Thursday, 28 May 2009
Finance Bill 2009 (Certified Money Bill): Second Stage
This Finance Bill gives effect to the supplementary budget measures and addresses the two important requirements of showing a credible way forward on our structural problems while assisting us in placing the economy on the road to renewal. We must demonstrate that we have the ability to make the right choices for everyone in this country, choices that will determine our long-term economic prosperity.
It is true that we recently saw some glimmers of hope that an end may be in sight to the deepest and most widespread recession that the world has experienced for over a half century. However, there is natural caution and reticence about forecasts of recovery and considerable uncertainty about both its sustainability and its strength. Maintaining our public finances on a sustainable path is a pre-requisite for economic growth. In this regard, the various expenditure-reducing and tax raising measures, introduced since last October, will have a beneficial impact by restoring confidence as well as improving our competitiveness. The supplementary budget alone delivered improvements to the Government finances of €3.3 billion in 2009. Approximately €1.5 billion of this improvement is due to expenditure adjustments, with €1.8 billion additional taxation being raised. Nonetheless, we are well aware that, as yet, global economic output is continuing to contract and is accompanied by falling world trade. According to the International Monetary Fund, the advanced global economies, which constitute Ireland's major trading partners, are predicted to contract by 3.75% this year, which will in turn weigh upon our export performance. The depreciation of sterling is also unhelpful for our indigenous exporters.
Policy makers around the world have responded to the financial crisis with marked determination and there are signs now that these efforts are beginning to bear fruit. The world's leading central bankers have noted improvements in business and consumer sentiment, while some important indicators in key economies have shown tentative signs of stabilisation. Such developments underscore the importance for this country of continuing to pursue the path we have embarked upon so that the economy will be well placed to benefit from a global recovery.
GNP is projected to contract by 8% this year. A more moderate decline is expected in 2010, but our economic growth rate is expected to become positive by 2011.
We need to remind ourselves that our economy has many strengths on which to build a recovery. Our labour force continues to be highly skilled and flexible. We are continuing to invest in education at all levels in order to ensure we have the skills demanded by our increasingly knowledge intensive economy. The Government remains committed to providing a pro-enterprise environment and to maintaining our low tax burden on business. We are also ensuring capital spending remains at a very high level by international standards. This will allow us to maintain our investment in productive infrastructure which will help enhance our competitiveness.
Our economy remains resilient. Labour costs are falling in both the public and private sectors. Our capacity to make these adjustments in labour costs and work practices is critical to our recovery and will help us to reap large economic gains in the future. I am very well aware that this process is painful and I do not underestimate the difficulties it is causing workers and their families.
Our ability to respond to this most difficult of economic crises has been acknowledged by our European colleagues. They understood very well that the purpose of the supplementary budget was to restore order and stability to the public finances. This is essential to enable us to protect existing jobs and generate the essential economic confidence that will lead both to further employment creation and to a return to prosperity.
One of the ways in which we can ensure this return to prosperity is through our support and development of enterprise. I made the point in my budget speech that, despite the recent increases, our tax system remains competitive and pro-enterprise in character. Accordingly, I renewed the Government's commitment to our 12..5% corporate tax regime.
I undertook also in the supplementary budget to introduce a scheme of tax relief for the acquisition of intangible assets as a means of supporting the smart economy. I believe this measure will help to maintain employment in our existing industrial base and will help to attract sustainable high quality jobs in the future into the economy.
To address the fiscal challenge we face there is no escaping the unpalatable fact that tax increases are required; we must broaden our tax base significantly. We are endeavouring to ensure that any tax increases are progressive and fair. In that regard, I would remind Senators of the comments of the ESRI in its recent quarterly review about the redistributive impact of the budgetary measures we have taken since my appointment as Minister for Finance.
I announced in the supplementary budget speech that I was terminating property-related accelerated capital allowance tax relief schemes in the health sector in order to help broaden the tax base. As Senators are aware, all such schemes are now being terminated with the exception of the specialist palliative care units and the child care facilities.
The Bill sets out the transitional arrangements for the pipeline projects affected by the termination of these schemes. The schemes being terminated cover private hospitals, nursing homes, including associated residential units, convalescent homes and mental health hospitals. The estimated annual saving from the termination of these schemes is €60 million in a full year.
The Bill also gives effect to the budget day announcement of the abolition of the special 20% tax rate applicable to trading profits from dealing in or developing residential land. The income will now be charged at the individual's marginal income tax rate or at the 25% rate of corporation tax. It also restricts the relief that may be available where trading losses are incurred from dealing in or developing residential development land.
I consider that the proposals contained in the Bill relating to dealing in or developing residential land represent another significant step by the Government in ensuring that everyone makes a contribution toward raising additional revenue and broadening the tax base in our efforts to address the current difficulties we are experiencing in the public finances.
The Bill runs to 32 sections and is structured by tax headings. I will outline some of the main provisions in the time available to me. Section 2 makes provision for the doubling of income levy rates and reducing the rate thresholds from 1 May 2009, as announced in the supplementary budget. A rate of 2% will apply on income up to €75,036, 4% on the balance up to €174,980 and 6% on any income above that amount. The exemption threshold is also reduced from €18,304 to €15,028. Those with an entitlement to the medical card remain exempt from the income levy. For those over 65 years of age, the exemption remains at €20,000 for single individuals and €40,000 for married couples. Social Welfare and similar type payments also remain exempt from the levy.
The income levy is a progressive measure, with those who are most able to pay paying the most. The most vulnerable are protected by exemptions. The composite rate provision applying to 2009 included in this section is intended as an anti-avoidance measure which prevents individuals who can control their income from front loading their yearly income to avoid the higher rates. This section also provides that redundancy payments made in the first four months of the year will only be subject to the income levy rates in force during this period.
Sections 3 and 4 make provision for my supplementary budget announcement that, from 1 May, mortgage interest relief will be limited to the first seven years for qualifying home loans. This measure focuses resources on those most in need and provides a saving to the Exchequer. The relief remains available to first-time buyers and those taking out a new qualifying loan for the purposes of trading up or improving their principal private residence.
Section 5 of the Bill gives effect to the budget announcement whereby the level of tax relief investors can claim on the interest for mortgages and loans on residential rental properties is reduced to 75% of the interest accrued from 7 April 2009. I am introducing this measure at a time when mortgage interest rates are at historical low levels and the repayment burden on investors has been reduced significantly. The interest component of repayments is now less than 50% of the levels that pertained as recently as two years ago. I am aware that rents are falling, after a number of years of strong growth. This fact was taken into consideration when I framed the supplementary budget and decided to reduce rather than abolish this relief. Ordinary workers on relatively modest incomes are being asked to make additional contributions to help with the recovery in public finances so I believe it is fair and equitable to ensure that residential investors contribute a proportionate share of the burden of adjustment needed in the economy.
Section 6 abolishes the 20% incentive rate of tax for income arising from dealing in residential development land with effect from the 2009 tax year. Such income will be taxed under normal income tax rules. The incentive rate is being abolished in recognition of the fact that the relief has served its stated purpose of releasing development land. The measure also introduces new arrangements for dealing with losses which ensure that where profits were taxed at 20%, losses cannot be relieved at 41%. Any such loss will now be converted into a tax credit valued at 20% of the loss and can be offset sideways against income tax which would otherwise be payable on the person's other income.
Section 7 of the Bill extends the period during which applications for certification can be made to the Mid-Shannon Tourism Infrastructure Board from one year to two years so that the latest date for the submission of applications is now 31 May 2010. To deal with any project that may avail of the new date for the submission of applications for approval, the period within which expenditure must be incurred for capital allowances is also being extended from 31 May 2011 and will now end on 31 May 2013. It is my understanding that there are a number of significant projects currently in the pipeline which have not yet been submitted formally to the board for approval. All are being promoted by experienced tourism operators and if the existing deadline for submission of projects to the board for certification were retained, none of these projects would be able to proceed.
Section 8 amends sections 268 and 316 of the Taxes Consolidation Act 1997 regarding expenditure incurred on the construction or refurbishment of certain health-related facilities in order to provide for the termination of these capital allowances schemes and for transitional measures for pipeline projects. The facilities covered by this section are registered nursing homes, convalescent homes, qualifying hospitals and mental health centres. The amendments to section 268 provide that certain schemes that were previously open-ended in relation to incurring qualifying expenditure for capital allowances purposes now have a termination date of 31 December 2009, unless certain qualifying criteria are met.
Section 9 increases the rate of tax that applies to interest on deposit accounts and to income from certain other savings products. The normal rate of tax is increased from 23% to 25% with effect from 8 April. For more long-term savings products, the rate of tax which applies is increased from 26% to 28%, also with effect from 8 April. While the rates are increased by 2%, it remains the case that this income is not subject to the income levy. Section 10 increases by two percentage points the rate of "exit tax" on life assurance policies and other investment funds, with effect from 8 April. Those products previously taxable at 23% are now taxed at 25%, and those products previously taxed at 26% are now taxed at 28%. As an anti-avoidance measure, where the investment is held in a personal portfolio investment undertaking or a personal portfolio life policy, the tax rate that applies with effect from 8 April is the standard rate plus an additional 28 percentage points.
Section 11, in tandem with arrangements made in section 6, abolishes the effective 20% rate applied to trading profits from dealing in residential development land with effect from 1 January 2009. An accounting period that straddles that date is treated for this purpose as two accounting periods. Profits or gains on dealing in residential development land will now be charged at the general rate of corporation tax that applies to dealing in land, which is 25%. Section 11 also introduces a new section 644C to the Taxes Consolidation Act 1997. This section restricts the allowance of losses on residential land incurred before 1 January 2009 and carried forward to accounting periods beginning on or after that date to allowance on a value basis. This is to ensure that the effect of the tax treatment of trading losses is commensurate with the effect of the increase in the tax rate on trading income from 20% to 25%.
Section 12 ensures that, where an Irish resident company makes a gain on the disposal of shares deriving their value from exploration or exploitation rights, the gain will not be exempt from tax under what is known as the "participation exemption". By closing off a potential loophole, this measure means that such shares are treated the same as shares deriving their value from land or minerals in the State.
Section 13 provides for a new scheme of tax relief for capital expenditure incurred by companies on intangible assets, as announced in the supplementary budget. A new section 291A is being included in Part 9, Chapter 2 of the Taxes Consolidation Act 1997 for this purpose. The scheme provides for capital allowances against taxable income on capital expenditure incurred by companies on the provision of intangible assets for the purposes of a trade. The scheme applies to intangible assets which are recognised as such under generally accepted accounting practice and which are included in the specified categories listed in the new section. The new scheme applies to expenditure incurred by a company after 7 May 2009.
Section 14 increases the rate of capital gains tax from 22% to 25%. This change applies with effect from 8 April 2009. Sections 15 and 16 respectively confirm the supplementary budget increases in mineral oil tax of 5 cent per litre, inclusive of VAT, on auto diesel, and in excise duty of 25 cent, inclusive of VAT, on a packet of 20 cigarettes, with a pro rata increase on other tobacco products. Section 17 defers the increase in the betting duty from 1% to 2%, in view of the likely adverse impact the increase would have, in current circumstances, on the betting industry. This will have the effect of continuing the existing betting duty rate of 1%, unless and until an order is made bringing the 2% rate into effect.
Section 18 provides the necessary legislative change for the decision, announced on 25 February last, to exempt small peripheral airports from the air travel tax. It amends the definition of "airport" used for the air travel tax to exclude from the scope of the tax airports from which fewer than 50,000 persons departed on aircraft in the previous calendar year. As regards section 19, the Finance (No. 2) Act 2008 introduced an unjust enrichment provision in respect of vehicle registration tax, VRT, to limit the repayment of VRT claims by dealers. This section corrects the formula that is used for the calculation of a repayment of VRT on a pro rata basis. It is a technical amendment.
Sections 20 to 22, inclusive, relate to VAT and introduce a VAT on property anti-avoidance provision. The sections form a package of measures which amend sections 7 and 7B of the VAT Act, to close off a loophole in the VAT on property legislation, which has been used to avoid paying VAT due on the sale of a property in certain circumstances. The avoidance mechanism relied on misinterpreting a particular provision in the VAT Act, which was designed to prevent double taxation. Section 23 is an interpretation section for the stamp duty provisions of the Bill.
Section 24 provides for a new "exchange of houses" scheme, under which a person selling a new residential property can take a second-hand residence in exchange or part exchange and will not have to pay the stamp duty on the second-hand property until he or she either sells the second-hand property or in any event by 31 December 2010, when the scheme ends. The purpose of the scheme is to give impetus to the residential property market by freeing up the overhang of completed but unsold new property, with consequential impact on employment.
Section 25 is a technical follow-up from section 13 which deals with intangible assets. The definition of intellectual property has been amended in the Stamp Duties Consolidation Act 1999 to align it broadly with a similar definition being inserted into the Taxes Consolidation Act 1997 by section 13 of this Finance Bill. It should be noted that this change applies to instruments executed after 7 May 2009.
Section 26 provides for an increase from 2% to 3% in the existing levy on non-life insurance products. The non-life insurance levy does not apply to voluntary health insurance, re-insurance, marine, aviation and transport insurance, export credit insurance and certain dental contracts. The section also provides for a new 1% levy on life insurance premiums.
Section 27 provides for an increase in the rate of capital acquisitions tax from 22% to 25%, and for a reduction by approximately 20% in the thresholds below which a gift or inheritance can be taken free of tax. Although this is the first time the CAT tax-free thresholds have been reduced, I feel this reduction is justified in light of recent economic conditions. The tax-free thresholds remain generous. They now stand at €424,000 for gifts and inheritances from parents to children, €42,400 for gifts and inheritances between siblings, from aunts and uncles to nieces and nephews, and from grandparents to grandchildren, and €21,700 for gifts and inheritances between individuals not covered by the first two categories. The changes to the rate of capital acquisitions tax and to the tax-free thresholds both apply from 8 April 2009.
Section 28 is an interpretation section. Section 29 reduces the statutory rate of interest applied by Revenue to delayed payments of taxation and to underpayments by taxpayers engaged in business activities. The current daily rates will be reduced by 20% giving respective annualised equivalents of 8% and 10%, approximately, from 1 July 2009. Section 30 covers miscellaneous technical amendments in respect of tax.
I hope the Seanad has found useful this explanation of the measures in the Finance Bill. As I have continued to emphasise, we must restore order and stability to the public finances so that we can protect existing jobs and generate the essential economic confidence that will lead to a return to prosperity. I commend this Bill to the Seanad.
Let us suppose that when the Minister ran for re-election in 2007 I had told him my house was worth €350,000. Can he tell me now when my house will be worth that amount again? I do not believe he can.
Too much is being made of speculation about growth returning to the economy, when we will start to see green shoots and what the future will hold. Two years ago, the former Taoiseach, Deputy Bertie Ahern, said that anybody who talked down the economy or who expressed concerns about it should commit suicide. It now transpires, two years later, that what was happening in our economy was like a great pyramid scheme or Ponzi scheme, as it is called. It involved excessive borrowing and the public finances going completely out of control. All the time, the present Taoiseach, Deputy Cowen, and the former Taoiseach, Deputy Ahern, carried on as if nothing was wrong. Perhaps the Minister might respond to this question. Is there an acceptance that it was Government policy which got us into this mess? What the Government was doing for the previous five or six years has landed us in a situation in which the indebtedness of this country will exceed €100 billion. There are many questions to be answered concerning what this means to the ordinary taxpayer and the State as a whole.
Mortgage holders do not feel any relief that interest rates have come down because they have been crucified with increased taxes arising from the state of the public finances. Ordinary civil servants now pay three levies: on income, health and pension. These are the same people who took out mortgages in recent years. This Government told them to go ahead and buy their expensive houses because it saw a good future for them. Clearly that was a lie perpetrated on the people. There should be an acknowledgement by the Government that its policies have destroyed the finances of this country but no Minister has had the courage to say that those policies have got us into the mess in which we find ourselves.
Look at our economy which contracted by 9% in one year. There has been a vast increase in Government borrowings, amounting to in excess of €100 billion since the Government was re-elected. Unemployment is destined to go beyond 500,000, unprecedented in the history of this State. We continue to see increases in current day-to-day expenditure by the Government. This seems to be an acknowledgement of its failure to get spending under control even after the many budgets it was required to introduce as emergency measures.
What are the predictions for the end of the year in respect of Government income? When the budget was introduced on 7 April 2009 we were told that Government income should be approximately €34 billion, having dropped from €37 billion at the beginning of the year. There are now predictions it may be as low as €32 or €31 billion. How will this impact on what the Government will do in the budget before the end of the year? If it is the case that the losses will amount to another €3 billion in addition to what the Government already predicted for its income, namely, 10% less than expected in November, we will see the harshest budget in the history of the State. What we had in April will prove to have been only a taster of what is to come.
There is nothing in what the Minister said today, however, or in what Ministers have stated collectively, that gives any indication the Government has a plan. Since the general election, the Government has borrowed in excess of €30 billion just for day-to-day spending. With the establishment of the National Asset Management Agency, NAMA, the Government proposes the introduction of €90 billion worth of Government bonds. A sizeable percentage of those will cover what are merely junk assets, complete rubbish. I ask the Minister of State, Deputy Billy Kelleher, to respond, not necessarily about NAMA, but about how dealing with that kind of junk and putting responsibility for it back on the taxpayer will affect public finances over the coming years. We have already seen that the Government does not have control of day-to-day spending, there is contraction in the overall economy, unemployment is increasing rapidly and the Government's income dropping. None the less, the bailout for the banking sector will be substantial. How will it impact on public finances if the Government needs another €2 or €3 billion merely to service those junk bonds to be produced by the end of the year? That is not the same €2 or €3 billion needed to service the Government debt which is being produced at an incredible rate. This will impact on the ordinary man and woman because the Government is obviously adopting a policy of increasing taxes rather than controlling spending.
This month average civil or public servants have seen a reduction in take-home pay of at least 10% compared with earnings at the beginning of the year. That far outweighs any savings they might get on their mortgages or on other spending costs that have reduced. The same applies to many other people across the private sector if they have managed to hold on to their jobs. The biggest problem is that many have not managed to do so and there is still no response from Government as to how we can keep people at work or produce new jobs at a rate that will protect the solid basis of our economy. Our economic base is reasonably solid now but is not as solid as it was even 12 months ago. However, one hears nothing from the Government and there is nothing in the budget that gives any confidence the Government is taking on board the seriousness of the deterioration in the overall public finances.
What galls me, from the social point of view, is the way the Minister for Health and Children, Deputy Harney, led the Progressive Democrats culture of the past six or seven years, namely: "To hell with the public health services. We will find the new mantra in the private sector." We have here an acknowledgement by Government that this was another fools' paradise towards which it was trying to lead the people. It is now getting rid of all the beautiful tax incentives that had been given out to developers and those involved in property. These tax write-offs for the construction of private hospitals were not available to the Minister of State or me because only those who owned a substantial property could avail of them. This is now being disregarded.
As jobs are lost and incomes decrease, people close their VHI policies. For seven years the Minister for Health and Children, Deputy Harney, blew out of all proportion the need to rely on the private sector and the Fianna Fáil Party did nothing to rein her in. Throughout that period, the Government failed to reform the public health sector. As a result, wards and accident and emergency departments are being closed across the country as hospitals seek to stay within budget. They know already their finances are in dire straits and must look forward to an even busier period towards the end of the year. The continued waste of money across the public service is the reason for many of the problems in the health service. We hear many fine words about accountability, transparency and reform but no action has been taken. We will pay for this failure to act by having expensive and awful public services which should have been improved in the good times. In addition, reliance on the private sector has fallen by the wayside.
While there may be a sense that the anger of ordinary people has diminished, I believe people are still angry because their lives and dreams have been destroyed. The quality of life people experienced two years ago will not return for at least a decade. The Government should stop spreading a message that things will be great in 2011. I do not know from where it has this information.
Two years ago, public debt amounted to €100 million, while Government debt was approximately €50 billion. Currently, while the combined debt of ordinary men and women is still more than €100 billion, people have fewer means at their disposal to pay their debts. Government debt now exceeds €70 billion and the Government has given a commitment to bail out the banks by providing them with direct funding and acquiring distressed assets of some €70 billion. While I accept some of these assets will retain value, we do not know what their value is or when it will increase.
As I stated, if my house was worth €350,000 on the day the Government took office, when will it again be worth this amount? This is a matter of speculation but we must deal with the here and now. It would be wise of the Government to bear in mind the substantial debt of the nation - individuals and Government - and make some serious corrections. Otherwise, the country will not benefit when the upswing occurs in a couple of years.
I join Senators in welcoming the Minister of State and I welcome the opportunity to make a few points on the Finance Bill.
In the past two years, Members have had many opportunities to speak about the economy as activity, both domestically and globally, has experienced an unprecedented decline. This has resulted in circumstances in which we simply cannot afford to continue to provide the level of service provided heretofore. While this is regrettable and I wish we had more money to provide more and better services, unfortunately, circumstances have changed.
Senator Twomey referred to the manifesto commitments of the Fianna Fáil Party under former Taoiseach, Deputy Bertie Ahern. The expenditures outlined in my party's election manifesto in 2007 were in line with anticipated increases in growth rates and tax revenues of 4% to 5% per annum. When circumstances change, however, it is incumbent on governments and others to change their approach, which is what we have done.
In the past year or two, it has been necessary, through a series of budgets and other adjustments, to change focus and introduce a range of measures, not least those included in the Finance Bill. These have caused pain and created considerable anger and frustration among many individuals and families. Members of the Oireachtas are not exempt from this pain. Senators, Deputies and other State employees will receive pay packets today which are substantially lower than they were last month. This is a regrettable reality to which we must all face up, painful as it is.
I welcome the Finance Bill 2009 as another important and appropriate measure on the bumpy road to economic recovery. The Bill gives effect to the measures announced in the supplementary budget in April. It marks another confident step by the Government to ensure we sort out our economic and fiscal difficulties. Given our small, open economy, it is vital we operate flexibly and in an effective manner. As the nation takes these difficult steps, we will begin to see the first green shoots of economic recovery.
I will rebut some of the comments made by Senator Twomey. Speaking in Dublin at the end of February, ECB President, Jean-Claude Trichet, stated he had full confidence that the Irish Government would take the necessary decisions, would come through current problems and was "acting resolutely to do so". At the beginning of May, the head of the eurozone group of Finance Ministers, Jean-Claude Juncker, stated: "I do think that the Irish Government, with great courage and a deep sense of responsibility, are on the way to taking the right step in a very difficult situation." Ireland, he added, "is behaving in the right way" and "we take our hats off and pay tribute to the Irish people in rising to the challenge and bearing the sacrifices that the Government is asking them to make". It is a matter of public record that our supplementary budget was recently endorsed by Mr. Juncker and Commissioner Joaquín Almunia as the correct approach to our economic and fiscal difficulties.
The market response to the sentiments expressed by Mr. Trichet, Mr. Juncker and others was clear last week when we learned that the National Treasury Management Agency international bond issue was oversubscribed. While these bonds carried a higher interest rate than previous bond issues, nevertheless the oversubscription marked a clear improvement in international sentiment towards Ireland, which was due to the tough decisions being taken by the Government. Although these decisions will inflict a great deal of pain on many families, we were left no with no choice in the matter. We have moved far beyond considering the political implications of such measures and history will record that the appropriate steps were taken at the appropriate time.
As the Minister outlined, the aims of the Finance Bill were to show a credible way forward for dealing with our structural problems while protecting the economy and ensuring the measures introduced are fair and progressive. The Government seeks to look after to the fullest possible extent those who are less well off, while sharing the burden across all sectors. Those who can should pay their way in these difficult and unprecedented times.
While many measures are not popular, it is necessary that we take them. The establishment of the National Asset Management Agency, NAMA, to which Senator Twomey referred, is another necessary measure. The House had an excellent debate on NAMA as did a meeting of the Joint Committee on Finance and the Public Service this week which lasted for four hours and which was attended by both Senator Quinn and me. The meeting clarified plans for the new agency, although I accept some of these plans remain very much a work in progress. Nevertheless, we now have much more information than previously and I am confident the principle behind the decision to establish NAMA is the correct one and the agency will produce dividends over the medium to long term. The Government has taken the correct approach, which I believe will be mimicked throughout the eurozone, if not further afield.
One of the first steps being taken in the Bill is to address the fiscal challenge in the area of taxation. As the Minister indicated, we must broaden our tax base. The taxation measures introduced will raise some €3.8 billion and there will be cutbacks in expenditure of €4.3 billion for 2009.
As the Minister, Deputy Brian Lenihan, pointed out, property related accelerated capital allowance tax relief schemes in the health sector have been terminated and it is estimated this will save up to €60 million in a full year. The rates of interest applied by Revenue on late payments and underpayments of tax by businesses will be reduced by 20% to annualised equivalents of 8% and 10%, approximately. This is a welcome measure for businesses across the country.
We have managed to keep our corporation tax rate of 12.5% in order to continue supporting enterprise in the country. Indeed, there has been an increased level of expenditure by FDI companies operating in Ireland in recent times. In fact, anecdotally, I understand that Mr. Bill Gates is currently holidaying in Mulranny in the west, which is a good vote of confidence in this country, not least from a tourism perspective but also in his particular belief that this country is moving in the right direction.
Deposit interest retention tax, capital gains tax and capital acquisition tax have all increased to 25%, which is part of the Government's base-broadening measures and ensures that all forms of income contribute to the fiscal correction.
The increases in the income levy can be seen as a progressive measure in so far as those who earn more pay more. Notwithstanding that many in the public sector will receive their pay packets for the month this week, there is no question it will bring an unprecedented level of reduction and will inflict pain on a great many families. We need to be conscious of that and to the fullest extent introduce any measures we can - I have spoken to the Minister in person about his - in the area of mortgage default which will help those who ordinarily would not have difficulty in paying their mortgages but for whom, with these necessary measures being introduce, the situation may change. Although the limiting of mortgage interest relief to the first seven years of a qualifying home loan may be seen as painful to some and, indeed, it is, it is also in line with the drop by the ECB in lending rates which, as the Minister alluded to, is unprecedented.
These are merely some of the highlighted tax measures to be introduced. The Commission on Taxation is due to report in July and full reform of the taxation system will take place then. An bord snip will also report in July on further cuts which we can make across the Departments, and they will be necessary. As I stated earlier, there is a level of outgoings that we can no longer support and we need to cut our clothe to measure - it is as simple as that.
GNP is projected to contract by 8% this year, as the Minister stated. Indeed, Senator Twomey also alluded to that. The contraction is expected to be more moderate in 2010 and in 2011: as international recovery gains momentum, our economic growth rate is expected to turn positive.
There have been small signs internationally of a pick-up, as the Minister alluded to this in his speech, and these signs are welcome. The recession hit Ireland harder than most, as we are one of the most open economies in the world and, it must be said, we had an over reliance on a tax base which was substantially in the property sector. Mistakes will always be made and any Government, as it looks back retrospectively, would like to have done certain things differently. I am sure this Administration is no different to those in the past. The fact of life is that Governments operate in a real-time environment and do not have the benefit of hindsight. We need to move forward in a confident and determined way to display to citizens that this Government can and will take the appropriate measures to get this country back on the road to recovery as quickly as possible.
Although there is a significant downturn in world trade, interestingly, the relative downturn in Irish exports is substantially less. We are holding our own in terms of market share while other countries are losing market share in the world economy. This is partly due to the nature and quality of our exports, many of which are in the food sector, as Senator Quinn will be well aware.
When compared to Singapore which has lost 30% of its export market share and Taiwan which has lost 40%, the Irish Exporters Association has forecasted that our exports will fall by 13% in 2009. This is significantly less than the countries I mentioned and is worth noting.
Another striking challenge for Ireland is the fall in the value of sterling, which has been difficult for indigenous exports. However, we are beginning to see the Irish market become more competitive as a national correction takes place in terms of our pricing.
The Government is continuing to implement initiatives to ensure the unemployed are given incentives for up-skilling and are ready to face the upturn when it comes. One such initiative announced by the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Coughlan, and the Minister for Social and Family Affairs, Deputy Hanafin, is a work placement programme and a short-time working training programme. The work placement programme is a six-month work experience programme for an initial 2,000 individuals who are currently unemployed. Under this programme there will be two streams, each consisting of an initial 1,000 places. The pilot short-time working training programme will provide two days' training a week for 277 workers over a 52-week period. I welcome this measure and others which are planned.
On reports in the news today of the suggestion that there may be cuts in social welfare, it would never have been an intention of Fianna Fáil in Government to cut social welfare. In fact, the record will show that Fianna Fáil in Government has produced more in the context of increases to social welfare and pension payments throughout the history of politics in this country. I very much hope that it will not become necessary to cut social welfare or to reduce the likes of child care payments in the future. Having said that, it is important we maintain an incentive to work and I hope we can find the appropriate balance in this regard.
There are difficult and painful measures contained in this Finance Bill. We have outlined that they are extremely necessary at this time. On that basis I commend the Bill to the House as another step. More will be required as we continue on the road to economic recovery.
I welcome the Minister of State, Deputy Kelleher. The Minister for Finance, Deputy Brian Lenihan, was also welcome, as were his words. I must agree with Senator MacSharry when he stated the world has changed. We cannot sit back and merely do what we have done in the past. We must change as well. If these changes are taking place, to what extent are we taking the right steps and to what extent are we going in the right direction?
I draw the Minister's attention to the danger of big Government and the benefit of entrepreneurship. I am not sure that, in general, this Government understands that the success of the economy will depend on entrepreneurs and we must find a way to ensure that happens.
I mentioned previously that I met Ms Elaine Chao, the former secretary for employment in the United States. Her job was to ensure jobs were created but she stated it was her intention not to create jobs but to create the environment in which entrepreneurs could create jobs, and that is what we must ensure we do. I am worried that big Government will do things itself. I remember somebody saying to me some years ago that he would get very worried when he saw anybody making decisions who never had to worry about where to get the money to pay the wages at the end of the week. I am not saying that applies to any particular Minister.
Commissioner McCreevy expressed concern earlier this month that raising taxes for high earners could produce diminishing results. If one looks back to 1977 and 1982, the steps we took on those occasions damaged the economy. It was not until 1987 when we took different steps that we were imaginative and got some sense of what we could do differently. It was former Minister for Finance, Ray MacSharry, who was given the task in 1987 and grabbed hold of it with imagination.
Let me offer one example of that imagination, that is, the Irish Financial Services Centre. The Irish Financial Services Centre reduced tax by a percentage and this is the real message we must get across. With ingenuity it is possible to reduce the rate of tax and take more money in.
The example I have often used is former Minister, Charlie McCreevy's, betting tax. I remember he came in here and spoke of reducing the betting tax from 20% to 10% and there were howls that he was looking after friends in County Kildare. The following year he came in and stated he would reduce it to 5% because he took more money in at 10% than he did at 20%, and he took more money in at 5% than he did at 10%.
He stated it is essential we remain focused on the dynamic and human nature that drives risk-taking, economic activity and tax revenues and that we guard against policies and tax rates that drive risk-taking, economic activity and tax revenues backwards. He stated that it was higher economic activity and not simply high tax rates that generated high tax revenue. We could sink or swim depending on whether we lost sight of these simple facts. We are in danger of being over-regulated and too top heavy. We must avoid solving the problem by increasing tax rates to bring in more money. The real benefit is gained conversely.
Senator MacSharry discussed the cuts in social welfare and other payments mentioned in today's newspapers. Some time ago, I referred to a letter to the Irish Independent that concerned me. The letter writer had met a friend who was getting more money into his pocket after he had been made redundant. He used to earn €38,000, €33,000 or so after tax, but he was better off staying unemployed thanks to mortgage relief and so on. His objective was to lower his golf handicap. I mention this letter because we are in danger of going in that direction if we do not understand what is occurring.
I welcome some of the steps referred to today. According to newspapers, Accenture, which employs 1,400 in Ireland, is planning to transfer its headquarters to here. I do not know how many more jobs this would create because it may not bring many people with it. WPP, the large British marketing and advertising agency, moved to Ireland last year. Our lower tax rate makes us attractive, which the Minister for Finance recognises, and we must acknowledge that by reducing tax rates we can bring in more money.
I draw the Minister of State's attention to one or two matters. I am concerned about the retrospective aspect of the pension levy contained in section 2. In addition, I disagree with the retrospective aspects of sections 6 and 11, which will abolish the 20% tax rate on profits from dealings in residential development land from 1 January 2009. Adopting retrospective tax policies is always dangerous, not least because it complicates the system and makes the filing of tax returns more complex for businesses and individuals. Retroactive taxes should always be avoided, for which reason I am recommending changes to sections 2, 6 and 11, but we will discuss them when we deal with the recommendations. As the difference between January and now will not be great, the implementation of the changes dating from after the Bill's enactment would be more sensible.
Regarding the new tax regime for intellectual property, a recommendation on the definition of intangible assets has been proposed. I welcome the inclusion in the Bill of the promised new regime, but I hope that this section will help to attract international business to locate such operations in this country, which occurred previously. However, I draw attention to the definition used in the context of intellectual property. Under section 13, exemption from stamp duty under section 101 of the Stamp Duties Consolidation Act 1999 has been extended to include any trade name, trade dress, brand name, service mark, publishing title, sales authorisation in respect of medicine or product arising from any design, formula, process or invention and rights derived from research undertaken in the field of medicine.
The definition of an intangible asset should be broadened to include marketing and distribution base lists, such as customer lists and other databases. My company introduced a product called Superclub and identified our customers, the majority, who used it. This scheme played an important part in helping my business to develop, to improve customer service and to bring the customer back to the business. If intellectual property is given tax relief in the Bill, such things as customer lists could be included. This area provides a considerable opening for other companies to set up in Ireland. Thus, I recommend a change to section 13 so that the definition of an intangible asset would include customer lists and other marketing and distribution lists, which are invaluable to businesses. When I was involved in An Post years ago, I realised it would be of benefit to attract Reader's Digest to Ireland by way of our post office service, and its customer list was very valuable to it.
I am concerned by the provisions in section 5 on the deductibility of mortgage interest on borrowed money used to purchase, improve or repair residential premises. Given that the interest comprises some of the cost of carrying out a rental business, it should be tax deductible. It would pay the Government to introduce such a measure and, therefore, I recommend the removal of the restriction on interest.
I was approached by someone and, while I am unsure as to whether the issue has been addressed, I will refer to a letter. It is a little technical. Employers have been setting up group pension arrangements for their staff on a defined contribution basis for many years. According to this person, two models are available, the traditional approach introduced in 1972 and the newer group PRSA approach. It has taken time for the latter to become established, but it was designed by the Pensions Board to deliver transparent, simple, portable and flexible pensions. After years of research and development, PRSAs have become popular. Large companies, such as eBay and Irish Life & Permanent implemented PRSAs for their staff pension arrangements, with the employer contributing in each case.
According to the writer of the letter, the problem that needs to be addressed is that employer contributions into PRSAs have always been treated in the same way as employer contributions to traditional pension schemes, that is, they have been run through payroll with no benefit in kind. That has been changed with the introduction of the income levy, to which employer contributions to PRSAs are deemed subject. The reason is technical, but it relates to the way in which the PRSA contribution legislation was originally framed.
Employees who have joined staff PRSA schemes will have to pay a levy on the contributions paid into their PRSAs by their employers, whereas employees in the old style pension arrangements will not have to pay such a levy. This is obviously unfair and distorts the market. The man told me that he spoke to a wide range of industry experts and the head of the pension division in Revenue, all of whom agree that this was not planned. It was inadvertent and needed be changed. The problem is that no one seems to be moving to change it, despite how simple that would be - for example, there could be a line in the Finance Bill stating that employers' contributions to PRSAs are exempt from the income levy. This would not be a major income generator and it was not the target of the income levy. As the man said, it is unfair to hit one sector of the pensions market, which is the most highly regulated sector of the market, with the levy while leaving the broader pensions market unaffected. I apologise for sticking to the detail of that letter, but it is an important matter. The measure seems unfair and as it was not the intention, perhaps it can be solved in another way.
I welcome many of the measures contained in this comparatively short Finance Bill. Last week, I spoke to Dr. James Watson, the man who won the Nobel Prize in 1962 for identifying the double helix structure of DNA. He referred to America, innovation and investment in universities and in research and development. According to him, all this occurred around universities. Aside from Harvard, he used the example of the Massachusetts Institute of Technology, MIT, which was established in the same area. Many innovations came from it and the jobs created were long-term jobs because they were based on science and technology. The same occurred in Silicon Valley, where there was a very high level of investment in universities in Seattle. The steps taken in the Bill are recognition of the fact that we can do something in this regard.
I am concerned about the long-term effect of big government, that is, the belief that the Government can solve everything. The less government there is, the better the chance of solving a problem. The term used in the European Union is "subsidiarity", namely, trying to make decisions closer to the citizens. In our case, more and more decisions seem to be taken at Government rather than local level.
When an attempt was made in Britain to change what is called council tax or, under Margaret Thatcher, poll tax, it was very difficult. When we tried to change it, and did so in 1977, we did away with what we called rates. What has happened is more and more decisions are being made at the top. I do not know if any Minister in the future will be brave or foolhardy enough to re-introduce rates, but the more we bring decisions to the top in Government, the less likely it is the right decisions will be made. I encourage more thought being given to how we can manage to pass responsibility closer to where the systems are.
Another criticism was made by Dr. Eoin O'Leary, who said:
The problem would seem to be that Irish Governments continually suffer from group-think. They surround themselves with an elite consisting of policy advisers, consultants and spinners whose main function is to tell ministers what they want to hear. There are too few dissenting voices inside the corridors of power. Those who do offer alternative perspectives are either ridiculed as naive or accused of being resentful at not being part of the elite.
I am concerned there are too many academics and economists being given too much say in advising the Government. That is what went wrong in 1977, when we into difficulty, and the same source of policies was used in 1982. It was not until, I understand, 1987, when those who grabbed hold of the initiatives said they could do something about the situation in a different way. The basic concept was that by reducing the tax rate, more money could be taken in by the State.
That concept has been applied in a number of different ways. It happened in 1987. What did we do last October? We increased VAT by 0.5% at the same time Britain, which supposedly has a socialist Government, reduced it. We saw what happened. It is a reminder to us that we should not automatically assume the way to get more money into the Exchequer is by increasing the tax rate, because very often the opposite is the case.
I encourage the Minister of State to think along those lines, because if we are to solve this problem we need different thinking from that which we have had in the past. We need skill, initiative and courage to take some of those steps.
In the times in which we live, the distinctions between politics and political parties are becoming ever more blurred. As politics moves increasingly towards the centre the traditional ways of defining policies as right wing and left wing are becoming more irrelevant. The distinctions in politics today are exemplified by the election of President Barack Obama, and are the politics of hope and the politics of disillusionment. Unfortunately, in the times in which we live, and in our own country, the politics of disillusionment are holding sway.
We see how these politics play in other jurisdictions and how it helps the rise of racist and xenophobic politicians and political parties. It also leads to a type of politics which is about quick and easy solutions to the depths of problems that have not been faced in generations. We find ourselves in this Finance Bill, the second in an eight month period, trying to deal with the scale and depth of those particular problems.
It can be fairly argued what has been proposed and put in place now represents short-term solutions to immediate problems. I do not think they can be argued in any way, however much other political parties may try, as an attempt to cause offence or create greater economic disharmony. There are international economic factors at work, and we have our own indigenous factors that have made the situation in this country worse. We require a radical change in how we structure our economy and make decisions about it, and this Finance Bill, building on the previous one, is a sincere attempt to do that.
Those who prefer to practise the politics of disillusionment will live on soundbites and play to prejudices, but will avoid answering, in public at least, how they would respond in similar circumstances. The reality is the situation would be the same whoever was in Government, and the room for manoeuvre in dealing with the situation would be as small.
It is fair to compare the current circumstances to those which existed in 1987. Much has been made of the Tallaght strategy, when the incoming Fianna Fáil Government took the budgetary parameters of the outgoing Fine Gael and Labour Party Government, and the new leader of Fine Gael at the time, Alan Dukes, was seen to facilitate that. The reality was the incoming Government would probably have acted in the way it did anyway, because the room to manoeuvre was so painfully small, just as it is now.
The gap between what we receive in our taxes and intend to spend, an expectation that has arisen during the Celtic tiger years, is so vast we can use the three mechanisms available to us, that is, cut expenditure, increase taxation or borrow more. It has not been admitted in the last 18 months that the mechanism which has been used most by Government and which has the longest impact for future generations in terms of paying back, is borrowing more than we have additionally taxed and cut services. That will still be the mechanism chosen, because to do otherwise would have a serious affect on public services.
The measures in the Finance Bill, particularly the levy, represent a short-term response to the immediate situation. I welcome the fact the levies, in their second incarnation, are far more progressive than when they were originally introduced. They include many anomalies, as Senator Quinn has said, and it is possible some of them can be addressed when we look at the Bill.
I suspect most can only be addressed in the context of next December's budget and the following Finance Bill, because we need the report of the Commission on Taxation, which, I am proud to say was an input from my party in the programme for Government. When the commission issues its report, including its recommendations, what is accepted and included in a future budget and Finance Bill will be the means that can iron out many of the anomalies which have been introduced as a result of the introduction of both levies.
It is fair to say the amount of change in taxation brought about in such a short time has probably been the largest shift this country has ever seen. It is too large an increase over too short a time period. Yet, when one looks at the basket of taxes collected in this country, including income tax, VAT, capital gains tax, corporation tax and money gained through social insurances, we still collect less in the total combination of taxes than any other European country. Despite this, we have an expectation that our services should be similar to those in other EU countries. I am afraid we cannot do that. We cannot have an economic recovery and the sense of expectation of the highest possible public services with taxes that are below the European norm. The problem we have with our taxes, which I hope the Commission on Taxation will be clear on, is that we collect the wrong taxes in the wrong way and in ways which affect disproportionately the wrong people. People who are on low incomes and different types of income are affected disproportionately, and we need a fairer, more effective and efficient taxation system.
It is a debate which will arise in next year's Finance Bill. This Bill is a series of short-term measures to address the immediate issues facing us. It could be fair to say it is a sticking-plaster approach to the economic difficulties we have. It is necessary. The fact the European Central Bank, the European Commission and the ESRI have talked, sadly, about these measures being necessary shows confidence the Government and the Minister for Finance, Deputy Brian Lenihan, are doing the right thing.
It is also confirmation that any alternative Government or Minister for Finance would have to do the same thing. That is the reality. Senator McCarthy can mutter under his breath, but the reality is that unless the Opposition can say, if there was a new Government tomorrow, which of these measures would be changed and which alternative measures would be put in their place-----
The reality is that any of the measures one seeks to change will mean the introduction of an alternative measure that has the same effect. I tire of hearing soundbite politics and talk of bailouts to sectoral interests. Exactly the same policies are being instituted in every other country in the western world. The reality is that if we do not have a financial services sector, we will not have an economy. We must ensure there is political, ethical and corporate responsibility, but if we do not repair the collapse that has occurred we cannot have future economic activity in this country. The same measures have been proposed in every other developed country in the world. People might not like the proposal to set up NAMA but the proposal for a nationalised bank, a good bank or a bad bank would result in exactly the same amount of taxpayers money being put at risk. It is not a question of having a better system, it is only a question of having an alternative means to do the same thing at exactly the same risk.
If we are not going to conduct that type of honest politics then the politics of disillusionment will win out. As a glass half-full person I believe we can strive for hope in this country. We have the means within our own population to recover. We still maintain a high level of economic wealth and prosperity. If we use that as the basis of going where we need to go, but by taking a different route - one that is less concerned with the individual and the erosion of community values - then this could be a time not only of introspection but of renewal and self-discovery that we have lacked as a nation in the past.
We can achieve the measures outlined in the Bill, which is only part of the formula we have to use at the moment. We must control public expenditure and invest appropriately in infrastructure that would allow for future activity. Unfortunately, we have to depend on how the international recovery affects our main trading partners. Those elements, if done correctly, will mean that we as a country can prosper. The Bill has been drawn up with the right means in mind and it is following the only policy approach that is open to us as a nation. If other politicians and political parties are honest enough they would accept that the room to manoeuvre and the need to be honest with people means that their approach can be more dangerously wrong than that which is being followed at the moment.
I welcome the Minister of State, Deputy Kelleher, to the House. I look forward to interacting with him on the Finance Bill 2009.
Much has been said in recent times about the economic downturn. It is unfortunate that we find ourselves in the current situation. To paraphrase Laurel and Hardy, "That's another fine mess they've gotten us into." No one would win any prizes for guessing who "they" are. We have seen an unbelievable waste of Celtic tiger resources in recent years. Senator Boyle might want to believe he is sitting on the opposite side of the House and talking about honest politics, but it is about time he started to exert influence at Government level to have meaningful debate rather than just making cheap political soundbites at the other side of this House.
Let us look at the enormous wealth, prosperity and success this country enjoyed in the Celtic tiger years. There were the haves and the have-nots. Unfortunately, many people were left behind but when there was a lot of money around there was no long-term thinking on the part of Government in terms of providing for a possible downturn in the future. The downturn came with profound consequences. The manner in which thousands of people have joined the dole queues has been almost like a tsunami. People who were working or were self-employed and were doing well, rearing their families and making valuable contributions to the taxation system have suddenly found themselves unemployed, which has brought a whole host of difficulties. I was unemployed twice in my life and I know it does not do much for one's morale to join a dole queue every week and not to know when one will come off it given the bleak future.
The downturn provides us with an opportunity to reconfigure Government schemes such as the back to work scheme and other social welfare schemes. Now is the time to reconsider such schemes and to provide for more training and upskilling. That would allow people the opportunity to get a qualification, skill or trade and to contribute again to the economy when the upturn comes. We have no reason to think it will not happen. We need to ensure the people on the dole queues will not be on them for the long term. We all know families who have been affected by people losing their jobs and more people will end up on the live register before the end of the year. The ESRI forecasts in that regard are quite frightening. We must be careful about spending on social welfare. IBEC has made stomach-churning proposals that we should slash social welfare. People living on €220 a week find it difficult enough to live on that type of money without more being taken from them. We need to ensure supports are in place for people, not just financial supports but the provision of education to allow them to train and upskill. We must ensure we do not create poverty traps or long-term unemployment such as we saw in the 1980s.
When all is said and done we are left with two classes of citizen. There are those I mentioned who are working hard to make a living and to rear their families, who are making their rightful contribution to society through the PAYE system and, unfortunately, there are others who legitimately live for significant periods of time in this country, who are proud to say they are Irish but yet do not pay tax in this country. I will refer to tax exile status this afternoon when we consider Committee and Remaining Stages of the Bill. Every good luck to somebody who has been successful owing to their business or entrepreneurial skills. Many of them got it by hard graft. I am sure none of them stayed in bed and had someone knock on the door, hand them the idea and send them off. It is about time we started being fair and used the taxation system to ensure those who fly in and out under the Cinderella rule pay their dues. All we are looking for is equality and some element of fair play.
The rate of unemployment increase is alarming. I look forward to the Minister of State's reply on existing schemes. There are many obstacles to people who wish to return to full-time education. I know of a person who was employed. I will be vague but try to give as many details as I can at the same time. They decided to go back to education to pursue a four-year university degree. The individual has a partner and young family and lobbied the Minister for Health and Children, Deputy Harney, on the provision of support. No grants were available to enable that individual to access some financial support from the State to return to study. People who complete third level courses and graduate in various disciplines generally pay tax at the higher rate. The grant system is a great investment in a person's education. It would be a great return if we could use that system to facilitate the return to education of people who have become unemployed recently owing to the downturn in the economic fortunes of the country. We need to invest in education.
I have a question for the Minister of State on the effective marginal tax rate. For many years the Progressive Democrats mantra was that this was a low tax economy and people paid very little tax. We now know that many people did not pay any tax. That type of right wing political ideology has created huge hardships for the economy. The Progressive Democrats Party has been wound up and is no longer in existence. What will be the effective marginal tax rate for those earning €80,000 a year once the Finance Bill is enacted? What does the Minister of State think of the ESRI report that asserts that the rates of taxation have risen from 43.5% in 2008 to 52% in 2009? I have the table from the Irish Taxation Institute. A person who is self employed and earning €40,000 is on a rate of 50%. These are quite frightening statistics, and it is a mockery to say we have low tax rates when clearly we do not. We now have two income levies, the health levy, the PRSI increase and the pension levies for those in the public sector.
The pension levy is actually a tax. The reason it is called a levy is because the Government cannot introduce a tax between budgets. Therefore, it called it a levy although it is the same thing. Is it fair that a cleaner in a school or a part-time firefighter, of whom there are many of them in the Minister of State's city and county, must pay a pension levy when they will never receive a public service pension? This is an issue that has been communicated to the Government by spokespersons of my party in the Dáil and by the trade unions. There are people cleaning schools or who are part-time firefighters in every town and village in the country who are paying a pension levy and not getting a pension in return. It is a mockery to suggest in the first place it is a pension levy because it is not. It is a form of taxation, allied to the health levy, the income levies and the PRSI increase, that is creating huge difficulties for people.
Most of us who have been knocking on doors in recent weeks will have come across families similar to the one I encountered in west Cork. Both parents are public servants who are not earning big salaries but because of the income levies, the PRSI increase and the pension levies, they have had to cut out the extracurricular activities for their children such as music lessons, Taekwondo or any other classes that involve a fee. They have had to reconfigure their finances and cut out many of these things. The quality of family life suffers terribly because of it.
The straitened economic times are contributing to people's negative mental health. There is huge pressure on people in the current economic climate. There was a piece in the Irish Examiner recently which stated that many marriages will run into difficulty owing to this type of economic hardship. We need to be mindful of this.
Senator Boyle was very quick to mention the setting up of the National Asset Management Agency as the panacea for all ills. When it was announced, some people thought it was a good idea but when they teased it out, it is not nearly as clear as was being suggested. Dr. Michael Somers of the National Treasury Management Agency did not mince his words at the committee when he made statements on the possible operation of NAMA:
I am still not sure how the proposed NAMA operation would interact with the NTMA. Government statements have said it would be under the aegis of the NTMA [The Minister stated this when he announced the setting up of NAMA] ... it depends on the legislation.
Dr. Somers suggested that if it were up to him, he would prefer management of the debt to remain with the banks where there was experience and expertise in dealing with it, in which case the NTMA could oversee their operations. However, he said he was unsure what the agency's position was at the time. Does the Government realise the gravity of that statement? If the individual who is charged with overseeing NAMA is unsure of its operation, how can the compliant taxpayer and the citizen of this country expect to have any faith in that organ of the State? It does not do much for investing faith in the Minister's statement.
When asked what he knew about NAMA, Dr. Somers stated that he knew very little apart from what he had read in the newspapers. When he was asked about the workings of NAMA, he stated that he did not know whether NAMA would be a function of the NTMA, or whether it would have a separate board and the NTMA would just carry out the management. He said he did not know what NAMA was going to be. When asked why the NTMA has four external boards, he said: "It is like this: one would not start from here if one was starting again." That is quite serious and I would be interested to know the Minister of State's comments on the issue.
We are all aware of people making an honest few quid from small and medium-sized businesses. The downturn has come, the banks have stopped lending and there is huge pressure on these people. These businesses often form the backbone of the rural economy. There are other areas of industry that can flourish during the economic downturn but because of draconian legislation enacted by both Houses, the fisheries industry in this country is on its knees. That is one of the areas that can flourish through the boom and we can learn a lot from that. The Government should listen to the concerns of fishermen and look at the operation of the Sea-Fisheries Protection Authority. Homes of fishermen were raided in west Cork as if they were common drug dealers or part of some kind of Colombian drug cartel. These are the people on whom we depend unofficially to police our shoreline. These are the people who came across the cocaine haul off the coast of west Cork.
We rely on the people who were 40 miles out from Killybegs and discovered a massive stash of cannabis. They contacted the mainland and stated they would come back to Killybegs on the condition that when they got back, the Naval Service would seize the drugs and they would be allowed to go back out to where they were and fish the water there. When they came into Killybegs, the Sea-Fisheries Protection Agency officers were there and they boarded the vessel, checked the log, the gear and the quantity, quality and volume of catch. These people had only complied with the law and contributed to ensuring our shores are not used to import drugs freely into the State, yet that is the treatment they got from an organ of the State. We can depend on these people to regenerate rural economies only if they are allowed to do so.
Representatives from these organisations attended a meeting of the Joint Committee on Agriculture, Fisheries and Food. They have clearly stated that the current criminal sanctions against fishermen are putting them out of business. They are being criminalised by being brought in front of Circuit Court judges and their catches are being confiscated, as are their boats and equipment. This is unbelievable but it is happening. Will the Minister of State, Deputy Haughey, ask his senior colleagues to look at relaxing the criminal sanctions, introducing administrative sanctions and giving a break to people in an industry on its knees?
Small and medium-sized businesses are paying high rents for their premises. One particular retail outlet on Grafton Street saw its rent increase last November from €118,000 to €165,000 per year. That is enormous by any stretch of the imagination. That premises is now standing idle and will remain so if it costs €165,000 per year to rent. The Minister should bring in the landlords and demand flexibility to give people a break in the current economic climate.
We have often quoted Dickens in this House and it is worth remembering Mr. Micawber when he said:
Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
We are in a slightly different situation today in so far as the annual income is €34 billion and the annual income expenditure is €52 billion. It is interesting to hear commentators from the Opposition speak well about different aspects of the economy. They do not, however, deal specifically with the substantial problem of how to raise that type of income and what the Government was obliged to do. The reality is that the Government was obliged to introduce a supplementary budget and that it took hours, days and weeks of planning on the part of Cabinet to ensure it was fair. In as much as it could, the budget established a balance in a progressive tax system to ensure equity and fair play for all. There is no easy way of giving bad news. It is a hallmark of a political party that will put the country first regardless of the political consequences.
Often, when one knocks on a door one is asked what happened to the money in the good times, as if it had fallen into a well somewhere. The reality is that many excellent projects were undertaken with the money available in the good times. We were well positioned for a global downturn in that Ireland had the lowest tax wedge in the OECD; the National Treasury Management Agency was in place and we had full employment. Funds were made available for many necessary works, including infrastructure. Our economy is well placed for the upturn which appears in the marketplace at the moment, although it would be foolhardy to suggest we have turned a corner. There are positive indicators in the international marketplace notwithstanding the fact that 3.3 million people in the US lost their jobs, the German economy will contract by 5%, the Japanese economy will contract by 6% and the French and Italian economies will contract by 3% and 5% respectively.
While there has been a global downturn, we were fortunate it happened when it did given our banking system was in near crisis. The Government upheld the structures and security of the State. It is interesting to note that the Opposition parties did not support the introduction of the bank guarantee scheme or nationalisation of Anglo Irish Bank, undertakings that were absolutely necessary. The finance spokesperson, when repeatedly asked by Vincent Browne what his or her party would do, could not come up with an answer. The Government spent many hours, weeks and days ensuring equity and fair play in the supplementary budget that was necessary. There are aspects of the supplementary budget that are worth examination, including mortgage interest relief. There is no doubt it was a positive sign for our economy that we were able to allow large levels of mortgage interest relief. I hope that when the economy picks up, this issue will be revisited to ensure the necessary construction industry can get back on the road.
Another aspect is the 2% increase in deposit interest retention tax, which will bring in €70 million in a full year. That indicates there is €100 billion on deposit in this country. I would like if we could consider giving incentives to people to spend some of that income thus ensuring less need for increased taxation. Other positive aspects include allowances for development in intellectual software. This is thinking for the future in the midst of difficult times.
While it was necessary to raise capital acquisition taxes because of the need to raise income, valuations have fallen substantially in the interim. The capital allowances were welcome. Excise duty is an area which I hope we can re-examine. We should seek to ensure ministerial orders in the North dovetail with the Republic to ensure the price of alcohol and fuel is maintained at the same level. This would prevent much of the illegal activity across the Border. I am particularly cognisant of the fact that many of the people who engage in these illegal activities use a cover of disparate republican view to justify them. In other words, it is a double edge sword. If we could introduce a minimum pricing order on excise duty on mineral oils and alcohol, similar to the one in place in Scotland, this would assist us in our endeavours to ensure criminality is removed from the system.
I am cognisant also of matters relating to social welfare. It does no harm to remind ourselves that we have one of the best social welfare systems in Europe. Despite world difficulties and the downturn, the Government has continued to care for the less well-off to the best of its ability. On allowances, social welfare recipients here are often paid two or three times the amount paid to recipients in the North, thus leading to a temptation for people to defraud the Irish State, a matter which is currently being dealt with by Government.
There is a commitment in Government, in light of the inability to pay the Christmas bonus, to examine what savings can be made not alone in the Department of Social and Family Affairs but across all Departments to ensure the payment is reintroduced, even at a reduced rate, which is welcome.
I welcome the Minister of State to the House and I welcome the opportunity to contribute to the Second Stage debate on the Finance Bill 2009.
There is no doubt but that the country is in a serious financial state. However, I believe there are inefficiencies in our systems that are not being tackled by Government. There exists a golden opportunity for Government to tackle inefficiencies throughout the State. Considerable power has been given down through the years to the Revenue Commissioners by this and the other House. It has been brought to my attention that the heavy hand of the Revenue Commissioners is now coming down on the small business community. I know of people who have received attachment notices under powers given by us to the Revenue Commissioners. In the case of one person who was due to make returns in respect of PRSI and PAYE for March 2009, payment of which was due in mid-April, the Revenue Commissioners issued in May an attachment notice to the relevant bank. That is outrageous given the pressures under which small businesses are operating. The Revenue Commissioners would not enter into a payment plan with a small business struggling to remain open in respect of payments due in March 2009. I have no problem with the Revenue Commissioners wielding the heavy hand on people who do not make some effort to pay their dues, but in this case - there are several such cases throughout the country - the heavy hand of the Revenue Commissioners was used to issue an attachment notice to the relevant bank for money due in respect of PAYE-PRSI in March 2009. It is outrageous that the Revenue Commissioners would come down heavy on businesses which are experiencing difficulty obtaining credit from banks.
Another issue I would like the Minister of State, Deputy Haughey, to bring to the attention of the Minister is redundancies in the construction and small business sectors. They have paid redundancy to former employees but have been waiting six months for the State to refund 60% of the cost. Something should be done about this immediately because they need that money. They cannot re-finance through the banks because of the current credit difficulties. The Department of Finance should immediately refund its 60% share of the redundancies paid out by small businesses, builders and developers.
I welcome the Minister of State. This debate demonstrates the irrelevance of the Seanad to financial matters. We are basically neutered by the Constitution. Only one Member of the House, Senator Twomey, has tabled a handful of recommendations. We are not even allowed to amend the Bill. This reveals our lack of significance with regard to financial and economic matters.
However, the debate at least offers me an opportunity to put certain matters on the record. I am not innately antagonistic to the Government and say "Well done" on successfully floating Government bonds. This was an interesting indicator of some degree of resurgence. NAMA is another interesting development. I understand that Accenture plans to relocate its headquarters from Bermuda to the IFSC. I would insert a caveat, however, because I understand that only ten jobs will be created by the move. That does not suggest significantly increased activity. Once again, it may become another financial black hole.
Senator Hanafin quoted Dickens and the words of Mr. Micawber with great accuracy. However, he was less accurate when he said we were recently near a banking crisis. There is no question that we were actually in the middle of a crisis but I do not think we took the correct response. Internationally, this crisis was precipitated not only by underlying systemic failures and greed but also by Bush's decision to let Lehman Brothers go to the wall. However, I think we should have let Anglo Irish Bank go down because, in my humble opinion, we do not have an obligation to international investors. Money has not been freed up and we do not know how much will be spent on it. I recently interviewed on my radio show Pádraig Ó Céidigh, the chief executive and owner of Aer Arann. The airline has an annual throughput of €100 million but he cannot even raise €100. That is astonishing.
We must consider the effect of this on people. A recent episode of "Prime Time Investigates" reported on people who are losing their homes to these very institutions. Mr. Jerry Beades, who is a Fianna Fáil builder and a decent man as far as I know, was struggling to continue his work but had to let people go because of the unavailability of credit. It was heart-breaking to see these people being told the news. At least he confronted the situation in a manly fashion and addressed these men face to face.
The principal reason I wished to speak is the social welfare budget. I spotted a gap due to the lack of photographic identification which I gather has been resolved as a result of my intervention. However, I wish to highlight the increase in the tenant contribution. This comes on top of an 8% reduction which was kept very quiet. What about older people and single men who are less educated and vulnerable? They received letters from the Department of Social and Family Affairs which they were advised to show their landlords. That is astonishing impertinence.
I have received a letter from a well-educated professional man who is temporarily out of work. In January, after negotiations and without waving the Department's letter, his landlord decently agreed to reduce his rent by 15%. However, when he had to apply for rent allowance in March the community welfare officer was totally unhelpful. The budget contained a decrease in the rent allowance which effected an increase in the weekly contribution from €18 to €24. This might appear marginal but is significant to a person in receipt of €204 per week. To my correspondent's considerable shock, a further decrease in the allowance of 8% was imposed. This was unexpected and never went through. The letter my correspondent received from the Department reminded him of a "Prime Time" programme on people living in substandard rented accommodation, the majority of whom were isolated and ageing men. He asked what stability, surety or peace can be afforded to the most vulnerable in our society if the Government can without notice or approval reduce social welfare payments.
I salute Senator Hanafin and strongly support him in his efforts to reinstate the Christmas bonus. I refer to my good friend and north Dubliner, the Minister of State, Deputy Haughey, whose father I remember well a as a man of varied qualities, some good and others not entirely so. He will be remembered forever as the man who introduced free travel for elderly people. Throughout his career he looked after those vulnerable people and I ask the Minister of State, as his father's son, to tell the Government not only is reinstating the Christmas bonus the right thing to do, it would also be good for Fianna Fáil.
This budget was precipitated by a collapse in our tax take. We found ourselves having to bridge the gap between income and expenditure. Fianna Fáil has a fine record in supporting social welfare and pensions for the less well-off in society. Senator Norris touched on the wonderful actions taken by Mr. Haughey for the elderly in terms of free travel and increases to the old age pension. If people say we blew the boom, I am happy to stand over the decent increases we gave to old age pensioners and how we looked after them with free travel. We have done the right thing from a social point of view. This Government has borrowed €20 billion to ensure social welfare recipients can maintain a decent existence. One will not take many holidays on €210 per week but at least recipients have a better standard of living here than they would in most European countries.
As Senator Hanafin noted, prices have decreased substantially across the board. Commercial rents have been reduced by up to 25%. However, one will have to fight with one's landlord to achieve such a reduction. O'Brien's sandwich bars are a shining example of this. I recently attended a speech by Mr. Sweeney at a Chambers Ireland event at which he stated the rents in 50% of his sandwich bars were reduced by between 20% and 25%. He told the landlords that he would be unable to stay in business without substantial reductions. This reveals that one can reduce one's rent by approaching the issue properly.
The Government was then faced with a situation whereby it had to intervene in the banking deposit scenario. Unless the Minister for Finance had acted promptly and swiftly in that case there would have been a substantial run on our banks at the time.
Small businesses are finding the situation difficult at the moment, as the Minister knows. Recently, however, banks have introduced special charges on people with overdrafts, which is scary. The Minister should examine these charges in the interests of small businesses which make this country tick over. These overdraft charges represent an extra cost for businesses and it is not good enough.
A strong effort is made in the Bill to bridge the taxation gap. Senator Quinn was right to mention that there was a period when we were overtaxed and such taxation did not work. Over-taxation led to a black economy, which was not much good to the Exchequer. As this is an interim measure I understand why the levies must be there and they will be regularised in the next budget. It is important to note, however, that we will become very big property owners shortly as a result of NAMA. The Minister should also examine stamp duty because we are getting very little return from the current stamp duty regime. We could charge 50% and the return would still be the same. If stamp duty was reduced it could kick-start the property market again by the end of this year. Some sales are beginning to take place as property prices fall to a certain level and people start buying again. That is very important, but I warn the Minister about property tax. I would examine ways of structuring such a measure. The introduction of a property tax in the next budget would not send out the right message to those who wish to buy property or for hard-pressed people who purchased expensive houses in the past. The Minister should examine what might be done to structure such charges. The United Kingdom does not have a property tax but one must pay a local charge there for services such as water, libraries and the fire brigade. That approach might be considered here.
If we tried to introduce property tax, how would we value it? It is very difficult to put a value on any property at the moment. I know a young couple who bought a house in Bray for €315,000 and spent an additional €50,000 on refurbishing it. A similar house in the same road is now selling for approximately €250,000, which gives some indication of where property prices are going. The price one paid for a house two years ago will not be the same as the price today.
I have covered most of the matters I wished to raise in the context of this Bill. I heard criticism from the Labour Party about NAMA but it has not come up with one solution. Its suggestion is to nationalise the banks but what about small investors in bank shares? They have lost a lot of money because the shares are not worth what they were. How will we deal with these people? I think the Minister is proceeding the right way with NAMA. I encourage him to introduce NAMA as soon as he can because the current situation is inhibiting the banking sector.
I thank the Minister for attending the House. I will be very brief. In his fine address, Senator Butler has made a good case for indicting the Government on its financial record. If we take management of the public finances as a litmus test, the Government has failed no matter which way one looks at it. Senator Butler referred to blowing the boom but this must be taken in two parts. Part one involved the huge expenditure on public services and infrastructure. We welcome the level of investment on infrastructure but we have missed the fundamental points of making the country competitive again, including by upgrading broadband services. Part two is that we have maligned our public servants by introducing a pension levy, thus making them pay for bad government.
With respect to the Minister, the abolition of the Christmas bonus was a very bad decision. It told the most vulnerable people that they must pay the price for bad management of the economy. It might be a small sum in the overall pot, but when I go out knocking on doors I meet people who are incensed by this measure. They are ordinary decent people who, irrespective of politics, are under pressure, struggling and worried about next Christmas. Leaving politics alone, I appeal to the Minister to restore the Christmas bonus for ordinary genuine Cork people in Togher, Bishopstown and Wilton where I have been canvassing for the past three months.
Senators Butler and Twomey are right about small and medium enterprises being squeezed by the banks. They are squeezing people who are providing employment and trying to keep the economy moving. It is crazy to do so. I have heard of banks putting pressure on business people by letter, refusing credit and almost taking the keys of business premises. It is wrong and it should not be happening. I know the Minister is working on this but we need our banks to support small and medium enterprises, which are the lifeblood of the economy. They will not walk away if they get fair play from the banks.
As an educationalist, I believe the Minister has got it wrong regarding the pension levy. Never in the history of the State has middle-income Ireland been put under such pressure. Tá siad go léir faoi bhrú. They are under pressure. I know of countless families who will be under enormous financial pressure when they get their pay cheques this month. Couples bought property during the boom when both partners had jobs, but one job may now be gone or under pressure. We can no longer allow an unfair and unbalanced pension levy to affect those on middle incomes. The levy should be reviewed and changed.
The Opposition has put forward numerous proposals through Deputies Richard Bruton and Kieran O'Donnell and in this House from Senator Liam Twomey. We need to get rid of inefficiencies in our economy thus keeping costs down to restore competitiveness. The Minister might be surprised that last week I complimented him on his tour of Europe on the bond issue. He will get credit from some of us on this side of the House for what he does right, if it works, but there are question marks about NAMA. Neither Dr. Somers nor the Minister has provided the complete picture to people. Eliminating inefficiencies in our economy must be through strong regulation and good governance which we have not had from the Minister's predecessors. He may be an unfortunate victim to be in the position at this time but the best option available to us is to put the budget to the people through a general election and let the people give the next Government a mandate to govern. That is what the people really want.
I thank Senators for their comments and I will try to address each of them as best I can. I will begin by pointing out, in response to Senator Twomey, that the supplementary budget marked a new departure in budget formulation in Ireland. For the first time, detailed multi-annual plans were contained in the budgetary projections. Targets have been set for adjustments to taxation and expenditure for 2010 and 2011. While the detailed specifics of the measures are still being formulated, the overall policy areas for examination in this context have been announced. This multi-annual consolidation plan will ensure we restore the public finances to a sure footing by the end of 2013.
Senator Twomey expressed doubts about the reliability of economic forecasting and as the Minister for Finance for the past year I have had to share those doubts on occasion. However, the Economic and Social Research Institute in its recent commentary on Ireland's recovery scenarios made it clear we have a good prospect for recovery if we take the right corrective action. The ESRI very strongly supported the steps taken by the Government to date in the four budgetary adjustments conducted since I was appointed Minister for Finance. These adjustments were not easy but their cumulative effect has been a fiscal correction of between 4.5% and 5% of gross domestic product, which is very substantial by international standards and is the reason investors in other countries are recovering confidence in Ireland.
We have to take these difficult steps and I appreciate that many of them will be the stuff of party debate in both Houses. A moment ago, I heard Senator Buttimer speaking on various Government decisions. The hard incontestable fact is that two thirds of our expenditure relate to payroll and transfer payments to welfare recipients. These are very important payments but the idea that one can economise on expenditure without, for example, having the pension levy is unreal and sooner or later all parties in the House will have to face this fact.
The supplementary budget struck the appropriate balance between the need to restore order to the public finances and protecting the economy. It is important to understand that in making adjustments to the fiscal position for 2009 the supplementary budget was only the final step in the process. In July 2008, expenditure savings of €1 billion were delivered for 2009 and those savings focused on reducing the payroll bill and a range of efficiency measures. I will not bring the House through the October budget, which we already discussed here and I remember Senator Twomey commenting on it at the time. We also had adjustments in February 2009 with expenditure savings of almost €1.8 billion and finally we have the supplementary budget of which the Finance Bill before the House today implements the taxation side.
I know Senators realise that maintaining our public finances on a sustainable path is a prerequisite for economic growth. I am looking forward to the reports from the Commission on Taxation and the special group on public service numbers, both to be delivered this summer. As Senator MacSharry noted, they will have an important role to play in identifying measures that will improve the budgetary position in the coming years.
Our tax system remains competitive and pro-business. Senator Twomey spoke about the increase in taxation in the recent budget. For most income earners, these increases have only brought us back to 2004-05 levels. I do not believe this is excessive given the scale of the financial decline we have seen in our receipts. If the Senator wishes to confirm this fact, I will refer him to annex A(iii) of the published budget book which details the average tax rates of various categories of income since 1997. This table clearly shows that average tax rates for the average worker are approximately at 2004-05 levels. Ireland remains a low-tax economy and even after the supplementary budget, the country will still benefit from one of the lowest tax wedges in the EU for an average worker and one of the lowest in the entire OECD for married one-income earners on average wages.
Senators Twomey and McCarthy raised concerns about the banking sector. It is clear that Ireland, like many developed countries throughout the world, will need further measured and appropriate action in this area. That is why we will establish the National Asset Management Agency, NAMA. I understand Senators had a full debate on this earlier this week. I have no doubt Senators are aware the aim behind the establishment of NAMA is to reduce uncertainty and the lack of transparency about the level of bad debts and to ensure the flow of credit on a commercial basis to individuals and businesses in the real economy.
Senator Quinn questioned the Government's support for entrepreneurship and I remind him that the business expansion scheme and the associated seed capital scheme continue to be available to small and medium-sized enterprises. The limits on the amounts that can be raised by companies and the amounts that can be invested by individuals were significantly increased when the schemes were extended in 2007. Despite the need to secure a substantial increase in tax, in recent budgets and Finance Bills measures continued to be introduced by the Government to maintain and enhance pro-employment business tax reliefs.
Senator Quinn suggested the changes in sections 6 and 11 of the Bill for the treatment of income and losses from dealing in residential development land represent retrospective taxation. I am satisfied the changes being made do not represent retrospective taxation. An individual subject to taxation under schedule D in respect of income from dealing in residential development land is not required to pay preliminary tax on his or her 2009 taxable income until October and November 2009 while the final liability for the year of assessment 2009 will not be settled until October and November 2010. In the case of a company, the final corporation tax liability of any company affected by the change in the tax rate to 25% announced in the budget will not be settled until after the date of the budget announcement and in almost all cases not until the end of 2009 at the earliest for companies with accounting periods ending in March 2009. In these circumstances, the tax changes announced are not retrospective in effect.
Senator Quinn also raised the issue of liability of personal retirement savings accounts to the income levy. The position is that an employer contribution to a personal retirement savings account is chargeable to income tax in the hands of the employee as a benefit-in-kind under the 1997 Act. As the income levy treatment follows the income tax treatment, the employer's contribution to the personal retirement savings account is subject to the income levy. The income levy was specifically designed to maximise the yield by gaining access to income that can generally be sheltered from income tax. It should be noted that it is not only pension contributions that are subject to the income levy; capital investments, patent royalties, forestry, mining operations and earnings from writers, composers and artists are also subject to the levy.
In reply to the point made by Senator Quinn on employers' contributions to PRSAs and the 1% life assurance levy I announced on 7 April 2009, this is one part of our concerted effort to raise the necessary revenue. Since the supplementary budget, a number of issues have been raised by the life insurance industry. In response to these concerns, I have agreed to change the implementation date to 1 August to give a longer lead-in period for implementing the new levy.
Senator Quinn also raised the increase in the standard VAT rate in the 2009 budget. As I stated previously, the timing of the VAT increase was unfortunate given the subsequent temporary reduction in the UK rate and may have sent the wrong signal to consumers. The subsequent increase in the UK rate was temporary.
Senator McCarthy asked what was the marginal tax rate for an individual earning €80,000; it is 50%. However, looking at marginal tax rates can be misleading, in particular in the context of the credit system. What really matters is the effective rate of tax. The marginal rate of tax for a single individual earning €36,400 is 30% while the marginal rate for another individual, earning €36,401 - that is €1 more - is 51%. However, they both have the same average effective tax rate of 19.2%. I could give other examples - but I will not weary the House - to show that marginal tax rates are not as decisive as many Senators seem to suggest.
I thank Senators, including Senators MacSharry, Boyle, Hanafin, Butler and Buttimer, for their contributions. I appreciate the understanding shown by the Senators of the progressive nature of the measures contained in the Bill and the recognition that we are exposed to changes in the international position. I thank Senators for their constructive debate today.