanism for the budget, as it always makes the situation look better afterwards. Despite a budgetary policy over many years, we do not seem to have achieved the proper planning and evaluation of spending.
When we reflect on the budget of 2001, we have to remember that there was an election in 2002. Much of the spending was earmarked in that direction. From 2002 until the departure of the former Minister of Finance to Brussels, the Government adopted the mantle of Ray MacSharry, and the former Minister could have been christened "Mac the Knife". The Government rowed back with harsh cuts, which was probably reflected in the recent local and European elections, where the Government parties got a hammering. That resulted from the austere changes introduced by the former Minister for Finance. He claimed it was to stabilise the situation, but it was an economic situation which he himself helped to create in the first place.
In the run-up to the budget, the current Minister is probably faced with people pulling in every direction who are trying to get hold of the surplus. With such competing demands, the Minister has to evaluate where the funding goes. Many people refer to the time when Fine Gael and the Labour Party were in office from 1995 to 1997, yet that Government left the economy running at a rate 10% higher than when it came into office. The economy was in good hands at that time. From a political point of view, if the then Government had spent more in the run-up to the 1997 election, things might have worked out differently.
They took it on a responsible basis and we have to accept that they handed over the economy in good condition. The Celtic tiger purred over the following years as we benefited from international trends. The Government may have shown some prudence in its initial years, but that went out the door subsequently.
The public believed the former Minister, Deputy McCreevy, when he said before the last general election that no cuts were planned, secretly or otherwise, but we know what happened thereafter. I do not want to speak about what happened in the past two years as if I were giving a history lesson, because the Minister has inherited new circumstances and has to work from there. The taxpayers who fuelled this country's bonanza anticipated the indexation of tax bands, but that did not happen during the first two years of this Administration, despite a commitment that it would. There is a feeling that an increase has been given in an environment in which people find it difficult to meet escalating employment costs. Many of those who sought an increase are paying much more tax as they move into the 42% tax category. It is anticipated that the Government will do something for such taxpayers and I hope it will.
The Government took a retrograde step in last year's budget when it cut the budgets of job creation agencies, including Enterprise Ireland, IDA Ireland, Shannon Development and the county enterprise boards. The organisations' budgets are sufficiently restricted and I hope they will not be confronted with similar decreases this year.
It is interesting that this debate is following the debate earlier today on competitiveness. Although I did not participate in the debate, I followed it on the monitor and found it interesting. I will not cite many figures or give classic examples. The Minister for Arts, Sport and Tourism, Deputy O'Donoghue, said at a tourism conference in recent days that the use of emotive phrases like "rip-off Ireland" is projecting the wrong image of this country. Industry players at a big tourism exhibition in London have said they feel that Ireland is becoming more expensive to visit. We all know this country has become far more expensive and that people are encountering difficulties as a result. One might not like that message, which was followed up by the Minister, Deputy Martin, last night. He said that the use of phrases like "rip-off" and "high-cost" gives the wrong image of Ireland.
We cannot ignore what is happening in the marketplace. The increase in costs is fuelling the expectations of those whom the Minister will have to placate when he announces the budget shortly. It behoves everyone, including members of Opposition parties, to remind themselves of the problems about which Senator Leyden spoke on the Order of Business this morning. During the debate on competitiveness, he seemed to blame Fine Gael for saying that consumer costs are increasing. He was critical of increased costs some time ago, however, when he advocated the establishment of a "name and shame" inventory. I do not know what happened to that idea. Senator Leyden has acknowledged in the past that we have a problem in this regard, but he seems to have changed his mind because an Opposition party, Fine Gael, has highlighted price increases as wrong, unpopular and something that should not happen.
I wish the Minister for Finance well. It is not easy to allocate resources among the organisations which are competing for funding. The motion moved by Senator Mansergh is an exercise in back-slapping. It is selective in the points it raises, although I appreciate that the same could be said of the Fine Gael amendment. I would not like the Minister to pursue the policies advocated by his predecessor, Deputy McCreevy, as he meets his responsibilities. The decisions the former Minister took over the past two years contradicted what he did for the two years preceding the election. I am sure the Minister, Deputy Cowen, will take a responsible approach to his new position and I ask him to ensure that his decisions facilitate economic stability. I wish him well in what he is about to do. I support the Fine Gael amendment.
Margaret Cox (Fianna Fail)
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I find it funny that some Opposition Senators have said that the motion moved by Senator Mansergh is an exercise in back-slapping or self-praise. The motion "urges the Minister for Finance to continue to support a low tax regime". It is obvious that our economy has grown, developed and boomed in recent years because of the low-tax regime. Irish workers, particularly PAYE workers, are taking home more money on a daily and weekly basis than ever before. Those who have created indigenous employment by investing their entrepreneurial efforts in businesses are benefiting from a corporation tax rate of 12.5%, which used to be available only to multinational companies investing in Ireland. The lowering of that bar has helped small Irish service and manufacturing companies to create wealth and employment. It has facilitated the development of an economy that does not depend on globalisation and decisions taken at global headquarters in many parts of the world.
The decision to reduce the level of corporation tax from 50% to 12.5%, or to 10% for manufacturing enterprises, was an effective one. It has provided an interesting model which is being copied throughout Europe. It has been suggested that the Minister should examine those rates, but I do not think he should make any changes. A tax rate of 12.5% for all companies operating in Ireland is a fair one. Small businesses are happy to make profits and to pay their employees and the Government their dues. We are all happy to pay our fair share of taxes.
The motion also "notes that since 1997 the average tax rate for nearly all PAYE workers has fallen every year including the last two years — in no case has it increased." Does the Opposition disagree with that? Does it not want the Government to even out the tax burden? Does it not want the average tax rate to continue to fall? I prefer to pay a lower rate of tax on all my money than to pay a higher rate of tax. If I choose to buy an expensive bottle of wine or to have an expensive meal in a restaurant, I prefer to pay more tax on my disposable income than to pay it as PAYE. I should be allowed to make some decisions in this regard. We need to examine the entire area of taxation. It is not fair if nobody pays equitably — we need to have equity in the tax system.
Opposition Senators have spoken this evening about value for money, for example in respect of education. Would they like the Government to employ fewer special needs assistants? Would they like the additional teachers who have been employed in schools to reduce the pupil-teacher ratio to be made unemployed? Which of the changes in the education system which have resulted from increased public spending would the Opposition like to overturn? Why do Opposition Senators not consider such changes to be value for money?
There are many problems in the health service and many improvements need to be made. Does the Opposition know that state-of-the-art treatment is available in regional centres for people with cardiac problems and cancer?
Margaret Cox (Fianna Fail)
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Our cancer strategy has been highly successful.
John Paul Phelan (Fine Gael)
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Such treatment is not available in regional centres.
John Paul Phelan (Fine Gael)
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It is not available in the south east.
John Paul Phelan (Fine Gael)
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That is not true. There are no plans for such treatment to be made available.
Margaret Cox (Fianna Fail)
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We certainly have regional specialties such as chemotherapy in the two centres with which I am familiar, in the west of Ireland and Cork. Cancer liaison teams are operating effectively in such centres. Radiotherapy will come on stream in the new year, or possibly beforehand. We are seeing an improvement in the health services in many areas. It is not enough, however, and I do not claim that all our problems have been solved. Where do people wish to see money saved to achieve such value for money? Do they wish to see nurses' wages reduced again? It was this Government that resolved the issue by implementing the recommendations of the Commission on Nursing. It also addressed the issue of junior hospital doctors. Do they want to see that reversed? If they are going to talk about value for money, they should be clear about where cutbacks will be made.
I have a message for the Minister for Finance, Deputy Cowen, whom I am delighted to see here. We are approaching the budget, and I would like to make one or two points, particularly concerning VAT rates. I urge him to follow the British Government in what it is doing regarding VAT receipts from the Live Aid CD so that we might see some of the 21% VAT on this going back to the charity.
Mary O'Rourke (Fianna Fail)
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The Taoiseach said that today in the Dáil.
Margaret Cox (Fianna Fail)
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It is to be hoped he will ensure this happens. It would really be something for the money to go back to charity. I draw the Minister's attention to the fact that many charities in this country pay the full 21% rate of non-reclaimable VAT when buying services. For many organisations, that is a substantial additional cost. We must investigate whether there is any other way of proceeding. The Minister may be aware of this from his days in the Department of Health and Children. If one purchases incontinence wear for older people in a pharmacy, one pays the full 21% rate of VAT. If one buys aids or appliances for people to use at home — saving the State money, since one is not looking to the health board to provide them — one also pays the 21% rate of non-refundable VAT.
There is a case in certain areas for people being able to reclaim VAT. With services provided to hospitals, many of which use agency nurses as is happening all over this city to fill immediate vacancies as a result of sickness, staff shortages and so on, the agency employs the nurse, pays the wage, the employer's PRSI, and then charges that plus 21% VAT to the hospital, which must pay up. The Minister for Finance, Deputy Cowen, gets his take out of it and we go around in a circle. It does not make a great deal of sense to see that level of taxation on top of income tax and PRSI on wages. Perhaps the Minister might examine that in association with the Department of Health and Children.
I am proud of the Government and of our fiscal policies over the past five or seven years. It is not a matter of back-slapping but of acknowledging that our policies and economy are the envy of most of Europe and of many other countries. I commend the Minister on his new role and look forward to the initiatives he might present in the next budget.
Derek McDowell (Labour)
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I support neither the motion nor the amendment, but that will surprise no one. I recently looked at a few figures issued by the Department of Finance. It calculated that it would cost approximately €650 per annum to extend medical card free GP services, perhaps not including pharmaceuticals, to everyone. If one increased our current ODA contribution to the 0.7% requirement in one go, from €450 million to €750 million, it would cost us approximately €300 million a year. To abolish the carers' means test, depending on whose figures one accepts, would cost somewhere between €150 million and €300 million a year. I mention those numbers because I read an article last weekend by Robbie Kelleher, the stockbroker and former Dublin player, as I am sure others did. He wrote that he expected that the Government would have about €850 million to "give away" in tax cuts this year.
It is a remarkable commentary on the state of debate in Ireland that matters are expressed in these terms. We take in more than expected in recurring tax — in excess of €850 million — and the view is that we should give it back. No one considers the possibility of doing away with the carers' means test. We do not look at providing a free GP service to everyone or making a dramatic increase in our ODA. One could give another dozen examples of what we could do with that money, but the argument centres on our having to give it back in income tax cuts.
Those of us who argue for an alternative have more or less failed. We have lost the argument, since people do not see this as an opportunity to do big things in social provision. They see it as another opportunity to give people another €10 in their back pocket so that they might put it into private consumption. That is a terrible pity. After the American election last week, it seems the Democrats are a long way towards losing the argument on how they do things there. Unfortunately, the left in Ireland is a long way towards losing the argument without really making it, and that is also a terrible shame.
As the Minister and Senator Mansergh will certainly know, for a long time since 1994, which is the year from which one can really date the start of the boom, there was general consensus in this country on what had brought it about in the first place. It has almost become a mantra: FDI, partnership, low corporation tax rates and demographic changes throughout the 1980s leading to a lower dependency rate and so on. Most of us agreed that that was genuinely the case and that a matrix of factors had come together to cause the boom. It is interesting that people who in many cases should, and in some cases do, know better are trying to retro-fit another argument. They are now trying to say that lower direct taxes, principally on income, brought about and sustained the boom. That simply does not stand up. I concede that they made a contribution, but it is simply not fair or reasonable to say that low direct income tax rates in the early 1990s brought about the boom, which one can date to 1993 or 1994. It is a simple matter of fact that that was before direct tax rates had started to come down.
6:00 pm
Derek McDowell (Labour)
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The boom fed our capacity to reduce income tax. It did not happen the other way around; lower income tax did not cause the boom. That is a simple matter of fact, and it is interesting to speculate why people are suggesting it was lower taxes. The argument principally comes from the stockbroking community, if I might refer to it as such, and the Minister for Justice, Equality and Law Reform, Deputy Michael McDowell. This evening's motion is the first example I have seen of that appearing strictly under the name of Fianna Fáil, which seems to be suggesting that lower taxes were the boom's primary driver.
It is a more interesting and complicated argument to examine whether they sustained the boom through the 1990s and into the early part of this decade, and I agree that one can clearly make the case that increased consumer spending by people with more money in their back pockets added to demand, which added to growth. However, this evening's motion and some of the rhetoric I have heard recently talk it up far too much.
We all know what factors have sustained the boom and where employment has come — in what they call "the modern sector", including ICT, chemicals and pharmaceuticals, the multinationally owned sector of the economy. More recently it has come in the domestic sector, financial services and construction. Income tax rates do not impact one way or another on most of those sectors, which by and large have highly paid jobs. Income tax rates have made very little difference. Of course, one can argue that people having more money impacts on services, but they have not by any means been the primary cause of our sustaining our high rates of economic growth through the 1990s and into this decade. It has been the result rather than the cause.
We must treat the argument repeated in this evening's motion with considerable care. Incidentally, it is interesting to consider what the major influences will be on sustaining the boom in future. Fiscal policy impacts only to this extent. We have to have what the Department calls prudent economic policies, for example, ensuring that we do not have current budget deficits. However, I am not sure that income tax policy makes a damn bit of difference, unless we are to do something really fairly radical, and I do not think anyone is suggesting that. Senator Mansergh is partly right to say that there is something of a consensus on corporation taxes. This measure was originally proposed by the rainbow Government and subsequently implemented by the Fianna Fáil-Progressive Democrats Government in its first term. I would have argued for a rate of 15% or 17.5%, as that would be sustainable over a long period of time.
The rate of 12.5%, which represents an increase for many of those paying corporation tax, would be extremely difficult to reverse. This is especially the case since many recently acceded eastern European countries have lower rates. Competitive advantage is gained from a lower rate, but we must look at how to sustain it for even a short period of time. I do not think we will be able to do so indefinitely. The best way to sustain it, even for the next ten to 15 years, is to agree to a measure of tax harmonisation. This argument may seem counter-intuitive, and may not have held true ten years ago. However, it would be the case now. Corporation tax is perhaps making a greater contribution now than it did ten or 15 years ago in terms of being sustainable.
We must ask ourselves the fundamental question of why we tax. We tax to provide public services and infrastructure, which is a greater need in this country than in most. We tax in order to redistribute wealth and opportunity within the economy and society. We also make various targeted interventions.
Rory Kiely (Fianna Fail)
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I remind the Senator he has one minute remaining.
Derek McDowell (Labour)
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I am only warming up. I had a great deal more to say. There are choices with regard to public services. They can be paid for largely out of direct taxes, or out of user charges, by making people pay for the services when they use them. They can be provided by the private sector which can afford it, and this is a variation of the previous option, or they cannot be provided at all.
I have a problem with the Fine Gael motion. It is not realistic to say direct and indirect taxes are too high and should come down, or that we do not like stealth taxes, which is code for user charges, but we still need reform. That argument is inadequate and does not stack up. I have no problem with certain user chargers, for example, tolls on motorways. However, I have a serious problem with charges at points of use in the health service, including GP charges, and with charges in education. I would have a problem if we tried to privatise security or the way we deal with crime. We should look at it on an issue-by-issue basis.
The State should provide certain services free to all the population at the best level we can afford. I disagree with those who say we should provide medical cards to those who cannot afford access otherwise. We should provide the best possible service to everybody, paid for through the taxation system. However, I have no difficulty tolling the motorway through the Minister's constituency. That is discretionary use by an individual who will be asked to pay for the service at the time.
John Dardis (Progressive Democrats)
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Provided there is an alternative.
Derek McDowell (Labour)
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It is important to acknowledge that redistribution is part of the reason we tax. Certain people do not benefit from a booming economy, such as old age pensioners, those who are sick and lone parents who find it difficult to connect with the labour market. These people's boats will not be raised by the tide. If we accept they are not going to get into the labour market, the only way to assist them is to use the taxation system as a redistributive measure. Does that mean I want to raise taxes to give more money to old age pensioners? At this time, we do not have to do that. However, if it was necessary, I would say yes. That is fundamental to the political philosophy myself and my party represent.
This is a complex issue, but fundamental to our politics and the choices we offer. Most important, we must offer choice, even if it is only in terms of the priorities we articulate. The priorities I would like my party to articulate are not particularly well represented in the motion.
Brian Cowen (Laois-Offaly, Fianna Fail)
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I welcome the opportunity to speak this evening and address the motion before the House. This Government has a record second to none on taxation in both reducing the burden and making the system work more fairly.
On income tax over the past seven years, we have reduced the standard and higher rates of tax by six percentage points each; introduced a fairer system of tax credits and increased the value of those credits substantially so that no one in the PAYE system pays tax on less than €246 per week; significantly widened the standard band; reduced the average tax burden for all taxpayers; and put in place a regime where, in 2004, a third of all income earners are outside the tax net as compared with a little over a quarter in 1997.
Senator John Paul Phelan stated that half of income earners are paying at the higher rate, but that is not true. Of 1.8 million people in the workforce, 622,000 people are exempted from the tax net. That is basic maths. This Government has also more than doubled the tax exemption limits to €15,500 for single people, and €31,000 for married people and those aged 65 or over.
I was glad to hear the contributions of the Fine Gael Senators. The average single industrial worker earns almost €10,000 more now than in 1997. He or she still pays over €250 less in taxes and levies. If people think what we are trying to achieve is unfair, the facts are not on their side, particularly with regard to taxation.
In an international context, the most recent data from the OECD shows that in 2003 Ireland had the lowest tax wedge in the EU and one of the lowest in the OECD for a single person on the average production wage. That is an important advance in terms of the progressiveness of the tax system. I am in no doubt that the Government's tax policies, endorsed by the electorate, have been right for the economy, business and individual citizens. Low direct tax rates are also appropriate going forward in the context of an increasingly competitive international environment where an open economy such as ours must be able to attract and retain investment and skills in order to underpin our economic development.
However, it has not all been about tax bonuses. I do not question Senator McDowell's position. As Labour Party spokesman on finance, he has held a consistent position in both Houses, even if it was not always in line with some of his colleague's comments. That is the nature of any business.
By not having an informed debate on tax in this country, those in favour of a lower taxation regime are portrayed as less committed to public services. That is not the case. It is not an either-or argument. Between 1997 and 2004, economic growth generated an extra €29 billion in annual resources for the State. That is €29 billion more for resources such as social welfare and the provision of public services. This Government put in place a lower tax regime. Of the €29 billion generated, €19 billion, or two thirds, has been used to fund extra spending on services. We have used the increased resources brought about by greater buoyancy and economic activity. Two thirds of it is going towards the provision of public services.
It is phoney to suggest people should vote for a party because it is prepared to tax at a higher rate to ensure better services while the Government is not. Our economic model has generated unprecedented additional annual resources, two thirds of which is going into the provision of public services. A total of €4 billion went towards substantially higher public investment. This was much needed in terms of the social and economic infrastructure deficit. Approximately €6 billion went towards tax reductions. The remainder went to build up the national pensions reserve fund. It was noted in the 2002 budget that of the €4.8 billion in tax cuts up to then, 43% went on increasing personal tax credits, which are of more benefit to the lower paid, again showing a progressive equity in the distribution of the tax reliefs towards such people. Some 16% of the €4.8 billion went on cutting the lower rate of income tax, 22% went on widening the standard band and just 11% went towards cutting the top rate of tax. The equivalent 2004 figure for the amount of tax relief given on personal credits is now nearly 50%. Again that shows a progressive improvement for those on lower wages, in terms of how the tax relief system is working.
Much has been made in recent weeks of the fact that a very small number of higher earners have managed to pay little or no tax through the use of legitimate tax shelters introduced by Governments of all complexions. There are legitimate and reasonable reasons for tax reliefs as a general principle. We know about them. Governments of all complexions have introduced them to regenerate inner cities, improve tourism prospects in areas where the potential was not being realised and so on. Let us not throw the baby out with the bath water and suggest we should not have tax reliefs as a general principle. As we often hear in this and the lower House, they are needed in areas where the Celtic tiger has not roared as loudly as in parts of this city or parts of the country.
The portrayal of these tax reliefs in today's newspapers and commentaries is quite distorted. The top ten reliefs cover pension contributions, stamp duty and capital gains tax exemptions on one's home, mortgage interest relief, non-taxation of child benefit, medical insurance relief and the special savings accounts. These come to over €5 billion and I do not think anyone is suggesting they are tax shelters for the rich. They are for ordinary people trying to make a living and rear their families, ordinary members of the public trying to do the best they can for themselves and their families. These are not tax reliefs for the rich despite what some ill-advised Opposition press releases say. Those who put out such releases are very much in opposition to members of the constituencies which they claim to represent.
I am conscious nonetheless of the need and desire for greater equity in the tax system. Since 1998, we have made 29 separate and effective moves to close off loopholes, limit reliefs, re-focus allowances and ensure that a proper balance is struck. We will keep all these reliefs and incentives under regular review to ensure that they are fulfilling the purpose for which they were intended and to modify or abolish them as appropriate as we move forward. The Opposition did precious little to limit reliefs when last in power. One has to place the rhetoric beside the reality when the opportunity arises. Those are the people who had the responsibility which I am now privileged to possess.
The measures we took are having an effect. The most recent projections from the Revenue Commissioners in respect of the present tax year indicate that the top 1.5% of income earners will contribute over a quarter, some 26%, of all income tax attributable to 2004. I welcome that. At the same time, those earning the average industrial wage or less are expected to contribute no more than about 6.5% of the income tax for 2004, down from over 14% when this Government came to power in 1997. That is another solid example of greater tax equity for those who can most expect it and who are entitled to have it.
Since 1997, the present Government parties have brought about a position where the proportion of those exempt from tax, taken out of the tax net altogether, has increased from over a quarter to about a third of all income earners. The latest estimates indicate that there are about 622,000 earners exempt from tax this year compared with 380,000 when we came into office. These policies are often berated as being against the interests of ordinary people, but an extra 240,000 people, almost a quarter of a million, who were paying tax when this Government took over from the previous administration, no longer pay tax. That is against a background of huge growth in numbers in employment — an increase of about 400,000 since 1997 — a substantial growth in per capita incomes over the period and the introduction of a statutory minimum wage.
It is no harm to remind everyone that it was the present Government parties which introduced the minimum wage in 2000. In that year, around 64% of the minimum wage annualised was free of tax, yet in the past two years or so the Government has ensured that 90% of minimum wage has been kept outside the tax net. In assessing whether that is a reasonably good performance to date, with more to be done, we must also note two increases in the minimum wage value since 2002.
The present Government parties are committed in the agreed programme for Government to exempt the minimum wage from the tax net over our current term of office and it is our clear intention to meet that commitment in the context of a responsible approach to fiscal policy which is also part of the Government programme. That is not often mentioned when people talk about commitments. Every commitment in any credible programme is based on an overall budgetary framework, as we have also outlined in our manifesto commitments.
One media article last week complained about the alleged inequity of taxes, not on income, but on expenditure, VAT and excise. These, it was claimed, bear more heavily on the poor, but the facts suggest a different picture. Our VAT rates are zero, 13.5% and 21%. The zero rate applies to many essential purchases for those on low incomes, especially food and children's clothing and footwear, the lower rate applies to labour intensive services and the top rate applies to remaining items, many of which, such as cars, are obviously purchased more by the better off. This is a socially progressive tax structure which I am sure all sides of the House can and should readily support, based as it is on a social partnership network which seeks to ensure that all stakeholders in society have a real stake in the policy formation by Government.
When workers or their representatives are making their contributions to society that is not just about their relationship with management, nor simply about wages, but about access to education for their children, proper health services and the room for improvement which we can discuss and acknowledge in many of these areas. Let us also acknowledge the substantial improvement in relative terms that has been achieved because of that approach, instigated by the party which I represent, and to which we are fully committed as a fundamental aim of our organisation.
As for excise, 41% of excise revenue in the first ten months of 2004 came from duties on petrol and diesel and 22% from VRT on cars. Neither of these can be said to bear most heavily on the poorest of the poor. Some 20% of revenue came from alcohol and 16% from tobacco. If any excise impacts more on the lower income groups, it is these two. However, no Government since 1994 has increased excise duty on the plain person's pint of beer and the trade itself can take the honours for running up prices there. In the case of tobacco, increases in excise have been made for social policy reasons supported by all in this House tonight.
Some people say we have gone too far in cutting tax and should move up to EU levels. We are not as far below these levels as usually portrayed if we use GNP as the measure, since that is the relevant measure. Even so, why should we want to reach EU tax levels? Do we want the 10% unemployment and 1% growth rates that go with it? Is this what some of those in Opposition want?
If the Opposition informed itself of what is happening in Europe, it would see that France, Germany and others are desperately trying to reduce their tax and spend rates of 50% or so of national income. These rates are not sustainable, especially in the light of the mounting costs of supporting a quickly ageing population in Europe. As we found in the past, high rates of tax and spend leave us with little room for manoeuvre when a downturn comes, along with the inevitable dislocation of services which results, and the great difficulty we have in retrieving that existing level of service before we can again build sustainable improvement into the future. Why should we go back to that sort of stop-start approach? That is the approach I saw in the first ten or 12 years of my political career and I do not want to return to it.
Those EU member states I mentioned are frantically trying to pull back from the cliff edge. Some in this country on the other hand seem to want to head in that direction by insisting we should increase our tax take to overall EU levels. It is a fallacy to suggest that the commitment to improve public services is dependent on one's commitment to higher tax rates. That is not true and the evidence is otherwise with regard to the model of this economy and how we have worked here for the past ten years.
Let me turn now to business taxation. Low business tax rates have a long history in Ireland. Export sales relief which exempted exports of manufactured goods from tax was introduced as far back as 1956. From 1980, for European Union reasons, we replaced it with a 10% rate of corporation tax for all the manufacturing sector, both Irish and foreign-owned. According to the latest IDA Ireland data, in 2003 there were over 1,000 IDA supported foreign-owned companies located here which employed almost 130,000 persons. This is due, in some measure, to our tax policies. In addition to the 10% corporation tax rate for manufacturing, the 10% rate for the IFSC has also been an outstanding success.
In combination with other important factors, this low rate of tax has led to the creation of approximately 11,000 jobs directly associated with the IFSC itself. The financial services and computer software sectors would see the tax wedge on labour and management tax rates as a key issue in attracting business and investment dependent on skilled labour. It is not the case that people are agnostic in respect of that matter. They are not. Those involved in the sector make that point clearly to the Government and through various avenues when there is any indication that the position might change.
Derek McDowell (Labour)
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It is all nonsense. They all have their bonuses, stock options, etc. They find ways of doing it.
Brian Cowen (Laois-Offaly, Fianna Fail)
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The corporation tax yield from all IFSC companies in 2003 was over €600 million or approximately one eighth of the total corporation tax yield for that year. We must see it in terms of the contribution it is making. It is making a contribution of 12.5% of total corporation tax yield which itself has hugely increased since 1997, during which period the rates were progressively reduced. We must acknowledge that fact.
Derek McDowell (Labour)
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Will the Minister give way briefly because I am interested in ascertaining his view? Does he accept their argument that the tax rate on their employees is important in terms of determining whether they come here?
Brian Cowen (Laois-Offaly, Fianna Fail)
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It is certainly a factor but it may not be the determining one. It should not be ignored, particularly when one considers where some of these firms may go if we do not maintain our competitiveness across all of the criteria they consider. There are countries in other parts of the world which are looking to what we have achieved and which are prepared, if possible, to outdo us in many of these areas. Luckily, however, we have a track record that is keeping pace with developments. We must continually monitor developments in that sector and ensure we have the necessary legislative and regulatory framework in place to enable the continuation of that sort of investment here.
The major growth in our economy in recent years has been accompanied by a rise in corporate profits due to booming export and home markets. This has resulted in a big increase in our corporation tax receipts despite the reduction in the standard rate of corporation tax from 36% when we entered office in 1997 to 12.5% in 2003. The yield from corporation tax in 1997 was €2.16 billion. This increased to approximately €4.8 billion in 2002 and approximately €5.16 billion in 2003. The 2004 budget estimate is for it to increase to approximately €5.35 billion. I have only been Minister for Finance for a short period but I am aware that this is significant revenue, particularly if I want to be able to discuss with other Ministers how to build in sustained social improvements in other areas in which we have social priorities. That revenue is vital and I do not know where we would be without it.
Those who suggest increasing our corporation tax — I note that no one in this House has done so — should think long and hard about what this would do to employment and tax revenue in the economy. The Government is committed to maintaining the 12.5% rate, which has been a successful element in delivering a strong economy that provides jobs here in Ireland where we need them. That is another issue that arises in respect of our commitment to low rates of tax. There is a facile argument that we are looking after the rich. However, all of the progressive changes we have introduced have been geared towards the lower paid.
Another issue that arises is the fact that the corporation tax rate is great in terms of the number of jobs it helps to create. We need to ensure that we continue to create jobs. We sometimes look at this as a monetary issue or consider it a cash cow designed to provide for the provision of services. We have to keep the engine of the economy driving forward if we are to be able to meet the legitimate expectations of many of our people, particularly as they can see that the possibilities which exist are much better than any they could see on the horizon in the past.
I have no difficulty debating tax policy in this House. I am quite open about it. I want to see an informed economic debate take place in this country because there is not sufficient such debate here. There are, however, a great many facile arguments put forward. I want to see a competition of ideas in order that people might discover what are the options. We must devise a model which, on one hand, will maximise job creation and increase the tax take, on the other. I am a pragmatist. I favour low tax rates for a simple reason, namely, they help me to procure more tax revenue in order that I can finance the initiatives I want to take in the social areas. I have seen the damage high taxes did to the social infrastructure in this country and the missed economic opportunities to which they led.
Generations of people were, for too long, obliged to leave the country in order to make a living because of the existence of such high tax rates. We now have a chance to create a virtuous circle rather than a vicious cycle. The alternative being forward to this circle we have created is a return to the vicious cycle. We would be foolish to contemplate such a return. In the meantime, let us engage in a debate about the type of model which will maximise what we want, namely, maintain quality jobs, improve the health and education systems, etc. Let us debate that model but let us not suggest that there is a viable alternative because one does not exist. I accept that the latter is not Senator McDowell's intention. I want such a debate to take place because it would be better for everyone if we engaged in it.
A considerable amount of tax information is provided by me, in response to various parliamentary questions, and by my Department on tax issues. A large number of tax strategy group papers have been published on the web. Detailed tax ready reckoners on tax changes are regularly supplied to Opposition spokespersons and others. Surveys of tax paid by high earners have been published on two occasions. The basis is there for an informed and balanced discussion on tax issues.
A well informed debate would be healthy. Reasoned argument is always welcome and well worked out positions contribute to good policy formation. I would like it if the debate on tax policy could be elevated to that level and not done through the issuing of poorly researched press releases. That would be a benefit to everyone.
The Government's view is that low personal and business taxation have been good for economic growth. They are a key part of part of our overall economic policies, which only last week were endorsed by the IMF. That organisation indicated that the continued impressive performance of Ireland's economy, which is based on sound economic policies, provides useful lessons for other countries.
I hope Senators have found the points I have made useful and I look forward to their contribution to the public debate on these issues.
Shane Ross (Independent)
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I welcome the Minister. I was about to criticise the fatuousness of debating a motion of this sort because Government motions are often used as platforms for self-congratulation and the Opposition merely goes through the motions in opposing them. That the Government has produced a motion of this sort and that it has been seriously addressed by the Minister for Finance is a welcome development. I thank him for coming to the House to listen to this two hour debate.
I welcome the debate on this matter. The Minister's contribution was extremely enlightening. I hope we can continue to engage in this kind of thing on an annual basis. It is something of a privilege for us to have the Minister here. It is particularly good that he is here, in the pre-budget period, to explain his philosophy. I am glad to say that it is a philosophy which, to some extent, was not altogether expected by some of us.
It is a tough time to be in opposition and it is difficult for the Opposition to be confronted with a motion of this sort because there is really no response to it. When the Government chooses the economy and the public finances as its ground and says "We are standing on this platform of fiscal rectitude and prosperity, contest it with us", the Opposition really ought to go home. This has been a period of extraordinary wealth, prosperity and great success, not only for the Government but also for the rainbow coalition when it was in power for a short period.
The amended motion is facile and silly and represents mere nit-picking at something which is undoubtedly a great success. Even though it is a tough time to be in opposition, we could have had somewhat of a more constructive debate, offered congratulations and given credit where it is due.
Senator McDowell in his speech quite rightly pointed out that the beginning of the Celtic tiger was some time around 1993. There are different theories for the origin of the Celtic tiger. Most political parties manage somehow to claim it for themselves, which is difficult to do because most of them were not in power for most of that period. The most unpalatable reason is possibly the most truthful one, that it is led by external factors. It is led by multinationals who came to this country because they found it attractive. The enormous growth in wealth is almost certainly multinational-led and is almost certainly — which is even more unpalatable in the present climate — US-led. I do not find that particularly comfortable to say but I think it is the truth of the matter. That could not have happened if the economic conditions in Ireland were not suitable for multinationals.
The Government and Deputy Cowen's predecessor deserve credit for creating the conditions which welcomed multinationals and kept them here so that they became an anchor and an integrated part of the Irish economy. These guys come here for one reason only, not for love of Ireland, not to give employment, not to help the Irish Government, but rather to make money. If they can make money and they can bring us wealth at the same time, what is wrong with that? It is only some sort of prehistoric xenophobia which makes us fear people from outside coming in and helping us to get rich. What this Government is doing now — and what the Minister said is very encouraging — and what the last Government did, was say to the multinationals, not in terms which I am using because it is politically harder for the Government, "Come on in, the water is warm and we will make it warmer for you." What the Minister said today was a form of code which is easy to understand. He said, "The water will stay warm." What he said was not the sort of happy-clappy economics which Fianna Fáil had to put up with in Inchydoney. He said——
John Dardis (Progressive Democrats)
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The Senator is getting stuck in the sand.
Shane Ross (Independent)
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Senator Dardis was not there and no doubt he would have been extremely uncomfortable there, as were many of the people who were.
The Minister said that the tax system we have had, which was somehow a revelation to Fianna Fáil and everybody else in 1993-94, is working. I am open to contradiction but he said that low taxes give jobs and create prosperity. He said it himself, which I thought was very brave, that low taxes mean more tax revenue. Of course he is correct and the figures prove it. The figures he gave for corporation tax were staggering. Ireland has one of the lowest corporation tax rates in Europe and €5 billion is coming in every year. As the tax goes down, the revenue goes up.
I was delighted to hear what Senator McDowell had to say about corporation tax because, if I am not mistaken, he has shifted his ground a little. I listened to him in the past being critical of the low rate and today he said we may have to live with 12.5%. That statement is very welcome. If this is working, even the Labour Party will have to acknowledge that it works, creates more revenue and gives more money to the Minister to spend on those causes which the party genuinely espouses and champions. That is what we all want and it is only a means to an end.
What is so extraordinary is the statement a few weeks ago by the leader of ICTU, Mr. David Begg, that he wants corporate taxes to increase to 20%. He wants less tax to come in so that he can give less money to those underprivileged people whom he claims to champion and wants to see having a better life. I wonder what is going on. For the first time, and it is a very welcome development, I have seen Ministers pooh-poohing the head of the ICTU. They do not express it in those terms. They say such an idea is not a particularly good idea, without saying where the idea came from. They never say that David Begg is talking absolute nonsense because they are scared stiff of him. They would prefer to say that to the Taoiseach. There are some people of a traditional ideological conviction who still mouth the rhetoric of yesterday when the facts indicate otherwise.
I welcome the Minister's coming to the House and stating that these are the facts. I do not believe he is not going to balance that statement. The budget will contain a great deal of rhetoric which will presumably give some high profile grants to very deserving causes. That is tremendous, in my view. If the Minister has the opportunity to give away €1.5 billion in the budget, we should not scream that he is buying votes or buying his way to the leadership of Fianna Fáil. We should say that is wonderful because he has done it through a new policy which has only been discovered in the last ten years and he has done it successfully. He is beginning to prove that the days of high taxation, high borrowing, high expenditure and bankruptcy are beginning to come to an end. Those philosophies are finished and it is actually much easier than we thought.
Senator McDowell and his party may come over to this point of view. It looks like they are moving so fast that it will make for very boring politics in this country for the next 15 years because everybody will be in agreement. There will be a Fianna Fáil-Labour coalition the day after the next general election. I assure Senator McDowell we can all live with that; we lived with it before and we will live with it again.
John Dardis (Progressive Democrats)
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I am not sure if we can all live with it.
Shane Ross (Independent)
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I think Senator Dardis can live with it too. He is showing great art of compromise in this area. I wish to sound a note of warning of a dark cloud on the horizon — the issue of the public sector and public sector pay. Not long ago the public service rolled all over the Government and achieved benchmarking which caused some controversy in this House. It cost a lot of money and I think Senator Mansergh and I disagreed about that. Senator Mansergh no doubt would say again in retrospect that it was not a lot of money. The spectre of further benchmarking is coming in 2007, which is a huge sop to the same trade unions. The problem is that the Minister may have the money in 2007 — and I hope he does — to give away to the public service in an orgy of spending to keep them happy and stop them going on to the streets. What we have not seen in that period, and which is not contestable, is any meaningful reform in the public service. I have examined this in some detail and it is absolutely undeniable that those promised reforms in return for benchmarking have not been delivered. They were a fiction with which the Government was happy to go along in order to get over the hump and hope it could pay for it. I hope we are not about to see the same fantasy, the same farce, the same quarrels with the teachers about things they ought to have done years ago, the same fudges going on about the public service, the same nonsensical verification committees sitting and saying all is being done when it has not, and giving the nod. They were acting like stuffed dummies and nodding through the money for the public service.
While I hope and believe the Minister will be immensely successful in his post — today he has given us great encouragement in that regard — we must ensure that if there is to be another benchmarking round it is not done without a quid pro quo.
John Dardis (Progressive Democrats)
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I hope I have the same amount of time as Senator Ross.
Mary O'Rourke (Fianna Fail)
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The Senator has to be as enjoyable.
John Dardis (Progressive Democrats)
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I welcome the Minister, Deputy Cowen, to the House for this debate. I appreciate his attendance here as the senior Minister and I commend him for his presentation, particularly because it contained so many facts. We have had all the rhetoric, and the Sunday Independent can bluster as much as anybody without facts, but the facts have been spelled out for us clearly and they are a cause for great celebration.
I agree with the Minister that all we are interested in doing is producing the extra revenue to allow us give to our people the services they require. The political debate is on the way we allocate those moneys. All of us are agreed that the most disadvantaged in our society must be cared for first and that everything else is secondary to that. If we examine the figures from previous budgets, and particularly those from last year's budget, it is significant that the proportion of money spent on the health service, education and the essential services our people need is much higher, relatively, to that in other areas. In other words, if Government spending has increased by 8%, 12% has gone to health and 9% to education in terms of the increase in spending, not the allocation of the moneys.
Do we remember what it was like in the past? I was elected to this House in 1989 at a time when the unemployment rate was 14%. We had no growth. People were leaving the country on boats and aeroplanes. Do we realise how bad it was and is that something to which we want to return? If one advocated reduced taxation at that time there was a universal outcry that it would lead to reduced revenue, that all the services in terms of education, health and so on would be cut and the country would not be able to survive. We see the effect of that in Germany and on the Continent generally where there is a growth rate of 1%. Those countries cannot fund what they are doing and they have got into trouble with the Stability and Growth Pact. We had a minor blip and the former Minister, Deputy McCreevy, was more or less carpeted by the European Union. The big guys can do it, and it does not seem to matter, but it has an effect on what we are doing if that discipline is not exercised across the Community, and not just in this country.
Objective observers both inside and outside the country have stated repeatedly that the former Minister for Finance, Deputy McCreevy, was one of the best ever Ministers. There has been a consistent pattern, over an extended period, of ensuring that capital, income and corporation taxes are reduced and that spending is kept under control; the two go hand in hand. Senator McDowell is right that this is not exclusively about income tax but it is a big factor.
The Minister made the point, which the Tánaiste also made, that the best measure to combat poverty is a job.
Mary WhiteJohn Dardis (Progressive Democrats)
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We have created the jobs within the economy by having a prudent approach to our economic governance and ensuring that taxes were reduced to the extent that the revenue has increased exponentially. I will not repeat the figures the Minister gave — they are on the record — but the significant aspect is that the figure increased so much in the face of limited inflation. We could accept those figures increasing enormously if inflation was increasing to the same extent but inflation, in general, has been kept under control and the figures continue to rise exponentially. That is extremely significant. The burden has decreased and the proportion of people entering the tax net, given the huge increase in employment, has been reduced. That is a spectacular achievement and we should celebrate our achievements more often.
Many groups come into these Houses to try to understand what we have done and the reason we have been so successful in the hope that they can transfer that experience to their own domestic economics and emulate some of our achievements. It has conferred on us far more than economic benefits. It has conferred on us a self-confidence and a realisation of our place in the world.
I agree with Senator Ross on the inward investment by the multinational companies. They were attracted by the level of taxation here but they were also attracted by the fact that we are a stable democracy, and there are not many of them in the world, we are English speaking, we have good contract law and a sophisticated and well-educated labour force. There was much more to it than just simple economics, although that was at the heart of it. That is something we should celebrate.
I had the experience of meeting a senior executive from a computer company while I was on holiday in the west. I asked him why he came to Ireland and not to the Far East or one of the economies where labour costs are so low. He said it is very simple; the productivity here is much higher. That comes back to the debate this afternoon about competitiveness. We have been successful in becoming competitive internationally.
We talk ourselves down in terms of the high wage costs. Are our people not entitled to high wages? The trick is to ensure the companies that have to pay those high wages are given the competitive edge, through taxation and other Government measures, that make it attractive for them to come here and be competitive internationally.
Senator Ross was wrong on one aspect. If he was as dramatically in favour of the multinational inward investment as he said, we would have GDP that was a factor of 3% or 4% above GNP, and we do not. We have achieved quite a lot ourselves. It is not just a question of the inward multinationals coming here. I agree with the Minister on the point he repeated, and it bears repeating, that the objective of any Government should be to provide the extra resources to give people the health and education services they need and that we can be proud of internationally. That is what has been done and must continue to do.
In that context, I wish the Minister, Deputy Cowen, every success in his portfolio and I wish him well in the onerous task of framing a budget within the next month. In his hands that budget will deliver more of the benefits we have achieved and we will continue to experience the growth we have returned to and from which our people will benefit.
Fergal Browne (Fine Gael)
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I wish to share my time with Senator Terry.
Fergal Browne (Fine Gael)
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I am not an economist but if I were to become Minister for Finance tomorrow morning, or even in two years time, I imagine I would be told that the main task of the Minister for Finance is to control spending. Ultimately, Ministers for Finance have some role in bringing in revenue but they cannot control it. They can bring about conditions to ensure revenue will come in every month but the one area over which the Minister for Finance has direct control is spending. He must ensure that any money allocated is spent and that it the money allocated is not overspent. This Government has a terrible record in that area. Every quarter we see George Lee on the television telling us that revenue receipts are up but that the Government has underspent. That should be good news but it is not.
John Dardis (Progressive Democrats)
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It never will be with George; that is for sure.
Fergal Browne (Fine Gael)
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It is good news if the revenue is up. The Government can take some credit for that but not all the credit. That is a reflection on the general economy. When we hear that road projects, for example, have gone €9 billion over budget, that the Government has underspent in general but overspent in specific areas, that demonstrates that it is mismanaging our finances.
It is dreadful that the Government is underspending when certain sectors are crying out for extra funding. A school group from Carlow, which visited the Houses today at my invitation, is seeking funding for a new building because the current building is unsafe. Students cannot use the gymnasium. I received a letter from another school this morning, in which it was pointed out that students are being taught in a storeroom with no windows or ventilation. It is criminal that such conditions persist, particularly when sufficient money is available but is not being properly managed. The Government should not clap itself on the back when it underspends every month but ask why it is underspending when the costs of major capital and infrastructural projects are significantly exceeding their budgets. Something major has gone wrong.
As regards taxation, I will concentrate on the issues people must face in everyday life, for example, the purchase of a house. Young Fine Gael had a successful campaign this year which revealed that tax accounts for 45% of the cost of a house. When the Government refers to low personal taxation, it ignores this fact.
At a meeting in Buswell's Hotel yesterday, SIMI noted the high cost of cars. Taxation, including VAT and vehicle registration tax, accounts for nearly 50% of the cost of an average car. Contrary to what the Minister appeared to hint, cars are basic items rather than luxuries.
VAT is a significant tax which impacts on people's lives. The changes to benefits-in-kind announced in the previous budget have had a negative impact on employees and employers. The bands for stamp duty on houses must be widened in the budget. We are discouraging people from purchasing second-hand houses which contributes to an artificial housing market. We should reduce stamp duty on second-hand houses and raise thresholds, some of which are unrealistic and result in those buying modest houses paying the top rate of stamp duty.
The Minister referred to complaints by the Opposition parties about certain tax reliefs. While I am proud that Fine Gael introduced the urban renewal initiative, it was appropriate in a different era. The party now favours abolishing these tax reliefs in light of the substantial change in the economy since then and their contribution to artificially high prices of houses.
Sheila Terry (Fine Gael)
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I thank Senator Browne for sharing time. As only a short time is left to me, I will confine my remarks to pensions, particularly the position of members of private occupational pension schemes. Many of those who retired in recent years have found that the pension schemes into which they and their employers paid for many years are underfunded and do not deliver the type of pension to which they aspired or from which they expected to benefit in their old age. The Government is not doing anything, particularly through the Pensions Board, to protect private pensions.
The only people who can safely expect to retire on a good pension are civil servants. Those engaged in the private sector, particularly PAYE workers, pay into pension schemes throughout their working lives. These schemes are being destroyed by the pensions industry. One needs only to turn on one's television or radio any evening to see or hear large numbers of advertisements encouraging people to take out pensions. We do not hear the Pensions Board, the Minister for Finance or any of the Departments involved in maintaining pensions indicating that pensions should be protected. What is being done?
People are paying into pension schemes in the belief that their money is being well spent and protected. This is not the case. Most people, if asked what their pensions will be worth when they retire, would not have a clue. They are placing their money in the hands of the pensions industry which is not protecting it on their behalf. It is time the Government examined the matter.
The pensions industry has finally answered a number of questions I have been putting to it for many years. I asked, for example, how many pension schemes are underfunded. The industry has admitted the number is sizeable. We hear of many companies which have informed their employees that the company's pension fund is not sufficient to deliver the anticipated level of pension. In many cases, the companies which were supposed to protect their employees' investments are asking staff to top up their pensions with exorbitant sums of money. It is now compulsory for many employees to join a pension scheme. While it has always been obligatory for employers to establish a pension scheme, employees should not be obliged to join it.
It is time the Government took action to look after those who have worked for many years by providing a decent standard of living for them in retirement. Instead, we hear the Insurance Federation of Ireland requesting the Minister for Finance to encourage people to put the moneys in their special savings investment accounts into pension funds when they mature in a couple of years. Why should people do this? Why can the Government not encourage them to save their money by providing an incentive under the SSIA scheme? This would not necessarily require the level of returns people receive under the SSIAs. The Government should examine the scheme to find ways to encourage holders of SSIAs to continue to save. People will do so when they know the money they save is secure. It is time we woke up and looked after the many elderly people who have been robbed of their pensions.
Terry Leyden (Fianna Fail)
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I welcome the Minister of State at the Department of the Environment, Heritage and Local Government, Deputy Batt O'Keeffe, who replaces the Minister of State at the Department of Finance, Deputy Parlon. It was great to have the new Minister for Finance, Deputy Cowen, in the House. The Fianna Fáil Party is most fortunate to have one great Minister for Finance succeed another, Deputy McCreevy. The party is blessed with people of ability and capacity. I met the Minister outside the Chamber and told him his speech should be circulated to every household, not only cumann members.
Maurice Cummins (Fine Gael)
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He could give it out like confetti. The Minister for Communications, Marine and Natural Resources, Deputy Noel Dempsey, did something similar with Fianna Fáil councillors when he was Minister for Education and Science.
Terry Leyden (Fianna Fail)
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The details outlined in the speech are excellent. The facts speak louder than words. Government Senators find it difficult to criticise the Opposition because it has been such a long time since it was in power.
Maurice Cummins (Fine Gael)
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The Senator could start with 1997 when 1,000 jobs were being created every week.
Terry Leyden (Fianna Fail)
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The exemption of VAT on children's clothes and footwear reminds me of the time former Taoiseach, Garret FitzGerald, attempted to impose VAT on these items. Even former Deputy Jim Kemmy could not live with it and begged him not to do it.
Maurice Cummins (Fine Gael)
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The Senator said he would name and shame petrol stations in County Roscommon. Why is he not doing so?
Terry Leyden (Fianna Fail)
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This debate brings back strange memories of the items on which the Opposition imposed tax.
Terry Leyden (Fianna Fail)
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The Senator was not born at the time.
Terry Leyden (Fianna Fail)
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He was one of the children who would have been taxed.
Paddy Burke (Fine Gael)
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The Senator should conclude. I have given him considerable latitude.
7:00 pm
Terry Leyden (Fianna Fail)
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I wish to make one further point while the officials are present. All old age pensions should be exempt from income tax and the free fuel allowance should be doubled, given that a tank full of oil of costs €530 and tax on oil is high. We are doing a great deal of lobbying in this regard. I ask the Leas-Chathaoirleach to allow me to make another point.
Terry Leyden (Fianna Fail)
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Free fuel should be given all year round because it is needed throughout the year. I hope the officials will listen.
Martin Mansergh (Fianna Fail)
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It has been a good debate and I compliment Senators on all sides of the House. We were privileged to have a particularly lucid speech from the Minister but there were also valuable contributions from, among others, Senators McDowell and Ross and I compliment Senator Terry on her contribution which addressed a serious social problem.
I will address some points which arose during the debate. While there are many competitiveness indexes, I cited the Bertelsmann index, a German index for economic development and economic policy. It divides countries into three zones: the danger free zone, which Ireland tops, the warning zone, which contains a number of countries, and an alarm zone, which includes France and Germany. We are still close to the top, at least on some indexes.
On the adjustment of tax bands, we are only referring to the one third of income earners on higher incomes. That the tax bands have not been adjusted does not affect the tax situation of the two thirds of taxpayers on lower incomes. To address other points, an increase in VAT is not a stealth tax but an overt tax and taxation on work and PRSI is practically the lowest in the EU. Most of the construction incentives are to be abolished by July 2006 which, on the evidence of the Revenue Commissioners to the Joint Committee on Finance and the Public Service today, will deal with the millionaires who are not paying tax at present.
The policies of 2001 and 2002, whatever motives may be attributed to them, had a counter-cyclical effect which was acknowledged last year by the IMF and the OECD and which means they were beneficial in counteracting tendencies towards depression. Such a slowdown in spending as occurred in 2003 bears no comparison to what had to be done in the late 1980s.
With regard to the UK, I do not agree with Senator McDowell's point that an increase in income tax would not have any effect on our competitiveness. We are in competition with the UK and labour is very mobile. Even in the UK of Gordon Brown, the top rate of tax is 40% and there is an introductory rate of tax lower than 20%, which cannot be ignored.
I agree up to a point with Senator Ross when he stresses the importance of US multinational-led investment. Unfortunately, he can never bring himself to acknowledge the role of social partnership in the recovery since 1987. An IMF document states that, while not the only factor, social partnership contributed significantly to the increase in the employment rate since the early 1990s, which averaged 2.1% per annum during the second half of the 1990s. The IMF also favours a further benchmarking exercise as an alternative to past practice, which involved special pay claims and relativity.
It was not clear from Senator Browne's remarks or the amendment to the motion whether we are being criticised for underspending or overspending.
Martin Mansergh (Fianna Fail)
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Senator McDowell said all that needed to be said about the coherence of the amendment. There is a great degree of consensus, which was evident in the debate, that the economy is the on the right road and needs to be kept there. There is real debate on what should be done with revenue and the fruits of economic growth and what are the priorities. I commend the motion to the House.
The Dail Divided:
For the motion: 19 (James Bannon, Paul Bradford, Fergal Browne, Paddy Burke, Ulick Burke, Paul Coghlan, Noel Coonan, Maurice Cummins, Michael Finucane, Brian Hayes, Mary Henry, Martin Mansergh, Joe McHugh, David Norris, Kathleen O'Meara, Joe O'Toole, John Paul Phelan, Brendan Ryan, Sheila Terry)
Against the motion: 29 (Eddie Bohan, Cyprian Brady, Peter Callanan, Margaret Cox, Brendan Daly, John Dardis, Timmy Dooley, Geraldine Feeney, Liam Fitzgerald, Camillus Glynn, Tony Kett, Michael Kitt, Terry Leyden, Don Lydon, Marc MacSharry, Martin Mansergh, John Minihan, Paschal Mooney, Tom Morrissey, Pat Moylan, Labhrás Ó Murchú, Francis O'Brien, Mary O'Rourke, Ann Ormonde, Kieran Phelan, Shane Ross, Jim Walsh, Kate Walsh, Mary White)
Tellers: Tá, Senators Cummins and J. Phelan; Níl, Senators Minihan and Moylan.
Mary O'Rourke (Fianna Fail)
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On Wednesday, 17 November 2004 at 10.30 a.m.