Friday, 19 December 2008
Finance (No. 2) Bill 2008 (Certified Money Bill): Second Stage
I am glad that Seanad Éireann has set aside this day to debate the Finance Bill and I look forward to hearing the views of Senators. The Bill before us has been framed in the context of the most difficult economic and fiscal climate in a generation.
The speed and depth of the economic downturn has surprised even the most pessimistic of the commentators. It is important to remember that despite the gloomy short-term outlook, our economy retains the structural achievements of the past decade. We still have in excess of 500,000 more people at work than ten years ago. Our export levels are much higher than in 1998 and the living standards of ordinary workers have risen substantially. We also have one of the lowest public debt levels in the EU and a low tax regime for both business and individual income earners. In public debate, we are inclined to focus on the contraction in the housing cycle as the source of our difficulties. It is true that it has contributed to our economic difficulties, but these difficulties now have been compounded by an international factor, namely, the lack of confidence and distrust in world financial markets. Concerning the Irish banking system, I am determined to ensure the financial stability of all our institutions. The Government stands behind these institutions and all capitalisation arrangements will be completed in the shortest possible time.
Our main economic focus must be the restoration of cost competitiveness so that we will be able to take advantage quickly of any emerging global recovery. The first prerequisite for this is the restoration of credibility and sustainability to the public finances. Accordingly, the budget set out a medium-term strategy to ensure this by, inter alia, reducing and prioritising public expenditure and adjusting taxation levels to take account of the reversals in economic growth. This responsible approach underscores and maintains Ireland's well-earned international reputation as a good place to do business. This approach is also taken in the framework for sustainable economic renewal, Building Ireland's Smart Economy, published yesterday. The Finance Bill makes a significant start in implementing this strategy by providing targeted support to enterprise and economic activity.
One key measure in the Bill to bring the public finances back into order is the income levy. As Members will be aware, this will now apply at a rate of 1% to gross income up to €100,100, at a rate of 2% to the next €150,020, and 3% on the remainder. The tiered rates ensure that the levy, as currently structured, is highly progressive and bears least, if at all, on the most vulnerable sectors. For example, the Bill provides an exemption threshold of €18,304 per annum to exclude those on low incomes, all social welfare and similar type payments are excluded from the levy, and those with an entitlement to the medical card will also be exempt from the income levy. The Bill protects the vulnerable and the elderly while those best able to pay, pay the most. Those paying at the top rate of 3% will contribute 20% of the total take from the levy.
In the case of income tax, the standard rate bands will increase by €1,000 from €35,400 to €36,400 for single individuals, from €44,400 to €45,400 for a married one-earner couple and an increase of €2,000 from €70,800 to €72,800 for a married two-earner couple. This measure will help to cushion the effect of the income levy on middle-income earners.
There is also provision for an increase in the rate of mortgage interest relief for first-time buyers from 20% to 25% in years one and two and from 20% to 22.5% in years three, four and five. While the measure also provides for a reduction in the rate of mortgage interest relief for non-first-time buyers from 20% to 15%, it is broadly revenue neutral. This rebalancing makes for a fairer system and helps those buyers with the biggest financial exposure and those facing falling property values.
The Bill confirms the budget increases in excise duties and it provides for an increase in betting duty from 1% to 2% from 1 May 2009. It allows deducibility for betting duty in computing the amount of profits or losses of a bookmaking business for income tax or corporation tax purposes.
New arrangements for the VAT treatment of tour operators and travel agents are also contained in the Bill. A margin scheme for tour operators and a measure making travel agents liable to VAT on their commission is being introduced with effect from 1 January 2010. Most EU member states operate a margin scheme for tour operators whereby they are taxed on the profit margin realised on the supply of a domestic or EU travel package.
To support the sale of CO2 efficient cars a partial removal of the block on VAT deductibility in respect of business cars is being introduced. This will allow a business to deduct 20% of the VAT incurred in respect of a car, purchased or leased for business purposes, which is first registered for VRT on or after 1 January 2009 and has CO2 emissions of less than 156g/km, that is a car that falls within CO2 emission bands A, B and C.
Owing to the worsening budgetary position, we faced difficult choices but in making those choices and in subsequent constructive debate, we made every effort to protect the truly vulnerable. To take one example, despite the economic circumstances, we increased the State pension by €7 per week and all working age payments by €6.50 per week.
The Government is also committed to maintaining a pro-business and pro-employment environment and this is reflected in the framework for economic renewal. The Bill delivers a number of significant pro-enterprise measures. These include improvements to the research and development tax credit regime that make it one of the most attractive in the world and provisions to support small start-up companies, along with the reintroduction of the remittance basis of tax so that we can attract in scarce skills to our economy. It will incentivise to help provide venture capital for start-up companies involved in innovation.
The Government has long supported research and development as the fundamental key to a successful knowledge-based economy. The Bill increases research and development tax credit by 5% and provides other measures of benefit to business, in particular small companies and those in the start-up and expansion phase. These include an option to carry back unused tax credits for set-off against the previous year's corporate tax liability, thus generating a tax repayment. There is also a further option, where there is insufficient or no corporation tax liability in the previous year, to claim payment of the remaining unused credit which will be paid in instalments over a three-year period. The base year, 2003, will be permanently set as the base year for calculating incremental research and development expenditure under the scheme. Over time, this will have the effect of turning the scheme into a volume-based scheme. The Bill also provides that a tax credit will be available in respect of a proportion of the expenditure incurred on a new or refurbished building used in part for research and development activities. This change reflects the reality that research and development takes place in manufacturing or production environments and not only in laboratory conditions. These combined changes make our research and development regime one of the most attractive in the world.
The Bill also provides for a three-year exemption from corporation tax on trading profits and chargeable gains for new companies commencing trade in 2009. Full relief applies where corporation tax liability in any of the first three accounting periods does not exceed €40,000. Marginal relief will apply where the corporation tax liability is between €40,000 and €60,000. Furthermore, the Bill legislates for the tax treatment of restricted share awards. Such share awards have traditionally been dealt with on an administrative basis by the Revenue Commissioners. Restricted shares are often awarded by companies that are in start-up and expansion stages, as part of an overall remuneration package when access to capital may be limited. They are particularly important for small businesses in the current economic climate as a performance incentive and employee retention mechanism. Restricted share awards are also beneficial to the employee as the income tax charge due on the value of the shares awarded is reduced progressively, depending on the period of the restrictions.
At international level, double taxation agreements have been concluded with Turkey, Malta, Vietnam, Macedonia and Georgia. These agreements significantly improve our bilateral trading and investment opportunities in the countries concerned. Ratification of these agreements can take time because of lengthy parliamentary procedures in the other countries so I am providing for the recognition of payments to and from these countries for preferential tax treatment as soon as the agreements are signed. This will accelerate reliefs to relevant businesses in the area of dividends, interest and capital gains tax.
The Bill amends Revenue's civil penalties regime across all taxes and duties except customs so as to ensure its compatibility with the provisions of Article 6 of the European Convention on Human Rights. It provides that tax and duty penalties will not be imposed against the wishes of a taxpayer unless a court has determined that the penalty is due. The Bill also places on a statutory basis the current practice of the Revenue Commissioners in respect of the level of tax-geared penalties sought in settlements arising out of Revenue audits and investigations. In addition, a number of fixed penalties are updated and standardised and the amounts of such penalties are accordingly increased.
The Bill runs to 102 sections and six Schedules and is structured by tax headings. In the time available to me, I will recall some of the main provisions in sequence. Section 2 describes the income levy. I have described the percentages that apply to the relevant limits. All social welfare payments will be excluded from the levy, as will similar type payments made by Departments and agencies other than the Department of Social and Family Affairs, in addition to similar payments from other states. Those with an entitlement to the medical card will also be exempt from the income levy and an exemption threshold of €18,304 per annum excludes those on low incomes from the levy. An age-related exemption threshold of €20,000 per annum applies for persons aged 65 years and over. Where the age-related or general thresholds are exceeded the levy will be payable on all income.
Section 3 provides for a parking levy, which is to apply where an employer provides car parking facilities for employees. The levy will apply where an employee has an entitlement to use a parking space and such space is provided directly or indirectly by his or her employer. It will not apply to disabled drivers or to employees of the emergency services in the context of responding to an emergency position. The charge for a full year will be €200 where an employee has an ongoing entitlement to use a parking space. Where parking spaces are shared by employees, the levy is reduced to €100 where the ratio of the number of employees to the number of parking spaces is two to one or more. Section 4 provides for an increase in the standard rate bands.
Continuing the work commenced earlier this year, section 6 will provide for a new CO2 based system of calculation of benefit-in-kind in respect of company cars provided for employees. The new system is structured on the seven bands adopted for vehicle registration tax. Cars in the three lowest bands of CO2 emissions remain at the current level of benefit-in-kind charge and higher charges apply for vehicles with higher emission levels. Existing vehicles retain the current method of calculation of benefit-in-kind.
As regards health expenses relief, section 8 provides that the relief will be granted at the standard rate only from 1 January 2009, with the exception of nursing home expenses which will continue to be allowed at a the marginal rate. In providing tax relief, we must ensure as far as possible that it is targeted on those who need it most. Section 14 provides for an increase in the rate of mortgage interest relief for first-time buyers, refocusing the relief on those buyers with the biggest financial exposure and facing falling property values.
The so-called Cinderella rule is changed by section 15. Hitherto, presence in the State during a day did not count in determining residence for tax purposes where the individual leaves before midnight. In future, a presence in the State at any time during a day will be counted for determining residency, so the midnight flit will no longer facilitate tax avoidance.
As regards pensions, section 16 provides that the annual earnings limit for determining maximum tax-relievable contributions for pension purposes is being set at €150,000 for 2009 as compared with the 2008 limit of €275,239. It also amends the formula for determining this limit and the standard and personal fund thresholds to provide the Minister for Finance with discretion as to whether those thresholds should be indexed.
In the area of farming, section 17 extends the farm pollution control relief to 31 December 2010. This relief will continue to encourage farmers to make the necessary and sometimes costly investments in pollution control measures while section 18 renews the 25% general farming stock relief and the special 100% stock relief for the same period.
A scheme to facilitate the removal and relocation of certain facilities where potentially dangerous activities are undertaken is introduced by section 21. Such industrial facilities can hinder the residential and commercial regeneration of docklands in urban brownfield areas. The scheme arises from the EU Seveso Directive, which seeks to protect public safety near locations where potentially dangerous activities are undertaken. The relief, given by way of accelerated capital allowances and additional relocation allowances, covers the removal costs of the industrial facilities and the cost of building the relocated facilities, including land purchase costs. Costs are limited to the net costs of the removal and relocation.
The rates of tax that apply for DIRT and other investment products are increased by sections 26 and 27. Section 28 increases the amounts eligible for tax relief for investment in films and makes our fiscal incentive for film making one of the most attractive around for prospective investors.
To support new companies, section 31 introduces the three-year tax exemption for new start-up companies that commence trading next year. In support of business, section 33 provides for the recognition of payments to and from countries where double taxation agreements have been signed, for preferential treatment, rather than awaiting the completion of the ratification process. Sections 34, 35 and 36 deal with various amendments to the provisions relating to the research and development tax credit, the main elements of which I have outlined.
Building on the initiatives in the Finance Act 2008, section 37 extends from three to seven the categories of energy-efficient equipment included in the scheme of accelerated capital allowances for energy-efficient equipment. The scheme provides for 100% capital allowances in the year of purchase on expenditure incurred by companies on qualifying equipment bought for the purposes of the trade. The new categories included in this scheme are information and communications technology; heating and electricity provision, process and heating, ventilation and air-conditioning, HVAC, control systems and electric and alternative fuel vehicles.
All sectors must make a contribution to stabilising our public finances. Accordingly, section 38 provides for revised arrangements for the payment of preliminary tax by large companies with a tax liability of more than €200,000 in their previous accounting period. It also revises the dates for payment of capital gains tax on asset disposals by individuals, thereby giving effect to the two measures announced in the Budget Statement. The section provides for payment of preliminary tax by large companies in two instalments, the details of which are set out in the explanatory memorandum to the Bill. Regarding capital gains tax, the payment date for disposals made in the period 1 January to 30 November of a year of assessment will be 15 December, while the payment date for disposals made in December will be the following 31 January. The revised payment dates apply to disposals made in 2009 and subsequent years.
To ensure consistency with the EC treaty, section 42 amends the existing provision that provides that any gain arising from the disposal of assets situated outside the State and the United Kingdom to a person who is resident or ordinarily resident but not domiciled in the State is based on the actual amount received in the State, that is, in accordance with the remittance basis of taxation.
Section 44 increases the capital gains tax rate from 20% to 22%, in respect of disposals made on or after 15 October 2008. Excise duties are dealt with in sections 46 to 66, inclusive. These sections set out a range of changes in regard to excise duties, including confirming the budget day increases in excise on tobacco, wine and petrol; the introduction of a lower rate of excise duty for low alcohol beer and cider; and increases in excise duty payable in respect of licences, other than pub licences, permitting the sale of alcohol.
The provision to increase betting duty from 1 % to 2% from 1 May 2009 is set out in section 53, as is the provision to allow deductibility for betting duty in computing the amount of profits or losses of a bookmaking business for income tax or corporation tax purposes. The introduction of an air travel tax from 30 March 2009 is provided for in section 55. The general rate applying will be €10 per passenger, with a lower rate of €2 for shorter air journeys. I have taken account of concerns raised by the regional airports, particularly those on the western seaboard. The lower rate of €2 will apply to departures from any Irish airport where the destination is 300 km or less from Dublin Airport. This means that all Irish departures to locations such as Manchester, Liverpool and Glasgow will be subject to the €2 rate.
To address ongoing concerns about both road safety and VRT evasion, section 61 provides for the introduction in respect of VRT of a pre-registration test for vehicles, including used imported vehicles, being brought into the State while section 64 provides for the setting up of a temporary registration system for non-Irish registered vehicles being brought into the State for a period of more than 42 days.
In addition, provision is being made for the introduction of estimated excise assessments in cases where excise duty, including VRT, has not been paid, extending more specifically the principle of unjust enrichment to VRT, and for changes to the VRT relief scheme for short-term car-hire including phasing out the scheme over a period of two years by October 2011.
VAT is dealt with in sections 67 to 77, inclusive. These sections set out a range of changes in regard to VAT including, as announced in the budget, the increase in the standard VAT rate by 0.5% to 21.5% with effect from 1 December 2008. This increase applies to all goods and services which were subject to VAT at 21%. The other VAT rates are unaffected.
Section 79 amends several sections of the Stamp Duties Consolidation Act 1999 to allow for the introduction of the e-stamping of instruments for stamp duty purposes. To facilitate the introduction of e-stamping, section 81 provides an incentive to encourage the presentation to Revenue of instruments executed before the enactment of the Bill and in respect of which the stamp duty chargeable has not been paid within the prescribed period of 30 days. Provided such instruments are presented to Revenue for stamping within eight weeks of the passing of the Act together with the full stamp duty and appropriate interest, a penalty will not be applied to such instruments. This measure is intended to facilitate a smooth transition to e-stamping.
Section 82 repeals section 110 of the Finance Act 2007 from the enactment of the Bill and reinstates it again with the same charging provisions but subject to certain exemptions being made to those charging provisions. These exemptions relate to certain transactions involving public private partnership arrangements and certain incentive schemes for capital allowances purposes. The section is subject to a commencement order being made and it is my intention to commence the provisions early next year.
Section 86 amends Part 9 of the Stamp Duties Consolidation Act 1999 to confirm the new reduced charges, already announced in the budget, for ATM, debit and combined ATM debit cards. The new rate on ATM cards will be €2.50, on debit cards €2.50 also and on combined cards €5.00. The reduced charges for ATM, debit and combined cards take effect for the year ending 31 December 2008.
Among other things, the reduction in the top rate of stamp duty for non-residential property from 9% to 6% is dealt with in section 87. The purpose here is to stimulate business and commercial activity and hence employment. Section 90 increases the rate of tax on gifts and inheritances from 20% to 22%.
The tax reliefs in respect of the donation of heritage items to approved State institutions and the donation of heritage property to the Irish Heritage Trust are amended by section 94 to 80% of the market value of the items and property donated, respectively. The ceiling on the aggregate value of donations qualifying for each of these schemes in any one year will remain at €6 million. This measure will ensure that the State achieves value for money and that there is a greater philanthropic element in the schemes.
To further facilitate business, section 96 and Schedule 3 give effect to the budget day announcement of an extension to return filing and payment deadlines where returns and payments are made electronically via the Revenue Online Service. A number of amendments are being made to the Taxes Consolidation Act 1997 and to the Value-Added Tax Act 1972 to extend and align the existing deadlines for corporation tax, relevant contracts tax and value-added tax.
With effect from 1 January 2009, where returns and payments are made electronically the return filing and payment deadlines for these taxes will be the 23rd of a month. This has the effect of extending the existing filing and payment deadlines by two days for corporation tax, four days for VAT and nine days for relevant contracts tax. A similar extension to the 23rd of a month is also being made for PAYE and PRSI by way of an amendment to the PAYE regulations.
Likewise, section 97 and Schedule 4 streamline and simplify the provisions in various Acts relating to the collection and recovery of taxes and duties, except customs, and replaces them with an integrated collection and recovery regime across the various tax heads.
I hope Seanad Éireann has benefited from this explanation of some of the measures in the Bill. The measures it contains strike a balance between the need to protect those on low incomes, the need to restore order to our public finances and providing targeted incentives to facilitate economic recovery. In this latter regard, the Bill also contains a number of measures to promote enterprise and business in this country so that we can return as early as possible to the path of growth.
A finance Bill is necessarily of a highly technical character and contains a diverse range of provisions in regard to the rates of tax, the collection of taxes and the administration of the tax system. The Finance Bill is part of a wider philosophy and direction which the Government is taking on our national economy. It is essential that we recognise the fact that our public finances are out of order and that the fall in tax receipts means our anticipated revenue is back to 2005 levels. Expenditure adjustments are and will be required to deal with this position.
Last July, I brought forward a package of measures which has been implemented in full since. The savings secured on that occasion have benefited the Exchequer position. We brought forward the budget to October, and I have been much criticised for doing so. However, it served the need to bring to public attention the difficulties which exist in the public finances. Naturally, the public expressed their views on this and that is legitimate and correct in a democratic society. However, we as a Government have to give leadership and make the necessary adjustments that are required to protect our economy.
Likewise, with the further deterioration that has occurred since budget day we will take the necessary measures in January after consultation with the social partners. We are determined to lead but we want to lead with the social partners working with us so that we can put this country in a position to benefit from an upswing in the world economy.
The budget contains an increase in taxation and I have heard calls for further additional increases in taxation rather than an adjustment of expenditure to tackle our problems. The amount of the tax increase in the budget is the most the economy can sustain in the year ahead. We must protect jobs. The decline in the tax receipts has been most marked in those areas where there is a discretionary element on the part of the purchaser of an item, be it a house, motor car, goods, services, cigarettes, tobacco or alcohol.
The declines in all of these areas are caused by the fact that consumer sentiment is weak and purchasers are not buying goods, services or houses or disposing of them. Given this circumstance the only effective way of increasing taxation is through the method of income taxation and this is why the levy is contained in the budget. However, I believe the levy is as far as we can go next year because further increased taxation on labour would result in further joblessness and we must recognise this.
With regard to the general philosophy of the budget, it is important that we send a clear message in the Finance Bill that we continue to incentivise business to come here and invest and create jobs. This is why the Bill contains a range of measures such as the research and development credit, the restoration of the remittance basis for certain restricted categories of employees in international companies, interest in venture capital being invested in research and development and other associated provisions. All of these measures are contained in the Bill to ensure Ireland remains as one of the most attractive places in the world in which to invest and create jobs. It is noticeable in the midst of this recession that those enterprises we have attracted here are proving durable. Many of them contribute an enormous amount to our economy and it is important that as well as addressing our cost competitiveness and ensuring we are competitive ourselves in selling goods and services to other countries that we sustain confidence in the inward investment sector in Ireland.
I thank Senators for arranging to debate this Bill today. I appreciate the fact that a day has been set aside and I will attempt to hear as many Senators as I can and conclude the debate. I commend the Bill to the Seanad.
I welcome the Minister to the House. When we discuss such a serious issue as our economy we need to be far more straightforward in what we state to the Irish people. The public finances have gone rapidly from boom to bust and we need to restore order to them.
The first thing that someone of the Minister's calibre should do, if he is taking the issue seriously, is to stop playing a charade with the social partners with regard to a 6% pay increase. Playing a charade that the 6% pay increase may still be paid gives the impression to the general public that the people in Dublin Castle are completely disconnected from, and not paying attention to, what is happening. On one level, that makes the Minister appear incompetent but, on another, it appears he is out of touch with what is happening.
The Minister is acutely aware of the financial tsunami that will hit this country next year in regard to the economy and we should be talking about the crisis in those terms. We should not spook people too much but leave them in no doubt about what is facing us next year.
When people compare what happened in Dublin Castle yesterday when the Minister announced the framework policy document with the stark results in the ESRI report in terms of what will happen next year, it makes them believe the Minister is disconnected. The ESRI has indicated that by the time these Houses sit again at the end of January there will be thousands of people on the live register and the economy will be showing signs of entering an even more serious recession than the one we know we are in now. We need to talk seriously about what is going on.
The social partners, whether it is Jack O'Connor, David Begg or Tom Parlon, are all the same in the sense that they represent vested interests. The Minister's role is to represent the public and it might not be wise of him to refer frequently to the social partners in terms of every decision he is making. They are part of that process but the most important part of it is what the Minister is supposed to do, which is represent the general public. The Minister should be talking about the reforms he is prepared to make in the public service next year and in subsequent years and point out to the people in a genuine way the differences he would like to see happen, not in broad terms but in real terms.
I have highlighted in this House the difference between the way the National Health Service operates in Northern Ireland and the way the Health Service Executive runs in the Republic of Ireland. The NHS spends approximately £2,000 for every man, woman and child in the United Kingdom. We are spending €3,000 for every man, woman and child in the Republic of Ireland.
The NHS pushed for the provision of colonoscopies to diagnose bowel cancer within six weeks and they have achieved that target. From working as a general practitioner, I am aware one would not get a colonoscopy in this country within six months.
Hospital consultants in Northern Ireland are paid significantly less than €100,000 for all grades, yet we are talking about giving academic grade consultants here €300,000. I am using those figures because it helps to highlight the contrast when people talk about competitiveness, transparency and reform of the public sector. The NHS is able to provide much more in terms of services to its citizens than the HSE can provide to its citizens here. In other words, the NHS is getting more for less but we are getting less for more. That is the problem we have failed to deal with, but I do not hear that from the social partners or from Government.
We must stop the charade about a 6% pay cut. It should be off the table. We will not talk about pay cuts yet — the ESRI took a hard line on that — but we must talk about serious reforms not just in the health care sector but throughout the public sector. That is what we need. We must begin talking as if we believe in something.
The Minister was in Dublin Castle yesterday, but he should stay out of Dublin Castle, especially as we are coming up to the 90th anniversary of the first Dáil, because it never had a good name for the people of Ireland. Everything should be brought back to the Oireachtas.
We might win over the people of Ireland and they will stop referring to him as the Castle's man.
The Minister's announcement yesterday, Building Ireland's Smart Economy — A Framework for Sustainable Economic Renewal, has been dismissed to some degree as aspirational. The innovation fund was probably the only new aspect about which he spoke. One aspect that makes the people and ourselves cynical about all of this is the greening of the Irish economy and the provision of €30 billion over ten years. In the Lower House the Minister, replying to Labour's Deputy Burton, stated: "Deputy Burton may think €3 billion can be loosely thrown around the street like that and turned into dead money in the hands of shareholders ..." He was referring to capitalising the Irish banks because of the other crisis currently in the banking sector. How will we spend €3 billion on the greening of the Irish economy if the Minister is clearly stating that he will not waste €3 billion on nationalising the Irish banks?
Regarding the banks, the Minister must come out stronger on that issue. We must be more clear on that area. Almost 11 weeks to the day we spoke about giving every depositor in the country a guarantee to the tune of €400 billion. I stated that we should ensure we spend no more than €10 billion on recapitalising the banks. The Minister said he did not envisage having to expend €10 billion on nationalising the Irish banks but now we are talking about putting in that money — it was clear there was a need to put that amount in at that time. I know the Minister has had all the audit reports since and because he is the Minister he has to say that he must get all that information first, but there is a need for him to make some definitive statements.
In the House this morning we called for the Houses of the Oireachtas to come back earlier in January because there is a need to keep the Irish people up to date, and it is best to do that within these two Houses. The Minister attacked me on a previous occasion when I made the same comment about Lisbon. We must have those debates in this House, not in Dublin Castle. I am worried about the Minister becoming a Castle man.
Those debates should be held in these Houses. The Houses should return earlier than the end of January because that is what the public expect of us. They do not want us to have a show case day in the Mansion House. They want us to show the real leadership they are looking for now to deal with the domestic crisis in the public finances, the economic crisis which is caused by outside influences and the banking crisis, which has the potential to worsen. They want us to start making those changes to show that we are in touch with their concerns.
One of my fears is that if Ministers are seen to be out of touch there will be a sense that the entire political establishment is out of touch and that makes it more difficult to win over the people to our arguments. Many people do not see much difference between Opposition and Government. They see us all as politicians who are out of touch.
The Minister should examine how the measures in the Finance Bill affect him because people like to see how it affects us. I spoke in this Chamber about us paying ourselves a 2.5% increase in September, and there is talk of another 6% increase next August while at the same time we are taking away universal entitlement for those aged over 70, refusing to vaccinate young girls of 12 years of age against a form of cancer and making savage cuts in education. In some respects, some of the measures in this budget are a betrayal of older people.
The Minister should ask himself how these measures affect him. The Minister is quite privileged. He is very well paid. He has a Government car but the benefit in kind in terms of CO2 emissions does not apply to him. The Minister will say it is a Garda car but he should consider how these measures would affect him to show that he is in touch with the ordinary man and woman in the street. Ministers who live outside Dublin get significant allowances on second homes yet when it comes to everybody else the Minister regards that as something he must tax. We have very generous pensions, yet we are not doing much to help out people in that regard, although I appreciate people can now postpone buying their annuities
It is because of those issues that the hair cut of the Minister, Deputy Harney, being paid by FÁS upset people so much. They see us as being very privileged. We have many benefits which we refuse to give up, yet we are asking the people to do that. We are taxing them also, yet the Minister would not pay for a hair cut out of her own salary. That should be taken on board in these difficult times. The flaithiúlach good days of being a FÁS executive are gone. The Minister should start connecting with ordinary people in his approach to the budget and its effect on them. I hope to be able later to discuss other issues, such as health expenses and changes to the VHI.
I hope the Minister will take on board some of my opening remarks. We have not yet dealt with the issues of competitiveness and public sector reform. The contrast I mentioned between the NHS in the North and the HSE in the South shows how disconnected we are from the reality of being an open small economy and how it affects us. That is driving up salaries, which is why we have lost our competitiveness. Public sector reform has failed dramatically in recent years and it is having a detrimental effect on efforts to restore order to the public finances and in the provision of services through the civil and public service. A proper and honest debate is required on this issue. It is not a political attack on anybody but the reality of people's view on the matter. We must focus on that issue in the next year and be sensible about it.
In supporting the Finance Bill, I am conscious that this was probably the most difficult climate, in terms of instability, a Minister for Finance has found himself in when framing a budget since the foundation of the State. Certainly the 1930s were more difficult but the uncertainty of the current situation is totally outside our country's control.
The price of property in Ireland was too high, but prior to recent external events there is no doubt the property market was heading for a soft landing. With the economy powering along as it was, against all the odds, we would have got through the slump quite rapidly. However, the failure internationally in national regulation of the banks and what were eventually found to be illegal practices, which nearly brought down the financial system, created a thunderstorm in the financial world. A total of $1 trillion in sub-prime loans were created in America, repackaged and re-sold. The finance from the repackaged and re-sold mortgages was used to sell more sub-prime mortgages. The name "sub-prime mortgages" is a misnomer as they were not prudent lending. In fact, what happened will probably go down in history as one of the great scandals, like the South Sea Bubble or the tulip crisis in the 1600s in Amsterdam.
There is no doubt we are now faced with one of the biggest bubbles in financial history. The financial mis-selling brought down banks and almost brought down governments. The Minister found himself in the most extraordinary circumstances. Yet he balanced the budget in many difficult ways. He ensured there was sufficient funding in the economy so the construction industry could continue. Money is being spent to assist our competitiveness, whether that is in roads, railways or other infrastructure. Most importantly, the Minister looked after the less well off. I commend him on that.
He also examined the opportunities for the future and provided incentives for business. He got rid of some of the abuses in the system, such as where exceptionally wealthy people acted in their own and not the national interest by staying abroad so they would not have to pay tax on vast amounts of money earned in this country. The Minister closed that loophole. It was fortunate when the financial tsunami struck that this country had low taxation, a reserve fund and the lowest debt of any major economy in western Europe. In other words, despite what has been said, the economy was exceptionally well managed. We are in a good position to deal with the crisis as it unfolds.
In the future it might be necessary to consider pay freezes rather than pay increases. A group I wish to particularly commend this morning is the group of workers in Dublin Airport, and Jack O'Connor and SIPTU, who are well known for protecting the rights of the worker. They accepted, on behalf of the workers, a pay cut of 10% to preserve their jobs. That is a practical move in the current climate. It does not mean the unions are rowing back or retrenching in the advance in workers' rights and terms and conditions of employment, but that there is a practical application whereby it is better to have a job with 10% less pay than no job at all in the current climate. This is an issue we should examine.
I urge the Minister to give serious consideration to workers' co-operatives. If a business is pulling out of Ireland because it can secure a lower cost base in Morocco, why not establish a workers' co-operative in that business? Let us face facts. This State was founded by men who had no experience of running a state. Did the Cosgrave and de Valera Administrations not do a fine job? We have made much progress since the 1920s. If any group has proven there is no merit in the concept that only certain people are capable of managing, it is Lehman Brothers and their belief that they were masters of the universe. They nearly destroyed the financial universe.
There is hope for the future. There are low oil prices — a barrel of oil was $36 this morning — and low interest rates. In fact, interest rates are almost nil. We also have low inflation. Best of all, we have low expectations, which means we can get on with starting to rebuild. The Government started that in Dublin Castle yesterday in announcing the incentives for research and development and investing again in the future of Ireland. There are wonderful opportunities at present in nanotechnology and biotechnology. In the depths of the depression in the 1930s, certain businesses powered ahead, such as the automotive and electronics industries. They were the new industries at the time. The new industries today will derive from adult stem cells. The debate on that issue has been well won because everybody knows that in 30 years there has not been one clinical application of embryonic stem cells. The application simply does not work. However, there are currently 70 to 80 applications for adult stem cells. We have an opportunity to make this country an ethical centre for development in the world. I hope we grasp that opportunity.
The challenges faced in the budget were well met. It is unfortunate that our colleagues in the North do not have the opportunity to merge the tax rates. At present people are streaming into the North to buy goods and services. It is difficult for people to seek an increase in public services if they are spending their money where the VAT and other revenue go to a different jurisdiction. This is an ideal opportunity to examine harmonising VAT rates and excise duties with the North. As an island nation it is difficult for somebody to bring petrol in from Scotland or the UK without being noticed but it is easy to move it across the Border. The abuse must be tackled. There are good reasons for examining harmonising the tax rates.
The economic situation is fluid. We will experience more shocks that are not of our making. In fairness, however, no bank in this country has been lost. Consider the situation in America where AIG, Freddie Mac, Fannie Mae, Lehman Brothers, Bear Sterns and so forth are gone. Northern Rock, Alliance and Leicester, HBOS, Lloyds and other banks in the UK have had to change their ways of operating. The Minister, by taking strong and immediate action, ensured that our economy was seen as solid and stable. It will be ready for the upturn.
I commend the Minister on the quick management of the pork crisis, which was vital for this important industry. If we sell computers worth €1 billion, only €400 million or €500 million stays in the country whereas the full value of €1 billion worth of meat products sold stays in the country, thus creating more jobs. In addition, software, research and development and royalties do not flow abroad. The handling of the crisis ensured Ireland will again be regarded as a guarantor of good quality, clean and green foodstuffs. This is essential for the economy.
I am conscious of the difficulties caused by the current value of sterling. We have, in our Central Bank, the means of ensuring that the board of the European Central Bank, at its meetings in Frankfurt, learns of the difficulties facing Ireland arising from our strong trading relationship with the United Kingdom and United States. I am certain the Minister will ensure our voice is heard when the ECB board next meets and the ECB rate will decrease further. In light of the stimulus packages announced in Europe, the United States and the Far East, and the low rates of inflation and interest, is it not reasonable to believe that we will come through the current crisis?
The Fianna Fáil Party has been served well by one of its key priorities. The depression caused by the Wall Street crash did not reach Europe until 1932, the same year as the party formed a Government. It remained in government for 16 years, which included the height of the depression, because it looked after everybody. In this crisis, I commend the Minister on ensuring the less well-off are looked after and ask him to continue with the traditional Fianna Fáil policy of looking after the less well-off, irrespective of what price, whether pay freezes, pay cuts or higher taxes, the rest of us have to pay in the future. As he correctly noted, however, removing a large amount of money from the economy creates further difficulty. I ask the Minister to continue his current approach of looking after the less well-off so that we emerge from this crisis stronger than ever and come through the gates like a lion.
I welcome the Minister to the House. While I recognise his Department is under extraordinary pressure at this time, it is a good time to place on record my views. The Minister will be aware that I approach this issue from a disinterested, non-party viewpoint. The Government is making a serious error in its dealings and relations with the Opposition parties. It is time the Opposition was taken into the tent to the greatest degree possible. I say this not to make a political point but as one who has considered the issue from the outside.
The Government failed yesterday because, in not allowing the Opposition parties to buy into its economic plan, it ensured it had nothing else to do except tear strips off it on the one o'clock news. The Minister will be aware of my views on social partnership. The social partners have a major role to play in the economy. However, in addition to meeting the social partners, the Government should have invited the Opposition parties to engage in a process of consultation in which they could express their views. The Government could have taken on board some of their views. I am not proposing a national government but describing strategy and tactics. I am uncomfortable with what I see taking place because it maintains an unnecessary divide in politics. While I accept that oppositions must oppose and governments must govern, I ask the Minister to bridge this gap in an appropriate fashion. Perhaps he needs to use a pontoon or lifting bridge which can be taken up or down. If we expect the Opposition to wear the green jersey, we have to make some move towards them and this has not been done.
The Government's economic plan should have been launched simultaneously at Dublin Castle and in both Houses of the Oireachtas. A Minister of State could have presented it in each of the Houses at the same time as the launch in Dublin Castle. That would have presented an image to the public that the entire political system, the social partners and others were focused on the issue. If this image had been sent out, we could have coped with the differences afterwards.
Senator Butler has asked on several occasions where the unions have been throughout this period. I am sure he will have noted the comment by the former president of ICTU, Mr. Peter McLoone, who bravely stated on the news last night that salary issues must be discussed. He showed bravery in saying this because his telephone will be ringing this morning. While there is no shortage of people who are willing to engage, the Department also has a duty to draw them in. It does not matter if there is disagreement provided there is some degree of involvement.
On a positive note, the Government has done as well as it could in its dealings with the banks. This may not be a popular a view but the bank guarantee and the decision not to put taxpayers' money into the banks has been well handled. As we are all aware, however, it could go wrong at any time. On the Order of Business, I expressed serious reservations about handing €10 billion in trust to the people who got us into the mess about which we learned last night, and Senators on the Government side nodded as I spoke. I should declare that I am a member of the Irish Auditing and Accounting Supervisory Authority and have an insight into the audit process. The audit and accounting issue must be re-examined.
Four years ago, I pleaded in the House to provide in legislation for the making of decent directors' compliance statements. We need a legal requirement for a proper, extensive directors' compliance statement. This is not a 40-page document but a short statement in which a director states that he or she has complied with the laws of the land and good governance. Under the current legislation, if he or she makes a false statement, the auditors will pick it up. What is required, however, is to provide that directors who make a false statement or fail to declare a matter are in breach of the law. It is unfortunate that in the case which arose last night no law was broken. Trust has been broken, taxpayers have lost out and the Minister, the Government and the Houses have been damaged.
A second bank was involved in the case. A first-year accountancy student knows that if €87 million goes in and out of a bank once a year for a couple of days, it is not an appropriate movement. It is also one which information technology systems in banks are designed to detect. This transaction should have jumped off the screen and I have no doubt this occurred. I want to know about the other bank, Irish Nationwide, and the Minister's views on the issue. As the name of the bank was referred to in the media, I am not taking advantage of the privilege of the House. This case raises serious issues.
I also want to know how the audit committee of Anglo Irish Bank operates. Did it have knowledge of this case? Did the governance of the bank require that the risk committee be made aware that the director had received €87 million? These are simple questions which do not breach confidence. It would be a confidence boosting measure if the Minister were to state that the risk committee was not informed but should have been informed or, alternatively, that it was informed but took no action and he has asked its members to resign. We need to see clear action within the law. We do not need witch-hunts or lynch mobs but the spirit and letter of the law requires that clear steps be taken.
I want to know whether the audit committee met the bank's internal and external auditors without the chief executive being present. What were the external auditors doing? It appears they simply looked at the books on one day. If this is the case, it raises a difficulty. The Minister will recall the long night we spent in this House discussing the Credit Institutions (Financial Support) Bill. During that debate, I pointed out that a new audit had begun on 1 October. I want the Minister to tell me that the auditors were not so idiotic as to look at the accounts of the banks on a single day. They must examine the flow of cash in and out of the banks over the year. When the Minister sent PricewaterhouseCoopers into the bank two months ago, did it unearth this information? Major questions arise from this case. If the auditors did not find the information, what else did they not find?
As a public representative, it is my duty to put the case of the Financial Regulator. Senator Boyle and I had an exchange on this issue on the Order of Business. The authority of the regulator needs to be strengthened. I want the Minister to say we did not give the regulator authority to deal with matters such as 110% loans. The Oireachtas decided four years ago not to give him authority to do that. There is no point in asking now why he did not do it. We need to revisit the matter and should do so.
The regulator may have done nothing wrong. If there is such a thing as vicarious liability, someone should have done something. He is the guy behind the eight ball, as it were, and may have to take the hit on this issue even though he may have acted within the regulations. I want to see how we approach these matters.
The Minister should look at where Ireland stands on the implementation of the eighth or ninth financial directive from Europe on international financial accountancy standards. A Member mentioned matters in the Irish Financial Services Centre were not properly regulated. We are one of the last few laggards in the European Community who have not implemented those standards. We should have done so on 30 June. It still has not been done. Why not?
Attached to that set of standards is the quality assurance requirement which Commissioner McCreevy, who is not known for interfering in the market or over-regulation, has asked we also adopt, despite the fact it is optional. Will the Minister tell the House he will apply the quality assurance standard and implement all other standards?
These are examples of the things we are not doing. How do we approach what we are doing? I want the Minister to respond to the issues. I am not saying Government could have sorted out what happened to the banks. Whoever is appointed must be put in place on the basis of trust. Therefore, we must have people we can trust and who can prove we can trust them. The Minister has put forward a fine selection of people acting for Government into the various banks and it is beyond question that they are solid people. However, that is not enough.
I have no doubt they have been and they are people of the highest quality and with the intellectual power to back that up. That said, there needs to be an oversight body for banking. We have an oversight body for accountancy and other matters. If we had an oversight body for banking, what would it do? There would be basic uniformity of standards which they would have to apply and conform to, and it would be checked and tested annually. Any changes in governance or association rules would have to be cleared at some level.
People may think this is over-regulation and ask if it will be another quango? Most of the latest quangos set up in the past ten years are self-financing. I am a member of two semi-state bodies, the Personal Injuries Assessment Board and the Irish Auditing and Accounting Supervisory Authority. They are fully or partly self-funded. If we set up a bank oversight body, it should be paid for by the banks. My proposal should not cost the State money.
This can be done and it works in other places. We have seen failure in the US. The Securities and Exchange Commission in the US does not work, nor does the Serbanes-Oxley Act. In the US everything works on the basis of rules. There is no rule to cover every situation. We need to apply principles and have people of quality, trust, confidence and intellectual capacity to examine what is being done, check it, look under stones to see what is going on and ensure we take control of the situation.
There is a lot to be done and a lot can be done. It must be done quickly, however. I understand the regulator brought the matter to the attention of the bank immediately, indicated it was not illegal but was unacceptable practice and on that basis it was declared to the auditors this year. I do not know why it was delayed; perhaps the person involved refused to resign. It is not difficult to work out the possible and probable scenarios. We can discuss the matter again.
I want the Minister to take firm action on some of the issues I raised to give confidence to ordinary people. He has given confidence on the basis of the deposit guarantee scheme, which has been very important in creating stability. He also created additional liquidity. He is now discussing recapitalisation. I have asked him privately and publicly six times to show me the connection between recapitalisation and loans. He cannot do it and neither can anyone else.
I have a difficulty in giving money unless I know it will come out the other end, so to speak. I believe it would be better to buy the cheapest bank, and one is going cheap this morning. The Minister can then do what he wishes with his €10 billion. He can then run the bank, make it available to people under proper, old fashioned banking standards and lend on that basis.
Much can be done and I recognise that we need to get rid of the perks and million euro salaries for directors. Action is needed on those issues and the Minister should say what he has been reluctant to say previously but has been thinking. These matters need to be in the public arena to show people the Minister is in control, we will not stand for this carry-on and the banks will toe the line and come down to our planet. They must be beamed down to earth, as it were.
We live in unprecedented times. There has been a downward trend nationally and internationally in key economic indicators unparalleled in economic history. How we deal with it is a challenge for our generation. In Ireland we are feeling it more markedly than most because it has come on the back of the longest sustained period of economic development in the country's history.
There is a need to examine critically and appraise how we got to where we now are. The main priority is to decide what can be put in place to achieve stability and sustainability in our society and economy. There is no doubt the Celtic tiger years brought about a degree of superficiality that gave us some false comfort of the actual wealth of the country. I would like to see a movement towards a more sustainable society and economy and a questioning of the value of real wealth.
The Government publication, which has been treated quite cynically by some sources, is an honest attempt to point a way forward, identify action areas and inject an element of specificity on where we need to get to from here. As a society, we need to have a debate on the fact that while there was a growth in confidence and development in entrepreneurial abilities during the Celtic tiger years which had not existed in the State to the same extent previously, negative factors also developed, such as the growth of individualism and the leakage between community and commercial interests. I, and my party, believe that we need to establish a more sustainable society by returning to a debate on values. The news today indicates that one of the factors of the Celtic tiger years was a diminution of many of those values. The increase in greed and individualism are some of the factors which have brought us to where we are today. I sense the Minister is facing those problems, in addition to the direct day-to-day difficulties to which the Government and political system must respond.
We are in a situation where the State has already made policy decisions and indicated that key resources will be made available to sustain the economy into the future. We need to ask who works with the State. I have stated on the record that many of those running our financial institutions are not and cannot be those who work with the State on where we go from here. It is a violent word but there should be a cull of executives in the banking system. Public confidence is needed from now on, and it does not and cannot exist with many of the people running our key institutions. Yesterday's resignation is the start of a process, and many people involved in financial institutions need to look to themselves to right the wrong.
We have insufficient regulation. This is not necessarily a flaw of Government policy. The legislation that exists was predicated on existing international regulatory practices which were flawed. They were flawed in the United States, the United Kingdom, Europe and especially in this country. The laws need to be reviewed and strengthened and as part of the public confidence process, the people doing the regulations need to be critically examined and, if necessary, changed. My personal opinion on that has not changed. Today's news means whatever oversight that has existed has not been to the degree we expect from a regulatory body.
I disagree with Senator O'Toole on some of the powers the Financial Regulator does not have directly but should have been able to apply through a moral authority. The regulator has supervisory and prudential powers but also consumer interest powers. When products such as 110% mortgages were made available, the only person I heard speaking about it was a Minister of State with responsibility for housing. I heard no one in the financial services industry or the Financial Regulator say this was a poor product and would be dangerous for people who used it. That is the ultimate failure of regulation, not only omitting to say whether a product should exist but also not warning the public on the danger of its existence.
I see the Finance Bill as the brighter side of the coin of the budget for 2009. Many difficult decisions were made on 14 October, many of which had to be reassessed in light of justified public concern. The nature of decisions made on budget day are part of a process. If public expenditure is to be controlled, it will require a series of such decisions, but I have not heard that in wider political debate. Not only have difficult decisions been made, there will be more of them and the decisions to be made will be even more difficult and will excite much more public apprehension and reaction. To be honest, anyone who is or aspires to be in Government must make that public declaration because there is no alternative.
The Finance Bill reverses many of the beliefs that existed in the Celtic tiger years, including that we had to incentivise people who were already wealthy. We have learned that, despite giving tax reliefs for many spurious areas, people who wrote off large amounts of tax and did not pay them to the State coffers still paid themselves exorbitantly high salaries and indulged in practices where they loaned shareholders' money to themselves. There was no system to bring them to account. We should be discussing the culture and lack of values as well as the euro and cent approach to making an economy work.
Despite what I said since beginning my contribution, I remain confident that this may be a period of a number of years in which difficult decisions will be made. I have faith in the people's ability to understand the nature of the difficulties we are in and in their having the resourcefulness to deal with those problems in a society we forgot during the Celtic tiger years. If we are to have a more sustainable society and an economy that is predicated on real wealth and lacks the superficiality of the Celtic tiger years, we must debate society and see the economy as an engine for that society rather than the focus of all our endeavours. When we get to that stage, Ireland will be better for it.
I welcome the Minister. We need to begin the difficult work of rebuilding the Irish economy from the bottom up, and protecting and creating jobs. This Finance Bill does none of this. It puts short-term accountancy over long-term recovery. It puts balancing the books over rebalancing our economy. The budget was brought forward to give the impression of activity on behalf of the Government in dealing with the declining economy. Old age pensioners, schoolchildren and their parents, and taxpayers have been lamenting ever since. Where is the strategy? Does this Finance Bill help or hinder the economy? That is the test. We needed a budget that helped to stimulate the economy, stem job losses and get people who had already lost their jobs back to work. We needed to see businesses, big and small, regaining confidence that their bank would be open for business and that the Government would be proactive in this for them.
Governments around the world are reflating their economies and reforming their banks to give fresh hope to their people. Our Government, in this Finance Bill, is doing the opposite. In this Finance Bill, the Minister increases VAT by 0.5% to 21.5%, one of the highest in Europe. Only Poland and Sweden have higher VAT rates. Our VAT is 6.5% above the new rate of 15% just across the Irish Sea and in the North. The Finance Bill imposes an income levy on all incomes over €18,304 without any marginal relief. Anyone earning slightly above the minimum wage who works overtime to boost their income risks being hit by a 1% charge on the whole of his or her income.
The news that there will be a 6.5 percentage point difference between VAT rates in the Republic and the UK, including Northern Ireland, has hastened the stampede of shoppers from the Republic to the North and the UK. It seems unbelievable that when the British Chancellor is slashing VAT rates from 17.5% to 15%, our Minister for Finance, Deputy Brian Lenihan is increasing our top VAT rate from 21% to 21.5%, one of the highest rates in Europe. The proposed VAT increase is one more own goal in a budget that has not stopped unravelling since 14 October. Just when Governments around the world are trying to stimulate consumer demand, our Minister seems to want to strangle it. It was the wrong signal at the wrong time to Irish consumers. Leadership was required in this area and, sadly, is lacking.
The Government forecast an average unemployment rate of 7.3% for 2009, which was hopelessly optimistic as we learned yesterday when the ESRI forecast an average rate of more than 10%. An entire generation of young people could find themselves locked out of the jobs market. Tens of thousands of people are losing their jobs from building sites and factory floors, as we are all aware. We need a major programme of training and upskilling to help people acquire the transferable skills needed for the 21st century.
A related matter regarding people's capacity to enter the marketplace is social welfare. The Social Welfare Bill withdrew child benefit for 18 year olds while hiking up college registration fees by €600. The parent of an 18 year old child stands to lose in excess of €1,000 in 2009 and just under €2,000 in 2010 from the changes to child benefit alone. Some 100,000 more people are on the live register than a year ago. In one of the meanest budgets ever, qualifying for jobseeker's benefit has been made much more difficult. This is a slap in the face to the many thousands of people who have lost their jobs through no fault of their own. They also have to wait seven to eight weeks to have their claims processed, which is scandalous.
Investing in public transport, promoting green technology enterprise and shifting to eco-friendly energy will stimulate the economy while providing the foundation for long-term sustainable growth. Growing the green economy now is not just good for the environment, it is also good for the economy. If we invest in Government action now, we can set out on a path to smart, green growth. Limited initiatives such as the bicycle grant scheme and home insulation are small pieces in the jigsaw, but they do not help us see the bigger picture. We need to overhaul radically the way our country is powered and the way we do business.
The Bill contains some positive measures. Significant measures to increase and broaden the tax reliefs on research and development expenditure, including for qualifying buildings, is welcome. These are necessary if we are serious about moving up the value chain. If we are serious about winning jobs in emerging high-tech sectors and attracting laboratory jobs of the future to replace those being lost on factory floors and construction sites, we need to match the research and development investment of those countries at the top of the competitiveness league. We support these limited measures, but when it comes to the type of economic transformation that the country now needs, they are insufficient.
Looking to the future with confidence is not easy. People have lost confidence in the triumvirate of the Taoiseach, the Tánaiste and the Minister for Finance to lead us out of the economic mess in which we now find ourselves. That is not just a political point, but is the reality we are hearing on the ground. The much heralded plan for economic recovery was launched yesterday and turned out to be very little beyond aspiration. There is no new money, no actual decisions, and nothing from which we can take hope. It contained 100 pages of restated and rehashed old ideas with the exception of those stolen from the Labour Party.
The transport element of the plan is short on specifics on public transport. Priority is given to additional buses and bus priority measures, but there is no mention of the metro and no timeline for the rapid transit systems needed to make our cities low carbon and attractive to young people and investors. Even the flagship idea of a venture capital fund is vague and unspecific. Borrowing to boost the economy in the short term by investing in education and infrastructure will see us in a better position to develop the economy over the medium term and balance the books over the long term. Putting money into the economy rather than taking money out is what we need at this point. It should happen as part of a coherent, co-ordinated economic strategy, but it is sadly lacking. Has the Government any strategy to generate stimulus at this stage to replace some of the demand which has been wiped out by the credit crunch? I do not think so.
The Labour Party, through our leader Deputy Eamon Gilmore and our finance spokesperson, Deputy Joan Burton, has set out the framework of a billion euro stimulus package. This package would include a significant primary and secondary school building scheme, putting construction workers to work building new schools, refurbishing old schools and improving educational opportunities for future generations. It would also include a meaningful and comprehensive insulation scheme to retrofit houses and schools across the country, putting construction workers to work at reducing Ireland's energy dependency, as well as a significant investment in public transport to improve quality of life, to reduce carbon emissions and to ensure that our infrastructure is good enough to attract the very best international businesses to the country. The €1.2 billion in development levies currently held by local authorities should be allocated for immediate use, putting construction workers to work building much needed community infrastructure around the country. New SME centred credit lines from the European Investment Bank must be utilised to the fullest extent. Small and medium sized businesses are the lifeblood of our economy and can be the engine of our economic recovery, but they must have access to the credit they need to grow and prosper.
The challenge for politicians in the debate on this Bill is to chart a strategy for economic recovery that is both realistic about the challenges we face and optimistic about what we can achieve in the future. We need to invest in our people and in our infrastructure so that we are poised to profit from an upturn in the global economy whenever that may come. We need to begin the hard work of rebuilding the Irish economy from the bottom up, retaining, protecting and creating jobs. The reason the Finance Bill 2008 is so inadequate is that it does none of the above. It puts short-term accountancy over long-term recovery and puts balancing the books over rebalancing our economy.
Cuirim fáilte roimh an t-Aire Stáit go dtí an Teach chun an ábhar tabhachtach seo a phlé. I welcome much of what the Minister had to say this morning. He pointed out that Ireland is a good place for business, which has meant that we have attracted much more foreign direct investment than our population would indicate. Much of that success is predicated on a well educated workforce with a very good work ethic. I am always surprised to see young, well qualified people who apply themselves so diligently to their jobs and who work long hours without overtime, especially in the private sector. That is something that has stood us in good stead.
Our taxation policies over the past ten years or more have facilitated the growth in our economy. While we have been playing catch up with our infrastructure, there has been significant improvement through the national development plan in the past few years, and much money has been ploughed into improving transportation, communication and other areas that are vital for business. The investment climate has generally been good. In the current situation, it is important that the fiscal policy we adopt maintains these gains.
Comments have been made in this House and elsewhere about the budget and about the rapid deterioration in the economy and in our public finances. It is a global phenomenon, and countries much larger and richer than Ireland are struggling to cope with their difficulties. Shortly after assuming office last July, the Minister took remedial action on public finances, which is to his credit, by looking for savings of €500 million due to indications that our public finances were going into deficit. Much has been made of the decision to introduce an early budget. At the time, I thought it was a good idea and was done for the right reasons. When the budget is left until very late in the year, the planned savings will come in after a few months of the following year, and the Exchequer does not get the full benefit. Therefore, it was right to do it. However, there has been a significant yet unforeseen deterioration in public finances since then, and we have seen the many problems that have been occurring worldwide.
I have heard a number of economists asked in the media whether they would like to be a Minister for Finance at this time, and they all said "No". Nobody envies the challenges confronting the Minister. I honestly think he has performed well in the short time that he has been there. During the banking crisis in September, our banking system could have collapsed, but very quick action was taken to give the guarantees which stabilised the situation. The Minister has been right to take his time on the capitalisation issue. Other countries took decisions on capitalisation early on, but this has not improved the banking situation for them and the volatility in the sector certainly has not been stabilised.
There are many aspects to this Bill that I would commend, although I would have reservations about some. In his speech, the Minister mentioned mortgage interest relief, and that is not just important for the construction industry. When house prices were seriously escalating, many people were not in a position to get on the property ladder, but now they have been given the opportunity to do so by the increase in mortgage interest relief and through the stimulus package introduced by the Department of the Environment, Heritage and Local Government.
About 18 months ago, the then Minister for Education and Science, Deputy Mary Hanafin, and the then Minister for Enterprise, Trade and Employment, Deputy Micheál Martin, came together to launch a greater emphasis on research and development. This area provides potential for job growth in the future, and I am glad the new plan announced will ensure the benefits and the ideas that come from the research and development will result in job creation. It is essential that we obtain the benefits, and that they do not end up in other economies. That we have targeted that area is to be welcomed.
I listened to what Senator Ryan had to say about VAT. Quite honestly, I do not think the 0.5% increase in the VAT rate will have a positive effect on our fiscal position or a negative effect on consumption levels. The real issue is the deteriorating value of sterling. I do not think any change in our VAT structure would offset that in any way. There is precious little we can do to reduce the financial impact of the decline of sterling. It is obvious that we have to try to cope as best we can until the various currencies regulate themselves and find their own levels.
We have gone as far as we should in respect of pension tax relief. Pension provision will be a major issue in the future. I am not sure the increase of 2% in capital gains tax and the increase from 23% to 26% in certain insurance-wrapped investment products represents a step in the right direction. I can understand why these increases are being provided for in a tight fiscal situation. I would like to think they will be reversed when we get an opportunity next year or in 2010. I think we should have reduced capital gains tax to 18% to attract investment. Fiscally, the increase in capital gains tax means nothing because people are suffering losses at present. It will be of very little benefit in the future.
I wish to comment on the overall position. I concur with the ESRI's prediction that unemployment will increase to 10%. It will be well in excess of what was predicted when the budget was drawn up. The current budget deficit of €4.7 billion will probably increase to €8 billion or €9 billion, unfortunately. The Minister emphasised that there is a real need to restore cost competitiveness. I wish to mention a worrying factor in that regard. I refer to a survey that was conducted in 2007, which involved a comparison of salaries in many EU capital cities. The second highest wage levels, of approximately €38,000, were found in Stockholm. The highest wage levels, of approximately €52,000, were found in Dublin. That indicates to me that our wages and salaries are probably between 25% and 30% higher than those in the countries with which we are competing. It is an enormous difference.
I suggest, from a fiscal point of view, that we should do what companies in the private sector are doing. Rather than merely freezing wages and salaries in the public service, we should claw back the 10% wage increases that were awarded under the benchmarking system. We need to look at numbers in the same way as the private sector. I suggest that a 15% reduction in staff levels would be appropriate. We may have to do this over a couple of years. We should aim to reduce our salary bill by approximately €4 billion. We should try to save a further €4 billion by eliminating wasteful and unnecessary expenditure that does not yield any services or add anything to the economy. I suggest that actions of that magnitude are needed if we are to overcome this serious and difficult challenge.
I agree with Senator O'Toole that a national consensus is needed if we are to achieve our aims. As politicians, we should be more than hurlers on the ditch. We should act as statesmen. If we fail to do so, we might still be talking about these issues five or ten years from now. That would be a sad reflection on all of us.
I welcome the Minister to the House. Three aspects of this country's economy will be important in the coming years. First, we need to address the question of public debt. The Government expects the budget deficit to be approximately 10% of national income next year. Our national debt will probably equate to almost half of next year's overall national income. The substantial increase in personal indebtedness that is taking place at present is as much a cause of concern as the public debt. People's credit card bills and mortgage arrears are increasing. At a time when there is so much public debt and the public finances are in such difficulty, the same is happening to people's private finances.
Second, we need to take a position on living standards. The ESRI report that was published last night contains an extraordinarily disturbing statistic that should give us all pause for thought. I refer to the prediction that per capita income in this State will decrease by 9% next year. When one refers to percentages, one can lose sight of what one is talking about. If a person had €100 to spend this year, he or she will have €91 to spend next year. That reduction will have immense implications for consumer confidence and people's private finances. Third, we need to consider what is happening to our national competitiveness. Senator Walsh acknowledged the importance of this issue in his contribution. I have spoken about it on the Order of Business over recent days. We need to focus particularly on the impact of currency movements. It is likely that the value of sterling and the dollar will continue to fall, which will mean that this country's cost structures, which are already uncompetitive, will come under even more pressure. The interplay between the three factors I have mentioned will affect this country's ability to move forward in 2009 and beyond.
I would like to make a point about the Government's management of this county's finances in recent years, which has been ignored in this debate so far. I was particularly struck by Senator Boyle's suggestion that all politicians, including the members of the Government, should take time to reflect on the values of the business community. I would add to that by suggesting that the political system — I refer in particular to the Government — should take time to reflect on the values that underpin the management of the public finances. It is apparent that various taxes, particularly income tax, were cut too quickly in the past ten years, to levels that are now unsustainably low. This point has not been emphasised in the debate we are having. As this country enters a period of global recession, it has a structural deficit of at least €7 billion around its neck as a consequence of the mismatch between its income from taxes and the cost of the services it needs to fund. It is a stunning indictment of the Government's mismanagement of the public finances. If the Government now had the ability to deliver the rates of income tax reduction that were so rapidly delivered some years ago, it would have an extraordinary effect on our confidence and the national economy at a time of crisis. The reductions in income tax and many other taxes that were provided at a time when such decreases were not needed by the economy are examples of the appalling manner in which budgets have been managed over many years. Now would be a more appropriate time for the kind of income tax reductions we saw in previous years. The Government has to take responsibility for the fact that such decreases are not possible. It cannot be blamed on the global recession or other international circumstances. This act of economic illiteracy on the part of the Government should be acknowledged and its lessons should be learnt.
The ESRI has described the report that was launched by the Government yesterday as an interesting aspirational document that does not deal with the real issues. We have a very real issue on our hands today. The headlines in today's newspapers say it all. The main headline in The Irish Times is "Anglo Irish chairman quits over transfer of loans". The main story in today's Irish Independent, under the headline "Anglo chief quits after hiding €87m bank loans", states that "Analysts were shocked to learn last night that the true figure of directors' borrowings at present is actually €150m".
We are talking about trust in banking and trust in our economy. The challenge for the Minister is how he can possibly restore citizens' trust in banking. What action will he take to restore trust? Trust is gone given the information that has become available today. This is a most serious day for Irish banking. How can citizens reading this have any trust in banking here? How can the international community, which we will approach shortly looking for money, have any trust in our economy? This is a most serious challenge for the Government.
We need to answer these questions. How has the regulation gone so wrong? Why did no one know this had happened? When this House discussed the bank guarantee scheme, was this known by the Financial Regulator and not brought to the attention of the House by the Government? I reiterate what our party leader, Deputy Kenny, asked last night. Who knew about this? When did they know it? When was the Government informed? What action did it take? What will it do now? Many citizens will be worried about their car and health insurance because of the connection of the Quinn Group to Anglo Irish Bank. They will worry about what could happen. We in Fine Gael believe the board of Anglo Irish Bank should resign and the Government needs to take over the bank. We need action from the Government to restore trust and faith in Irish banking and the economy which has reached level zero after these revelations.
There is a complete failure of governance and regulation. How can we go ahead and lend more to this sector unless we put safeguards in place? We must clarify what the role of the directors will be. This cannot be allowed to go on. Corporate governance is at the heart of this. There has been a dismal failure. It is extraordinary to think that this has been going on for eight years. I want to know about the involvement of other banks to which this money was moved. Why was activity on this scale not picked up by those other banks? These are the most serious questions that have ever arisen on Irish banking governance and oversight. When this came to the regulator's attention, what was done? When did the Government find out and why were these Houses not informed about this most serious situation in Anglo Irish Bank?
I agree with Senator Fitzgerald that action must and, I am sure, will be taken. I commend and support the budget. It was a most difficult one and was not the choice we would normally like to introduce. However, when one considers the economic problems not just in this country but globally, we had no choice but to introduce a very difficult budget.
I disagree with some of the speakers on the Opposition side of the House who said we had too much consultation with the social partners. I believe we do not have enough consultation with everyone. We made some mistakes in the budget, including the medical card changes. That is an example of not having consultation with the social partners and others. We have learnt a lesson in that regard. The Government is right in consulting the social partners. The economic problems are now so big that we will not do this on our own. We need to show statesmanship and leadership. There is also a responsibility on people on the Opposition side of the House who know the situation not to make political issues and to tell the truth to the people. We are doing that now, which is very responsible.
The economic plan we produced yesterday has not received a fair hearing and has been dismissed by some who did not even read it . The jobs arising from research and development into green and renewable energy will be vital. A sum of €500 million has been allocated to research and development. We need to consider how we will implement reform of the public service. Will we reduce the numbers? Will there be a 10% pay cut across the board? We are now looking at different ways of doing things. What happened in Aer Lingus sets an example. When it was planning to outsource some of the jobs, the unions played an important role, which was very responsible on their part, as Senator O'Toole mentioned earlier.
A realisation may be dawning that if people spend €100 outside the country, €20 will not go to health services and schools and may jeopardise our jobs. We need to be serious about becoming responsible to ensure we keep our jobs. Even though we do not have VAT on food, people are going across the Border to spend money. How can it be 20% dearer here given that we do not charge VAT on it?
The health service delivers very good service when one gets into it. However, there are certain areas such as accident and emergency units which I believe the Minister is trying to streamline. Some €15 billion or €16 billion is being pumped into the health service each year over which we have not had control. It is time we took back control of the health service. Instead of having the Health Service Executive as an autonomous body, it should be more answerable to this House.
Before there is any recapitalisation of the banks we need to ascertain their loan to asset ratio, especially in the land area, and asset values need to be written down. When we spend public money, we need to know we are not spending it badly. It is quite right for the Minister to take time over this. Action must be taken. The phantom loans revealed in Anglo Irish Bank yesterday are of grave concern. Having read the newspapers this morning, the public will not have been reassured about our banking system.
I commend the Minister on trying to shelter the least well-off, including old age pensioners and people on social welfare. In difficult times we would have liked to have been able to give them more. They can be assured by Fianna Fáil that we will never let down older people or less well-off people. We will try to give them as much as we can.
I welcome the Minister of State, Deputy Haughey, to the House.
When I came into the House almost 16 years ago, I did not have much experience of how to look at a Bill. I had experience of being in business and looking after customers. I began to consider Bills as though I was dealing with a business, whether they were health Bills, education Bills or any other type of Bill. How would a business person consider a particular Bill? Thus, I considered the Finance Bill and the budget as would a business person.
I agree entirely with Senator Butler's statement that we had no choice but to have a difficult budget. However, as a business person I lived through the 1960s, early 1970s and mid-1980s, which were very tough times. I examined what businesses, including my own, had to do. One of the first things one must do to survive is to look after one's customers. Who are the customers? In this case the customers are the citizens of Ireland, and the Minister's duty is to consider how he can act in the best interests of these citizens. That is a wide remit. He had a choice; he could have done something else, as businesses sometimes do. They sometimes decide to balance the books and forget about their customers for a particular year. I have a fear that this is what the Minister tried to do. I do not think he looked at the broader picture. He decided he had to balance the books immediately, and he therefore took steps that a business would not have taken.
A business would normally try to generate income and cut costs in tough times. I remember those tough times; we did have to cut costs and we did have to generate income. This Finance Bill does not seem to do that. Instead of looking after the customers and trying to generate income, the Minister decided not to cut costs. The costs of the public sector are large. Business managers would have said to their employees that they must take a cut this year and would have reduced prices in order to generate more business. We have learned so well that sometimes a lower percentage brings in more money. If one brings down one's price one generates more money.
It appears as though the British Government, the supposedly socialist Labour Party Government, has taken this attitude. It has decided to generate more business and to get people to spend more. I do not know whether it is the right thing to do, but it has at least given the example of cutting the VAT rate rather than increasing it. What did we do? We increased the VAT rate, although not by very much. We also raised taxes by introducing a 1% income levy, or 2% if one earns over a certain amount, although this will apply for only a couple of years. In other words, we have decided to solve this by putting up our prices. What do we do with capital gains tax? We said the same thing: we will put it up, at a time at which it is highly unlikely there would be any capital gains anyway.
The Minister has taken the opposite attitude to that of a business person. A business person would have said, "I am going to do something to generate more income." We have done that over the years. We brought down corporation tax from 30% to 12.5%, and every time we brought it down we took in more money. I remember the former Minister for Finance, Deputy McCreevy, coming in here and saying he was going to reduce the betting tax from 20% to10%, and there were howls. People said he was looking after his pals, because he is from County Kildare, which is great racing country. He came in a year later and said he had taken in far more money at 10% than he had taken at 20%, and he decided to reduce the tax again to 5%. He came in the following year and said he had again taken in more money. I mention this example because we are talking about the business of running our finances.
The objective of the Finance Bill is to make sure the citizens of Ireland do better. There may be a time in which we must cut costs and make sure we generate more income. The message we see in this Finance Bill is wrong. I may not have thought that on the day of the budget, but looking back I realise there were two steps we could have taken, and we took the wrong step. I would have preferred to see the Minister generate more business and cut costs instead of putting up prices, because in the business world that usually ensures that one loses one's customers and gives one less chance of survival.
There are steps the Minister can now take and should have taken in this case. One of them involves retailers and small businesses — those small and medium-sized enterprises that are trying to survive. How do we manage at a time in which there are major difficulties with finance and liquidity? One of the things the Government could have done was to give these enterprises a little break and, instead of asking them to pay their VAT within 30 days, stretch the length of time required for payment. It would provide a little more liquidity and give them a chance. I am talking about 60 days, 90 days or 120 days. Yes, it would cost the State that liquidity, but it would not cost it any money because in the long term it would get back its money. For one year the Government could say that retailers do not have to pay their VAT within those 30 days. That would encourage retailers, manufacturers and those who export goods by giving them a belief that the Government is supporting them and is trying to generate income rather than increase its prices.
I am drawing what is perhaps a facile comparison with business. However, a person with business experience would have done something different. A very successful businessman once said to me that he always worried when he saw someone running a government who had no experience of getting money together at the end of the week to pay the wages. There is a danger that in these Houses — I will upset many here by saying this — those who have never run a business or had to worry about getting money to pay the wages at the end of the week do not have that experience, although they may be well educated and experienced in many other ways. I may be too simplistic in my description, but I am expressing a concern that we have gone in the wrong direction this year. At a time when there are major financial difficulties, I would like to see small and medium-sized entrepreneurial businesses encouraged. I would like to see them generate activity and income. I would like to see the Minister's message go much further in that direction rather than being about balancing the books and raising prices. Of course it is important to balance the books, but this may be the very year in which he should have cut costs. There was a time to do it. It was possible to say to the public sector that we are facing a difficult time and everyone should take a pay cut. Those earning less than €30,000 or €40,000 could take a 10% or 5% pay cut and those earning more than €80,000 could take 20% or 10%. It would be possible to do this with the support and enthusiasm of the population.
The background to the budget and the Finance Bill consists of three problems, namely, our place in Europe in view of the Lisbon treaty referendum, the banking crisis, and the setting of a base for economic recovery. What we have from the Government in these areas is a framework with no specific decisions made. That is the problem we have here. The Government has failed to act. It continues to procrastinate and put off the decisions on which there is a broad consensus in the country. In his statement, the Minister said the priority is:
. . . the restoration of credibility and sustainability to the public finances. Accordingly, the budget sets out a medium-term strategy to ensure this.
However, it does no such thing. It does not even set out a strategy on how to balance the books between now and the end of 2009, which is what a budget is supposed to do. In fact, on the Minister's own admission, the budget is out of date. We know this from the November Exchequer returns. The Minister has not dealt with this. The latest is that we will have some announcement in January. The problem we have, to the disappointment of many people, is that there is no strategy or plan by this Government in which one can have any confidence.
We had a situation where the State intervened, particularly, we understood, because of the perilous state of Anglo Irish Bank. We now know more about that bank than we did yesterday regarding the loans made available to directors and especially the loans to Seán FitzPatrick. The Financial Regulator says these loans are under investigation by him but the board of Anglo Irish Bank denies any rule was breached. I question how long the Financial Regulator knew about the situation and how long the Minister knew about it. Did the Minister, Deputy Brian Lenihan, know this when he provided the State bank guarantee?
I draw the attention of the Minister of State to a number of measures that apply in this situation. One is the market abuse regulation where it is a requirement to disclose any price-sensitive information, and we know how price-sensitive is the information about these loans. The second is the Stock Exchange and accounting standards, where related party transactions are supposed to be fully disclosed. It is only when such disclosures are made that one can have a true and fair view of financial accounts. A State guarantee has been put in place for these banks and the Minister must be upfront on what he is doing with regard to the recapitalisation and the appropriateness of the directors of particular banks remaining in office in circumstances where these types of activities have gone on.
With regard to the Finance Bill proper, we do not have a normal budget situation where a Minister will set out how he intends to balance the books, how he intends to control expenditure and deal with the revenue and bridge the gap in borrowing. We know the figures are out of date yet the Minister has given us no indication today of how he intends correcting that situation. The latest ESRI report clearly shows just how out of touch he is.
The budget is characterised by the 0.5% increase in VAT which shows just how out of touch the Minister is with the real state of the economy. To have an increase in VAT when our nearest neighbour has reduced its VAT rate and the resulting disparity with Northern Ireland is a clear indication the Minister does not understand the fundamentals.
I apologise for spoiling the time arrangements. I have only a little more to say in my contribution.
The framework for economic renewal programme announced yesterday contains many issues and policies that have been announced with great fanfare over recent years, whether that is Transport 21 or the establishment of the new "bord snip", yet none of these measures is new and none of them indicates the Government has a handle on the real problems that exist at present. This is the Government that got us into this mess and it is becoming increasingly apparent that it is not capable of getting us out of it. It is not up to the task. With the 40-day recess over Christmas, the Taoiseach and the Government, in all the circumstances, should consider throwing in the towel.
This Finance Bill represents depressing evidence of a Government continuing to sleep-walk through a crisis that is not just threatening the banking system or the construction sector but is also slowly bleeding dry the small businesses that employ most workers and which are the heart of the economy. Even worse is that the hundreds of thousands of working families whose efforts drove this economy through the Celtic tiger years have all but been abandoned in this Bill. They have been condemned to endure higher taxes and more stealth charges, all to fund the policies of failure.
The Government has failed on income tax, VAT, the tax exile status, reforming tax relief and tackling tax fraud. It has failed to protect the vulnerable and most important in terms of ensuring economic growth. It is penalising rather than rewarding working families. There is nothing in this Bill to incentivise or stimulate enterprise.
I belong to one of the few parties in this House which were regularly castigated in years past for pointing up the structural flaws in the economy. There was a brief moment in September to October when it seemed that the Minister for Finance finally grasped the seriousness of the economic crisis threatening the economy and he scheduled an early budget for 2009. Ten weeks on, however, it is clear this was simply a public relations stunt devoid of any substance and lacking any direction to drive the economy forward over the next three years.
Sinn Féin had proposed increasing the PAYE tax credit by 5% so that those on low incomes would get some respite from the higher energy costs, mortgages and food prices they have endured over the past year. This Bill leaves the personal credits unchanged and only widens the 20% tax band marginally. It does nothing to help families deal with increased costs of living in an economy where inflation is more than 4% and with double digit increases in electricity and energy process already being levied on households this year. Many families face new transport charges for school buses, higher hospital charges, a new VHI levy and increasing university registration fees. When all these charges are added up along with the increases in taxes for low and middle income families, even at a conservative estimate hard-working families will see their income reduced by up to €1,500 in 2009.
Not only has the Minister done nothing to restore the purchasing power of Irish families, his proposal to increase VAT to 21.5% is another regressive step and will hit Irish families unfairly. With Border towns in the Twenty-six Counties being emptied of shoppers, the 2.5% cut in VAT announced by the British Chancellor of the Exchequer will exacerbate an already gaping imbalance between the two economies. The Minister for Finance is actively encouraging shoppers to leave his tax jurisdiction. It is more the economics of "Fianna Fawlty Towers" than the financial stability he promises us.
The 1% income levy on workers who earn more than €18,305 is unwarranted and will damage low income families. The levy should apply only on incomes in excess of €38,000 and Sinn Féin believes the 3% levy should apply on incomes in excess of €200,100. Our proposal to remove the PRSI ceiling would have had the double effect of raising much needed tax revenue while cushioning those on low and middle incomes from the worst effects of the increase.
While Sinn Féin welcomes the ending of the Cinderella clause for tax exiles, it questions the Minister's claim that tougher restrictions cannot be placed on Irish tax exiles because of double taxation agreements. Are we really to believe the Minister cannot act? He can raise taxes on a whim, he can write a blank cheque for banking, but he cannot act on a handful of supposed Irish citizens who do not want to pay tax here but demand to enjoy the benefits of Irish citizenship.
The Government stood by in recent years as billions of euro poured out of the economy into property investments in Britain and Europe. Forfás estimated in 2006 that the economy had become a net investor outside of Ireland since 2004 when Irish citizens invested €12.7 billion outside the economy. In 2006 Irish investors spent almost €8 billion on commercial property in Europe. Now, after the horse has bolted yet again, the Government arrives with half-hearted measures.
Another suspect measure is the proposal on changes to research and development tax credits. IBEC described the changes as disappointing and there are questions about the whole research and development strategy being adopted by the Government. It has to make sense in the boardroom and on the workplace floor. What is being proposed does not make sense and much more serious action needs to be taken. The Minister either believes in empowering the knowledge economy or he does not — there can be no halfway house.
When the budget was unveiled Sinn Féin said we could rebuild the economy but that would mean taking bold decisions. There is no evidence of that in this Bill. Where is the investment in infrastructure that will create jobs and build competitiveness? How will we help those who have lost their jobs get back into the workforce as quickly as possible and ensure they are supported properly while that happens? When will we end the era of tax breaks for the rich while PAYE workers struggle to survive? Time and again, the Government gets the small things wrong, such as the failure to tackle the flooding of the Irish market with cheap imports. It has not dealt with contentious issues such as sell-by-dates or the incorrect guaranteed Irish labelling.
Small businesses are being starved of capital with overdrafts cut while new businesses cannot get seed capital or start-up loans. The Bill, however, gives even more tax breaks to the private health service but cannot find a tax incentive or funding initiative for small business or retraining redundant workers. How is that possible? The Minister proposes that struggling businesses declare their corporation tax earlier. A four-year process of claiming research and development tax credits has been telescoped into four weeks. The Minister is more concerned with short-term cashflow than he is with long-term company strength.
The economy is in danger of a serious meltdown and this Bill does not reflect the gravity of that situation. What will it take to get the coalition Government to wake up? For now we have a Minister for Finance asleep at the wheel.
I welcome the Minister of State, Deputy Haughey, to the House. The Minister for Finance, Deputy Brian Lenihan, gave us an overview of the Bill's proposals. I recognise it is his responsibility to encourage, stimulate and talk up the economic situation as best he can, but judging by yesterday's ESRI report and other indicators, not alone are matters bad, they will get worse in 2009 and 2010. I agree it is time for a pay freeze for several years throughout the entire economy. I would like to see more agreement across the political divide on that matter and reform of the public service. I have no doubt that is a matter to which political leaders are giving attention.
I had hoped the Minister for Finance would have refined certain budgetary measures to bring about a better economic situation for our people, particularly those in Border areas. The different VAT rates of 21% and 15% that apply between the two jurisdictions have led to problems. While we all want more revenue to flow, the Minister could have removed the VAT differential. The high VAT in the South affects a range of products, such as clothes, groceries and alcohol. People can make up to 30% in savings if they shop across the Border and this is widening with the increasing strength of the euro against sterling. This disparity will come more into play and will be to our disadvantage in the financial short term.
Yesterday, the Government launched its economic revival plan, which we wish well. However, all commentators think it is too aspirational. There are some good measures for the smart economy and, hopefully, in time they will bear fruit. People seem to be despondent, however.
We are all concerned with the unfolding developments with the banks. The Minister is certainly taking his time with the recapitalisation programme. It is 12 weeks since the bank guarantee scheme was put in place. We gave it all the necessary urgency and the House sat all night to get it passed. Unfortunately, it did not steady the markets but was necessary for depositors to prevent any runs on the banks. The Minister has made subsequent announcements about the banking system but has not taken any measures.
I hope the €10 billion co-fund with investors and shareholders for banking recapitalisation will be developed more with shareholders than investors. We do not want foreign equity houses or venture capitalists funding our banking system. The Minister has stressed the banking system is one of the essential cornerstones of the economy. However, earlier he spoke of a rationalisation of banks with a reduction from six to two banks. While it might be necessary to strengthen the banks against foreign competition, it might not be good for competition. We need to hear further from the Minister on this matter.
On the one hand, the Minister speaks confidently but takes a softly-softly approach to bank recapitalisation. While some claim he is prevaricating, I believe he means well, but it is taking a long time. We wish it did not have to take so long but we will have to bear with it. While I am not seeking an SSIA-type scheme, perhaps a tax incentive for bank shareholders could be included in the co-funding arrangements.
Our tax exiles are as Irish as ourselves. Many of them have done much good work in making large amounts available to charity. In this time of great need, we need them. Will the Minister talk to them and see how they can be harnessed for the good of the economy? No one should be outside the fold now.
I welcome the Minister of State, Deputy Haughey, and his officials to the House.
This is an important debate. Our job must be to get the economy moving and working for the people. I feel a great sense of powerlessness, however. No matter what I say, it makes no difference. The economy is in free-fall and nothing serious is being done to intervene. The public, too, has lost faith. When I informed people I would be contributing to the Finance Bill debate, they told me to tell the Ministers to make up their minds and present a plan that will work. Over the years Deputy Cowen always postponed decisions. He is always one report away from important decisions. The most recent example is "an bord snip", another high level group being put together to make decisions that should be made by the Cabinet.
The experience of this Government has been largely in good times. It was easy to spend money when it was available. Now the Government is being challenged and its competencies are being tested. I ask the Minister to show bravery and neck for the people because this will not go away by itself. Decisions are needed.
When will the Government recapitalise the banks to provide credit to the many perfectly fine businesses in danger of going to the wall? A month ago, the Galway Chamber of Commerce said to me that the question was how many businesses would make it to Christmas. The question in January will be how many will make it to February. Why is the Government not providing the necessary credit lines for those good businesses so that they can pay wages? Otherwise they will have to let their employees go. The businesses will keep going but with fewer employees.
We must look at being responsible and suspending the pay deal. We must examine introducing a redundancy scheme to get rid of waste in the Health Service Executive. When the health boards were merged into the HSE, people found themselves at middle management level without job descriptions. They are still there. Let us make decisions and provide a way out for these people. Let us cut the waste.
We must reverse the increase in VAT. We must stop our consumers voting with their feet and shopping the North because of the attractive VAT rate. We should watch the trends in the economy. The people are telling us how they feel when we see these patterns.
I recommend that the Minister provide PRSI relief for employers taking on new workers in 2009. Employers are our income generators and the Minister should not tax them but incentivise them.
They are worth anything to this country now because they will give hope. Imagine if we had a bunch of new employers, indigenous people in small businesses ready to employ people. Would that not inject confidence? That is what the Government needs and Fine Gael is advising the Minister of State of that.
The Minister for Finance could intervene with the banks now. I have been contacted by couples who took out fixed rate mortgages a year ago. The ECB interest rate kept going up and, now that it has come down, they are trapped in fixed rate mortgages. The Minister should intervene with the banks to help them renegotiate their fixed rate downwards. They will suffer a six month penalty, which could be up to €15,000 in some cases that have been brought to me, to get out of those mortgages. We rescued the banks, as did those caught in fixed rate mortgages. We are in different times and all the ground rules have changed. Will the Minister for Finance help to rescue those people so that they can renegotiate with the banks? He should use his leverage. With every move, the Minister for Finance can make a proportion of the people happy and make a difference to the economy.
It is a pity the real Minister for Finance is not present because there is a clarion call for change in the Government. The patriotic thing the Minister of State and his colleagues could do is to dissolve both Houses of the Oireachtas, call a general election and let the people decide. It is time for leadership, new beginnings and prudent investment that has not happened for the past 11 years. We hear nauseating calls about national governments. The Government has had a majority in both Houses of the Oireachtas for the past 11 years, more so in the past two years, and it has done nothing about it. Let us stop talking about national governments and start talking about real leadership.
I refer to the importance of choices made by this Government. Senator Quinn referred to choices made by consumers, the Irish citizens. He is right. Let us examine the choices today. The Minster of State, Deputy Haughey, is in charge of education and lifelong learning. Let us look at the choices made by young people with mortgages. Some 10,000 people are three months in arrears. People are struggling to pay child care. This afternoon, people are visiting the money advice and budgeting service and the social welfare offices.
These are decent ordinary people who were working 12 months ago, 12 weeks ago or 12 days ago. This Government has not given them any hope.
The Government, through the Cork docklands issue, has betrayed the people of Cork city. We were promised 12 months ago that the Cork docklands would be included in the budget but they were not. There was mention in the budget of Seveso sites. Barack Obama is talking about investment in infrastructure. Let us build the gateway bridge in Cork city, the Sarsfield Road and Bandon Road flyover and let us invest in construction for Cork city. It is not happening, however.
What happened this morning is the litmus test for how the Government has failed the people. Banks, and those in the industry, think they can walk on water——
I echo many of the sentiments expressed by my party colleagues in this debate. I welcome the Minster of State, Deputy Haughey, to the House. I have spoken on every Finance Bill since I was elected to this House six and a half years ago. I will not support this Bill. It is interesting, in the time since the announcement of the budget a number of weeks ago, that there have been a number of mini-budgets since then. The Minister has rolled back on every announcement he has made on any national controversy in the period since the budget. This does not reflect well on him and seems to indicate he accepts a number of decisions made in the budget were incorrect.
We remember when the Taoiseach changed and the new Minister came into office. There was some speculation that there would be a supplementary budget. The Minister decided not to have one and we sailed on towards the end of the year. The budget date was brought forward at that stage. The Government has been slow in taking action and there was a strong case for a supplementary budget after Deputy Lenihan became Minister for Finance. There is a strong case to be made that he must do something in the first few months of the new year. It might be politically unpalatable as the Government faces into the local and European elections but, based on the tax returns we have seen in recent weeks and the Government's budgetary outlook, significant changes will be made. Whether those are in the form of a mini-budget is unclear but action must be taken.
In responding to the Finance Bill this year, I have noticed a marked change. I remember being the Opposition finance spokesperson for a number of years in this House. I got the impression the Government was laughing at me when I proposed changes and expressed the view we were building our economy based on a property bubble that could not be sustained. There was a sense of mocking from the Government that of course this would continue into the future. Obviously it has not and this has had knock-on effects in terms of the number of people employed in the construction sector and those related to it, and in respect of tax receipts to the Exchequer. Much of the current expenditure built up over recent years was built on the back of those tax receipts. These are gone now and are not coming back.
I am sorry that Senator Hanafin has left the Chamber. He spoke about efforts in the budget to support the construction sector. We built 90,000 units per year a few years ago. The prediction is that we will build 15,000 to 20,000 next year. The construction sector has collapsed and it will never return to what it was. This was always going to happen. We could not keep building units at the rate we were doing and expect it to continue. The comment made is ridiculous and bears no resemblance to reality.
Senator Hanafin also stated we were obviously heading for a soft landing until international factors came into play. I have not heard any economic commentator indicate we were obviously heading for a soft landing. There was no such obviousness. The landing would have been different if international circumstances had not occurred at the time our construction industry began to fall. However, to state we were obviously going to have a soft landing is daft.
The Senator also praised the Minister for balancing the budget. Based on the figures we have seen since it was announced, the budget is way off balance. It bears no resemblance to a balanced budget. Interestingly and correctly, the Senator referred to this being the worst financial situation in the history of the State and praised the Minister's role. I have some sympathy for the Minister for Finance, Deputy Brian Lenihan, in his role. The worst financial situation in the history of the State must reflect in some way on his predecessor, who is now Taoiseach. He came into the position at a time of continued growth in the economy and managed to leave it in a mess. Just as the Minister for Finance, Deputy Brian Lenihan, finds himself in a difficult situation, one must acknowledge that the Taoiseach, Deputy Brian Cowen, did not cover himself in glory when he was Minister for Finance.
Senator Hanafin made another point which had nothing to do with the Finance Bill but I want to mention it because I was gob-smacked. He spoke about the founding administrations of the State and mentioned Mr. de Valera's administration, which had nothing whatsoever to do with the founding of the State. They were the people in the ditches with guns when the State was founded, trying to undermine the people who founded the State. They changed their minds subsequently and I acknowledge that.
The difficulties we find ourselves in now are similar to the difficulties we were in during the 1930s, and Senator Hanafin mentioned that. Again, Fianna Fáil was in government and made a decision to launch an economic war with our largest trading partner at the time which led to many of the difficulties in which we found ourselves during the 1930s.
We are heading towards having 10% unemployment next year and increasingly large downturns in our tax take. The budget is already outdated, as is the Finance Bill. At its current rate of increase, the national debt is on course to treble during the next three years, which is a phenomenal change in a short period of time. The Government has handled this abysmally.
I read the statement issued yesterday in Dublin Castle. It was full of nice words but it was a rehash of everything we heard before. There was hardly anything new in it. At a time when people are looking for leadership from the Government, this was an appalling missed opportunity. I regret that I cannot support the Finance Bill as it is drafted. I hope that in 2009 we will see more realism and leadership with regard to the public finances.
Seán Haughey (Minister of State, Department of Education and Science; Minister of State, Department of Enterprise, Trade and Employment; Dublin North Central, Fianna Fail)
Link to this: Individually | In context
I thank the Senators for their comments and I will try to address each of them as best I can in a moment but, first, I would like to outline for the House the economic context in which this Bill is being presented. This debate is taking place against the backdrop of a dramatically changed economic environment. We see the recent effects of developments in the international financial system and the impact that this is having on the global economy and its prospects. The majority of our trading partners are in or are on the verge of recession and this clearly has an impact on developments here.
On the domestic front, the contraction in the new house building sector, which will continue into next year, has significantly weakened economic growth. This has also been associated with a deterioration in consumer sentiment and weakness in the labour market, as evident from the very sharp rise in the numbers on the live register. On foot of these developments, the economy will contract this year, a fact borne out by national accounts data published recently. Moreover, as the Minister for Finance indicated in the Dáil recently, activity looks set to contract by approximately 3% to 4% next year.
However, despite this poor short-term economic outlook we still retain several of the structural achievements of the past decade with more than 600,000 more people now in employment than in 1998 and a doubling of export levels over the past decade. Our main economic focus now must be the restoration of international cost competitiveness. It is imperative that we are in a position to take advantage of the global recovery whenever it emerges. Maintaining public capital investment at high levels relative to national income, boosting productivity and ensuring credibility and sustainability in the public finances will all be helpful in this regard.
As a number of Senators have noted, yesterday the Government published a framework for sustainable economic renewal, Building Ireland's Smart Economy. The Taoiseach set out clearly the importance of this initiative and how it will provide this country with a platform on which to build for the future when there will be a new economic order where we need to be positioned to take full advantage of the opportunities that will be presented.
The measures contained in the Finance Bill will assist greatly as we aim to become the world's leading location for business innovation. The Bill supports research and development, which is crucial as we develop a critical mass of companies, Irish and international, at the forefront of innovation, creating the products and services of tomorrow.
The Government envisages Ireland as a country where entrepreneurs from anywhere in the world will want to come because it provides the best environment for the commercialisation of innovative, leading-edge products and services and a key to achieving this will be ensuring that we have the best tax regime.
The framework for sustainable economic renewal sets out a number of priorities and actions that we will be taking in the short and medium term and creates a focused structure within which future initiatives and actions will be taken. Building Ireland's Smart Economy is a framework that points to Ireland's successful future if we are to do the right things.
We must address the current economic challenges facing the Irish economy by stabilising the public finances, by improving competitiveness, supporting those who become unemployed and supporting Irish business and multinational companies. We must invest heavily in research and development and incentivise multinational companies to locate more research and development capacity in Ireland. This House has heard today how the Bill before it encourages such investment and we must ensure the commercialisation and retention of ideas that flow from that investment.
It is important that we support high-value innovation of products and services that will create hundreds of thriving Irish companies and associated employment and implement a new green deal to move us away from fossil fuel-based energy production though investment in renewable energy to promote the green enterprise sector and the creation of green-collar jobs. We must also continue to develop a first-class infrastructure that will improve quality of life and increase the competitiveness of Irish business.
In each of these areas, we aim to build on our specific strengths and address the threats to our future economic performance. As the Taoiseach stated yesterday, this framework should not be seen as an instant solution to all our problems. Many of the factors that will determine the timing and pace of the recovery, such as exchange and interest rates, are beyond our control. There are no magic bullets that can allow us to avoid the consequences of the international recession but we refuse to simply weather the perfect storm of negative international economic factors. We should not lose sight of the fact that while we must confront challenging economic circumstances, there are also great opportunities on the horizon.
A transformation of the Irish economy is necessary for sustained growth and increasing levels of future national welfare. Innovation is the key. Ireland must move up the value chain and assert itself not only as an open enterprise economy with a positive environment for foreign and direct investment but also as an open entrepreneurial economy with significant comparative advantages. I remind the Senators again that this Bill contributes in a significant manner to that development process.
A key feature of the smart economy is building the innovation or ideas component of the economy through the utilisation of the knowledge, skills and creativity of people and their ability and effectiveness in translating ideas into valuable processes, products and services. The framework we published yesterday sets out the strategic direction we wish to take to manage the transition of a new model of sustainable economic growth. It does not seek to outline all the reforms or measures that will be required across the economy. Instead, it sets out a clear direction the Government intends to pursue and some of the specific actions we will take in the short term to help get us there.
Senator Twomey also raised the issue of the social partners. As the Taoiseach noted yesterday, and I accept, this was indeed in Dublin Castle where we will engage intensively with the social partners in the coming weeks on how we can develop and implement this framework beginning with the need to devise a credible timeframe in which to close the gap in the public finances. The end of year Exchequer returns will inform the discussion with the social partners, which the Government views as a problem solving process.
The Government believes all of the people involved in that process have the country's interest at heart. More and more people will lose jobs if we do not face up to the challenges and overcome them. At the meeting on Tuesday with the social partners, we agreed that we will work together with a specific focus on agreeing, by the end of January, an approach to manage those challenges we now face.
To reiterate the Taoiseach's point from yesterday, there are those who seem to decry the idea of a shared purpose and a common endeavour. Social partnership has always had its critics but the Government is committed to that process and to engagement on the basis of mutual dependence and respect, which has always brought about problem solving. Those who expect to have their needs and ideas considered as part of the national recovery effort have a duty to participate responsibly in that process.
Regarding the issue of Anglo Irish Bank raised by a number of Senators, including Senators O'Toole, Fitzgerald and Butler, the precise details of the matter are being investigated by the Financial Regulator but it is apparent that the conduct created an issue in terms of transparency. Two board members, including the chairman, have resigned as a result and Mr. Donal O'Connor has been appointed as chairman of the bank. These changes will not interrupt the substantial progress which has been made with Anglo Irish Bank regarding recapitalisation. Anglo Irish Bank remains covered by the Irish Government's guarantee and therefore its depositors and creditors are assured of the security of their funds.
The Financial Regulator has indicated that it became aware, following an inspection earlier this year, of matters surrounding loans from Anglo Irish Bank to Sean FitzPatrick. While it did not appear that anything illegal took place in regard to these loans, the Financial Regulator was of the view that the practices surrounding these loans were not appropriate. A review of the matter is also being carried out by the board of Anglo Irish Bank, which now includes two public interest directors, Alan Dukes and Frank Daly. The Minister for Finance will engage further with the Financial Regulator on these matters.
The Secretary General of the Department of Finance was advised on Wednesday evening that representatives of the board wished to meet early yesterday morning to advise us of the position. We had also been aware that in recent days the regulator was conducting a review of related matters.
As regards financial stability, I want to reiterate that the Government will continue to take all necessary measures to ensure that systemically relevant institutions, such as Anglo Irish Bank, remain sound and viable.
Senator Ryan spoke about the income levy. As the Senator is aware, the levy was introduced to restabilise revenues. As has been stated on a number of occasions, the income levy is progressive. A rate of 1% applies to gross income up to €100,100 per annum or €1,925 per week, and a rate of 2% will apply to income above that amount. The Bill provides that a further 1% will be payable on income in excess of €250,120 per annum or €4,810 per week.
All social welfare recipients will be excluded from the levy. There are a number of similar payments made by Departments and agencies other than the Department of Social and Family Affairs, as well as similar payments from other states, and these too will be excluded from the levy. Those with an entitlement to the medical card will also be exempt from income levy. An exemption threshold of €18,304 per annum is being set to exclude those on low incomes from the levy.
An age related exemption for persons aged 65 years and over is being introduced. These thresholds will be €20,000 per annum with a provision for double that limit for a married couple.
As previously stated, the income levy is progressive. It does not apply to low incomes or social welfare payments. In short, this means the vulnerable and elderly are protected while those best able to pay will pay the most.
I am glad the Senator also raised the issue of VAT. The standard VAT rate was increased in the budget by 0.5% as part of a general package of revenue-raising measures to fund key public services. Already, we are borrowing 10% of all day-to-day public services expenditure. That is unsustainable and we faced difficult choices in bringing forward corrective measures. Each percentage point reduction in our standard VAT rate would cost €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points, as has been done in the United Kingdom, would cost approximately €1.125 billion in a full year.
Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, telecommunications and adult clothing. The effect of the 0.5% increase in the standard rate is that the price of goods and services, which apply at this rate, will increase by 0.41%. This equates to an increase of 8 cent on a good costing €20, or 41 cent on a good costing €100. It must be also recognised that around half the value of goods and services purchased in the State are not subject to the standard rate of VAT and therefore are unaffected by the change in the standard rate.
The reduction in the UK standard VAT rate will have an impact on the price differential on goods between the North and the South. I would point out that the UK has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on these items. Consequently, there will be no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%. It is important to recognise that the weakening of sterling has had a more significant impact than any VAT changes on relative price differentials between North and South of the Border.
As a small open economy, many of our standard rated goods are imported, and cutting the VAT rate could benefit the economies from which we import more than our own. In other words, while it might help the consumer, it would not be the most effective way of helping our own economy. There are means other than reducing VAT of stimulating the economy. The Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP, which is twice the average in the EU.
I thank the Senators, particularly Senators Hanafin, Walsh and Butler, for their support of the Bill and their endorsement of the measures the Government has taken and continues to take to deal with the exceptional economic position in which we find ourselves. I particularly appreciate their comments on the framework for sustainable economic renewal. As Senator Hanafin and Senator Walsh said, we have a low tax economy here. The advances we have made in recent years have put us in a position of having one of the lowest tax regimes in Europe.
In an international context, the most recent data available from the OECD show that, in 2007, Ireland had the lowest tax wedge in the EU and one of the lowest in the OECD for single people, married one-earner couples with two children and married two-earner couples with two children earning the average wage or 167% of the average wage in the case of married two-earner couples. It is likely that this situation will continue in 2008 and 2009. A low tax wedge makes it easier for employers to take on new employees. In fact, for the seventh consecutive year, when cash benefits are taken into account, married one-earner families face a negative tax burden, receiving more money in cash transfers from the State than they pay out in income tax and social security contributions. While the Finance Bill includes a small increase in tax to restabilise revenues we, through the advances made in recent years, are in a very good position to absorb it. I reiterate that the Government has put the minimum wage outside the tax net. A total of 36% of workers do not pay any tax. I agree with Senator Hanafin that this Government cares for the less well off.
I disagree with Senator Donohoe's comments that income tax should not have been reduced in the past number of years. The Senator seems to have forgotten that reducing income tax means that average workers have more money in their pockets. These measures have increased the take-home pay of everyone in Ireland and have resulted in our being able to remove the minimum wage earners from the tax net altogether. They have also reduced the cost on employers of taking on employees. This Government is committed to a low tax burden on workers. We wish to keep people in jobs and to reduce their tax burden where possible. Ireland has one of the lowest tax burdens in the entire OECD.
I agree with Senator Walsh that the changes made to mortgage interest relief were a positive development. The Minister for Finance has managed, without any cost to the Exchequer, to refocus the relief on those who need it most. Senators will be aware of the changes being made to mortgage interest relief in the Bill. The rate is being increased for first time buyers from 20% to 25% in the first and second years of their mortgage and to 22.5% in the third to fifth years. It will remain at 20% in the sixth and seventh years. The rate for non-first time buyers is being reduced from 20% to 15%. As the Minister said, this ensures a fairer system and helps buyers with the biggest financial exposure and those facing falling property values.
Senator Quinn said that small companies must be supported. I agree this is important. The Minister for Finance made the point in his Budget Statement that the Government is committed, despite the need for increased taxes, to maintain and enhance pro-employment business tax relief. The budget introduced a three year exemption from corporation tax on trading profits and chargeable gains for new companies commencing to trade next year. The detailed provisions of this measure are set out in the Bill. New companies commencing to trade in 2009 will benefit from tax exemption, which will be granted by reducing to nil the corporation tax relating to the profits of a new trade and the chargeable gains on the disposal of any assets used for the purposes of a new trade.
Senator Ouinn also mentioned the increased yield that arose as a result of a reduction in the capital gains tax rate to 20%. However, a substantial portion of the increased yield arose as a result of the abolition of roll-over relief which effectively resulted in a permanent deferral of the tax that would normally be due. In other words, the reduced capital gains tax rate was levied on a wider tax base through the reduction of reliefs from this tax.
With regard to Senator Doherty's suggestion to increase the PAYE credit by 5%, this would cost approximately €130 million in 2009. This is the first year since 2002 that the employee tax credit has not been increased. Since 2004, all the main personal tax credits have been substantially increased. The combined value of the main personal tax credits has increased by 43%. These increases are ahead of both projected wage growth and the consumer price index from 2004 to end 2009, which are both projected to be about 20% on a cumulative basis. As a result of the increase in credits in recent years we are now in a position where a single person can earn up to €18,300 before paying any income tax. In addition, this ensures that minimum wage earners are well outside the liability for tax. The comparable figure for a married one-earner couple with children is €31,950 and a married two-earner couple is €36,600.
I must also disagree with Senator Doherty's contention that the changes introduced to the arrangements for the payment of preliminary corporation taxation impose undue pressures on struggling companies. These new arrangements will impact on only large companies, of which there are approximately 2,500, and they will have no impact on 95% of companies in the State. The arrangements we are introducing are common across the OECD and, in fact, are less onerous than the quarterly payment arrangements in some of our international competitor countries. It is recognised that for all of these companies, the fact that the Minister is bringing forward by five months the payment date for more or less half of their preliminary corporation tax, represents an opportunity cost in terms of the alternative use to which they might put those funds. However, I do not consider this to be onerous because the change involves only large companies paying half of their preliminary tax five months earlier than previously. If, for example, a company has a profit of €8 million after deductions and allowances and a corporation tax bill of €1 million, the opportunity cost will be about €10,000 — that is, just an eighth of 1% of their taxable profits.
Senator Doherty made reference to the changes to the research and development tax credit scheme which have been broadly welcomed by industry. Apart from the generous increase from 20% to 25% in the rate of the research and development tax credit, further significant enhancements to the scheme are included in the Finance Bill which will benefit companies generally, including small companies and those in the start-up phase. He also expressed concerns about the time limit on companies making a claim in respect of a tax credit. The Bill provides that such claims must be made within 12 months from the end of the accounting period in which research and development expenditure giving rise to the tax credit was incurred and applies to claims made on or after 1 January 2009. In general, this is a reasonable requirement for the future.
In conclusion, it is gratifying to hear Senator Ryan welcome the cycle to work scheme. The scheme will encourage people away from car use, thereby reducing greenhouse gases and traffic congestion while also contributing to the health of those who participate. Although described as "a piece of the jigsaw", it is only by putting in place such pieces that we can hope to achieve the "bigger picture". I thank Senators for their contributions and hope I have, on behalf of the Minister for Finance, addressed the main points they raised. As always in the Seanad, this has been a constructive debate. I commend the Bill to the House.
The Dail Divided:
For the motion: 26 (Dan Boyle, Martin Brady, Larry Butler, Ivor Callely, John Carty, Donie Cassidy, Maria Corrigan, Mark Daly, Déirdre de Búrca, John Ellis, Geraldine Feeney, Camillus Glynn, John Gerard Hanafin, Cecilia Keaveney, Terry Leyden, Marc MacSharry, Lisa McDonald, Brian Ó Domhnaill, Labhrás Ó Murchú, Francis O'Brien, Fiona O'Malley, Ann Ormonde, Kieran Phelan, Jim Walsh, Mary White, Diarmuid Wilson)
Against the motion: 19 (Paul Bradford, Paddy Burke, Jerry Buttimer, Paul Coghlan, Maurice Cummins, Pearse Doherty, Paschal Donohoe, Frances Fitzgerald, Dominic Hannigan, Fidelma Healy Eames, Nicky McFadden, Joe O'Reilly, Joe O'Toole, John Paul Phelan, Feargal Quinn, Eugene Regan, Shane Ross, Brendan Ryan, Liam Twomey)
Tellers: Tá, Senators Camillus Glynn and Diarmuid Wilson; Níl, Senators Maurice Cummins and Liam Twomey.
Question declared carried.