Seanad Éireann - Volume 188 - 12 March, 2008
Finance Bill 2008 ( Certified Money Bill ) : Second Stage.
Question proposed: “That the Bill be now read a Second Time.”
Deputy Willie O’Dea Deputy Willie O’Dea
Deputy Willie O’Dea: The Finance Bill 2008 contains the legislative proposals required to implement the tax changes announced by the Tánaiste in the budget last December. It also contains a range of other tax measures which will contribute significantly to underpinning growth in key sectors of the economy.
The principal aims of this Bill are to support enterprise, innovation and employment, to advance sustainable development and to ensure a fairer tax system. In so far as supporting enterprise, innovation and employment is concerned, the Bill seeks to build on measures to assist small business introduced in budget 2008, including a number of business-friendly measures such as revised preliminary tax payment arrangements for corporation tax aimed at small and start-up companies; an increase in VAT registration thresholds for small business to €37,500 in respect of services and €75,000 in respect of goods; and the extension of film relief for another four years to the end of 2012 with an increase in the cap on eligible expenditure from €35 million to €50 million per project.
The Bill further enhances the existing research and development tax credit scheme by extending the current base year of 2003 for a further four years to 2013, an increase on the current six years. The change will provide an additional incentive for increased expenditure on research and development in future years and help to achieve the targets set out in the Strategy for Science, Technology and Innovation 2006-2013.
In so far as advancing sustainable development is concerned, practical measures to help protect our environment are necessary and a number of new measures are being introduced in this area. The new tax initiative for energy efficient equipment will allow companies to claim the full cost, in the year of purchase, of specified energy efficient equipment against their taxable income. The purpose is to assist in improving cost competitiveness while helping to reduce overall energy demand and carbon emissions. The incentive is a pump-priming exercise for a period of three years. Companies should embrace the economic benefits of investing in energy-saving equipment.
The Finance Bill provides for the most fundamental reform of the Vehicle Registration System, VRT, since its inception in 1993. It will provide people with the opportunity to make choices to help the environment and with financial incentives to do so. The VRT system is being revised to take greater account of CO 2 emissions with VRT exemption for electric cars and up to €2,500 VRT relief for certain hybrid and flexible fuel cars.
Our income tax system is now fairer, friendlier and more progressive. The protection of more vulnerable groups must remain a priority when reviewing the income tax code and the Bill includes various improvements for such groups. It provides for increasing the personal credits and bands to ensure low income earners remain outside the standard rate band and average earners remain outside the higher rate band. It also provides for a further increase in the ceilings up to which first-time buyers can claim mortgage interest relief and for increases in rent relief.
Tax credits relating to those in special circumstances, namely, lone parents, widowed persons and widowed parents, the elderly and those caring for persons with a disability have increased very significantly in recent budgets. This Finance Bill makes further improvements in this regard. Age exemption limits have increased by 85% in the past seven years compared with inflation over the same period of 27%.
It is estimated that approximately 1% of top income earners, those with income over €200,000, will account for approximately 25% of the income tax take in 2008 compared with less than 15% in 1997. The most recent data from the OECD for 2006 indicates that for a single worker on average earnings Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the entire OECD. These are the hallmarks of a fair tax system.
The Bill contains 144 sections and eight Schedules and is structured by taxheads. I will outline some of its main provisions, listen carefully to Senators’ contributions and try to respond to the points made when I come to reply to the debate.
The various income tax measures and reliefs announced in the budget are dealt with in sections 2 to 4. These measures widen the tax bands and increase various credits including, the basic personal credit, employee tax credit and the home carer credit. Significant increases in the value of other personal credits and the age exemption limits, which are targeted at more vulnerable groups, underline the Government’s commitment to meet the needs and welfare of those most deserving in our society. When this Bill has been enacted, the increases in the value of the credits and bands will ensure that approximately four out of five income earners continue to pay tax at no more than the standard rate and almost two out of every five income earners will remain outside the tax net entirely.
Section 6 provides for an 11% increase in rent relief in an effort to address the cost pressures on those renting homes. Section 7 confirms the budget increases in the ceilings on mortgage interest relief for first-time buyers. The ceiling is increased from €8,000 to €10,000 for a single person and from €16,000 to €20,000 for a married couple or widowed person. This means that mortgage holders may receive extra relief of up to about €33 per month, if single, or about €66 per month, if married or widowed. This increase fulfils the commitment in this area as set out in the Government programme.
Section 11 deals with increases in the income tax exemption limit which applies to rent received under the rent-a-room scheme from €7,620 to €10,000. This increase takes account of the fact that the limit has not been increased since the scheme was introduced in 2001. The social partners have made a number of requests in respect of employee financial participation. In response to these requests, section 13 increases the aggregate maximum amount of monthly contributions that an employee can make under a certified contractual savings-related share option scheme from €320 to €500. The existing limit dates from the time the scheme was introduced in 1999. In addition, section 14 amends the rules relating to employee share ownership trusts. The change relates to instances where an ESOT takes out a loan over a period of ten years or more and lodges at least 50% of its shares as security for such loan for a minimum period of five years. In such circumstances, employees can gain access to triple the annual tax relief limit in the year the loan is paid off, in recognition of the fact that a large number of shares are not available for distribution to employees during the loan period and, thus, the employees would be unable to avail of the yearly tax free limit of €12,700 worth of shares on an annual basis. This amendment will permit the Revenue Commissioners to allow a loan period of less than ten years, on a case by case basis, where an ESOT has sufficient income, from dividends, for example, to pay off such loans earlier than expected. Section 15 is an amendment that ensures that farmers availing of tax averaging arrangements will not suffer a clawback of tax when they enter a milk production partnership.
As with all Finance Bills there are a number of measures to address tax avoidance. Section 16 is one such provision relating to convertible securities. The provision will ensure that the full value of the securities received by an employee or director will be subject to income tax. Section 18 extends the same basis of assessment to certain UK source income, as applies to income from other EU and EEA states. Section 20 is concerned with the spreading over six years of tax arising from the receipt of moneys under the scheme of aid for the restructuring of the sugar beet industry.
An income tax exemption of up to €5,000 for each eligible employee, where an employer bears the cost of retraining workers as part of a redundancy package, is provided for in section 22. Section 23 introduces provisions that restrict the use of reliefs by high income individuals which took effect from 2007. It clarifies the correct sequence of the calculations to be made in applying the measure when certain other provisions in the tax Acts are involved. The section will ensure that restriction will work as intended in such cases.
The European Commission gave state aid approval to the business expansion scheme and seed capital scheme changes in the 2007 budget. As a result, section 24 brings into primary law the amendments made to the schemes by regulations on a temporary basis last year following approval of the schemes by the European Commission. The section will also make it easier for some recycling companies to participate in the schemes.
Section 25 is a preventative measure which broadens the meaning of a contribution to an employee benefit trust to ensure that as intended by existing legislation, the employer will get a deduction for the contribution at the same time as the employees receive the benefits and no earlier.
A scheme of capital allowances for capital expenditure incurred on the construction or refurbishment of qualifying specialist palliative care units is introduced in section 26. This incentive will operate in a similar way to the existing schemes, for example, nursing homes and provision of capital allowances will be subject to a number of requirements including pre-approval from the Health Service Executive and the consent of the Minister for Health and Children. Section 27 updates legislative references in the mid-Shannon corridor tourism infrastructure investment scheme to reflect the EU state aid requirements that must be met in relation to projects and the exclusions which apply in relation to persons who may claim capital allowances under the scheme.
In order to assist capital expenditure on buildings and structures used in caravan parks and camping sites, section 28 introduces a tourism initiative to allow caravan parks and camping sites registered with Fáilte Ireland avail of capital allowances at the rate of 4% per annum for 25 years. Section 30 deals with an income tax matter relating to payments for decommissioning fishing vessels. Where a balancing charge arises as a result of claiming excess capital allowances, the charge will be spread over five years instead of the normal one year.
As a counterpart to the proposed changes to vehicle registration tax that relate it more closely to CO 2 emissions, section 31 sets out the changes to the capital allowances and leasing expenses regime for business cars announced in the budget by linking the availability of capital allowances and leasing expenses to the carbon emission levels of cars. The new provisions will come into effect in respect of cars purchased or leased on or after 1 July 2008. On foot of a recently completed independent review of the film relief, section 32 extends film relief for another four years until the end of 2012 with an increase in the cap on eligible expenditure from €35 million to €50 million per project.
To support the international financial services industry in Ireland sections 36 to 39, inclusive, along with sections 119 and 120 introduce a package of measures designed to provide a competitive boost to the securitisation, funds and insurance sectors by removing impediments to the development of these businesses here. Section 40 amends the provisions granting tax relief for certain expenditure on “know-how” that is bought by a person for use in a trade carried on by the person. This relief is not available where the “know-how” is bought as part of a trade that is being acquired, or where the buyer and the seller are connected. Section 41 is a response to the OECD recommendation to prohibit a deduction for tax purposes of illegal payments made to a foreign official.
Section 42 closes a tax avoidance loophole, under which tax deferral is available when assets are moved from a company subject to corporation tax into an investment company subject to tax under the gross-roll-up taxation regime. It was never intended that provisions designed to support commercially driven business decisions would be used as a tax avoidance measure. This section ensures that capital gains tax deferral rules can apply no longer in these cases.
The tax treatment of foreign dividends will be put on the same footing from the point of view of corporation tax as the taxation of income out of which Irish-sourced dividends are paid by section 43. Up to now, foreign sourced dividends have been subject to tax at the 25% rate. This change means, in broad terms, that the 12.5% rate will apply to foreign dividends received by Irish resident companies and which are paid out of trading income and the 25% rate will apply to foreign dividends paid out of non-trading income, where the foreign dividends arise from companies in EU member states or from countries with which Ireland has a double taxation treaty.
Section 44 amends the close company surcharge rules by also providing for parity of treatment for Irish holding companies that are closed companies in respect of dividends received from their foreign and domestic subsidiaries. A new profit resource rent tax is introduced in section 45 which may apply to profits arising from a new petroleum lease which follows an exploration licence granted by the Minister for Communications, Energy and Natural Resources after 1 January 2007. Additional taxes of between 5% and 15% will apply depending on the profitability of petroleum fields. These taxes will be in addition to the 25% corporation tax rate which currently applies to profits from such activities.
To increase the incentive for companies to purchase certain energy efficient equipment, section 46 allows companies to claim the full cost, in the year of purchase, of new energy efficient equipment against their taxable income. The equipment must be included on a specified list to be drawn up by the Department of Communications, Energy and Natural Resources in consultation with the Department of Finance. The incentive is subject to clearance by the European Commission from a state aid perspective.
Section 47 confirms, among other things, the budget day announcement that the preliminary corporation tax liability threshold for treatment as a small company is being increased from €150,000 to €200,000. New or start-up companies with a corporation tax liability of €200,000 or less for their first accounting period will not be required to pay preliminary tax in respect of that first accounting period.
Section 48 amends the provisions associated with taxation issues relating to the acquisition by a company of its own shares, that is, share buy-backs. This amendment provides that costs incurred by a company in buying back its own shares are not allowed as a deduction for tax purposes.
In order to provide an additional incentive for increased expenditure on research and development in future years and more certainty to industry in relation to the tax credit scheme, section 50 enhances the existing research and development tax credit scheme with an extension of the use of the base year 2003 for a further four years to 2013. The period over which any rolled-forward base year will apply on a “look back” basis is also being extended to ten years. For example, the relevant year for 2014 will be 2004.
Section 51 provides that where an abnormal dividend is paid to a company in connection with the disposal of shares in that company, the amount of the dividend is to be treated for capital gains tax purposes as proceeds for the disposal of the shares rather than a dividend. That will mean they will be subject to capital gains tax. This is an anti-avoidance provision.
Section 53 makes technical changes to section 448 of the Taxes Consolidation Act 1997, which deals with the calculation of manufacturing relief by reducing the tax charged at the standard rate of corporation tax, which is 12.5%, on income from manufacturing by a fraction that results in an effective 10% rate of tax.
In regard to capital gains tax, section 54 makes a number of changes to the capital gains tax retirement relief provisions. It introduces a preferential scheme where an individual receives a decommissioning payment in respect of a fishing vessel. Under the existing retirement provisions, an individual must be aged at least 55 and have been in business for at least ten years. These requirements are being amended and individuals aged 45 or more who have been in business for at least six years will be able to avail of the retirement relief in respect of the decommissioning payments that will be paid under a new scheme.
A further change provides a relief to farming partnerships on the dissolution of such partnerships prior to 31 December 2013. The relief provides that a gain will not be treated as accruing in respect of a relevant partnership asset and that the asset will be treated as having been acquired at the same time and for the same consideration as when it was originally acquired by the partner subsequently disposing of the asset.
Section 55 increases the capital gains tax exemption threshold that applies on a gain arising on the disposal of a site by a parent to a child to build a house. The new threshold is €500,000. The section also clarifies that the threshold applies where both parents make a simultaneous disposal of a site to their child.
As required under the EU energy tax directive, sections 57 to 68, inclusive, provide for an excise duty on electricity. The tax will be charged to the operator who supplies the electricity to the consumer and will apply to supplies of electricity made on or after 1 October 2008. The rates of tax are set at the minimum rates specified in the directive while electricity used by households will be exempt from the new charge, as will electricity produced from renewables and combined heat and power generation. The overall cost and impact on electricity prices for business will be marginal.
Sections 69 to 81, inclusive, set out a range of changes in regard to excise duties, including a confirmation of the budget day increases in excise on tobacco and duty payable in respect of an off-licence for the sale of alcohol. The necessary legislative changes are being made to revise the vehicle registration tax, VRT, system to take greater account of carbon dioxide emissions, exempt series production electrical cars from VRT, extend the existing relief for series production hybrid and flexible fuel cars until 30 June 2008 and replace it with a VRT relief of up to €2,500 for such cars from 1 July 2008.
Arising from European Commission decisions, section 72 includes the legislative changes to withdraw the excise reliefs in respect of fuel used for public passenger transport vehicles, private pleasure flying and private pleasure navigation, and for recycled waste oil. The reliefs will be withdrawn with effect from 1 November 2008. In the case of public passenger transport vehicles, alternative mechanisms to direct Exchequer resources towards such services, subject to state aid rules, continue to be explored by the Department of Transport in conjunction with the Department of Finance.
Sections 82 to 109, inclusive, deal with VAT. Following a review and extensive consultations, sections 85, 86, 88, 91, 97, 98 and 100 contain new rules regarding the application of VAT on property transactions. The purpose of the new system is to rationalise and simplify the VAT treatment of property which has become very complicated. There is also a strong anti-avoidance dimension to the new rules to deal with increasingly aggressive avoidance schemes in regard to VAT on property. The supply of new residential property, building land and undeveloped land will remain unchanged. The new system comes into effect on 1 July 2008.
The main changes include ceasing to charge VAT on the capitalised value of leases in excess of ten years, removing old properties from the VAT net by confining the period during which VAT will apply to the supply of new properties to a maximum of five years, and making some changes to the treatment of leases. In addition, a capital goods scheme is being introduced for property transactions. This will ensure the amount of VAT deductible will be proportionate to the business use of a property over a 20-year period. The legislation also includes necessary transitional measures.
To ease the administrative burden on small businesses, sections 92, 94 and 101 confirm budget day announcements increasing the VAT registration thresholds for small businesses to €37,500 in the case of services and to €75,000 in the case of goods. These increases will take effect from 1 May 2008. A reverse charge measure is also introduced in respect of VAT on supplies made by a subcontractor to a principal contractor in the construction sector with effect from 1 September 2008. This is a simplification measure.
Section 107 provides for a reduction in the VAT rate for inputs used for the agricultural production of bio-fuels from 21% to 13.5% with effect from 1 March 2008. This section also provides for a rate reduction for non-oral contraceptive products from 21% to 13.5%.
The Revenue Commissioners intend to introduce a computer-based facility in the second quarter of 2009 which will allow a full self-service on-line process where the user can file, pay stamp duty and receive an instant stamp without Revenue requiring to see the deed in up to 90% of cases. Section 111 introduces enabling legislation to allow for the e-stamping of instruments for stamp duty purposes.
Section 115 is an anti-avoidance measure to ensure transfers of shares to a connected company, which would benefit from a stamp duty exemption, will not be exempt from stamp duty where the company buying the shares claimed intermediary relief on the transaction.
Section 117 increases the stamp duty exemption threshold that applies on the transfer of a site by a parent to a child to build a house. The new threshold is €500,000. The provisions relating to the exemption from stamp duty in respect of the transfer of loan stock are amended by section 118. The existing provision that the loan stock is redeemable within 30 years is abolished and the requirement that it is not linked to stock exchange or inflation indices is amended so that relief will not apply if it is linked in any way to an equity index.
Section 122 amends the stamp duty regime for owner-occupiers who benefit from preferential stamp duty rates so that they are liable to a claw-back of relief if they let the house in the five years after purchase. This is being reduced to two years. In addition, in respect of first-time buyers, an anti-avoidance provision is being introduced to address certain abuses that have come to light.
To support increased use of electronically based financial transactions, section 123 reduces the charges on financial cards, as announced in the budget. In addition, financial institutions will be required to make a preliminary payment of 80% of the duty payable for that year by 15 December. However, the dates on which the institutions recover the stamp duty from their customers will not change.
Section 125 amends the first Schedule to the Stamp Duties Consolidation Act, provides for the stamp duty on cheques to increase from 15 cent to 30 cent and increases to €30,000 the rent threshold below which the annual rent on a house is not chargeable to duty. This section also gives effect to the substantial reform of stamp duty announced in the budget regarding residential property. The first €125,000 of the purchase price is charged at 0%, with the balance on properties up to €1 million charged at 7%. For properties valued at more than €1 million, the excess is liable to duty at 9%. However, to ensure no one loses out on this reform, stamp duty will not be charged on houses costing no more than €127,000. This will result in a much fairer system for house buyers.
Section 131 will facilitate the donation of collections of heritage manuscripts and archival material to bodies such as the National Library, while section 132 is intended to enable the Irish Heritage Trust to complete its acquisition this year of an outstanding collection of paintings and furniture for display at Fota House. The trust already has acquired some one third of the collection in question.
It is important our tax administration is modern and efficient and that the Revenue Commissioners have the power to enforce the law. Sections 134 to 140, inclusive, introduce several measures in this area. These include allowing Revenue officers to question suspects in Garda custody for indictable revenue offences; enabling any Revenue officer to determine residency of an individual for tax purposes; obliging agents in the State in receipt of rental income on behalf of another person to report rental income from foreign properties; and increasing in the maximum fines on summary conviction for certain tax offences to €5,000. This section also includes an amendment aimed at increasing the incentive for taxpayers to use the protective notification regime by increasing the existing surcharge of 10% to 20% and reducing to two years the time in which Revenue must form an opinion that a transaction is a tax avoidance transaction where a protective notification is made.
This Bill is grounded on the financial and economic policies which continue to deliver prosperity for our people and have been responsible for the overall sound position of our economy. I hope this outline of its provisions will facilitate an informed and constructive debate.
I commend the Bill to the Seanad and I look forward to the debate.
Senator Liam Twomey Senator Liam Twomey
Senator Liam Twomey: It is interesting that the Bill is now going through the Seanad when the Taoiseach seems to have accepted that it is no longer unpatriotic to talk down the economy because he has acknowledged there are serious difficulties in the economy this year and into 2009. When we vote on this Bill tomorrow, we will be voting to bring an end to the period in Irish life known as the Celtic tiger era. We need to bear that in mind as we discuss the future of the economy.
When we consider legislation of this nature at a macro level, we are reminded it is regrettable that the Government has failed to make major changes to our economic structures over the last decade. The downturn in the economy is exposing the gross mismanagement of sectors of the economy which are under the control of the Government. The real changes which are needed to make a difference, such as the reform of the health services, have not been achieved. I do not accept that the eight centres of excellence for which Professor Tom Keane is responsible will bring about genuine reform. Such changes have been happening for some time, but they do not constitute the real reform that was promised to make the health service work for every patient. The reforms set out in many Government reports over recent years, relating to the benchmarking process and the health strategy, for example, have simply not happened. That such failures are having an effect on the economy is evident from the significant amount of money we are spending on a health service that is not as efficient as it is supposed to be. The structure of the HSE is not to blame in this instance — it is a question of how the health service is being managed by the Government.
After a decade of unprecedented economic growth, it is regrettable that we do not have a completed motorway between any two of our major cities. When a major infrastructural programme was undertaken in the United Kingdom in the 1960s, the whole of that country was quickly crisscrossed by motorways connecting all the major cities. We have failed to connect two cities despite enjoying a decade of substantial growth.
When the Minister, Deputy O’Dea, is summing up this debate, perhaps he will summarise the changes being made to Government expenditure on social welfare. What is happening in that sector? There seems to be a strong clampdown on paying temporary and long-term disability benefit to the customers of the social welfare service. As a general practitioner, I am often asked to sign forms on behalf of people. I have noticed that many people are now being refused disability payments and are having to appeal. Has there been a serious change in this respect?
One of the most farcical aspects of this Finance Bill is the suggestion that it forms part of the greening of our economy. Section 31, which sets out the new tax relief regime for cars used by businesses, amounts to no more than window-dressing as it will only apply to cars which have certain CO 2 emissions. The Minister for Finance, and the Government as a whole, could demonstrate the seriousness of their intent by applying the section 31 limits to ministerial cars. If Ministers insist on driving cars which emit certain CO 2 levels, they should have to pay the additional charges themselves, rather than having them paid by the State. That might encourage the rest of the country to choose cars with reduced CO 2 emissions. When I hear Ministers lecturing the rest of us, I am reminded of a Minister in England who lectured the people of that country about the greening of the economy before sitting into a 4.2 litre Jaguar. The people of this country, similarly, should not have to take lectures from Ministers who sit in the back seats of cars which produce significant amounts of CO 2 . The Minister for Finance should amend this legislation at some stage so that section 31 applies to him and his Cabinet colleagues.
The tax reliefs applying to energy efficient mechanisms for business are purely restricted to businesses. I do not understand why they do not also apply to ordinary customers. If one wishes to improve the efficiency of one’s home by installing solar panels or geothermal heating systems, one has to apply for a grant and then wait up to 12 weeks for it to be approved. It seems that not enough funding is available to meet the costs of those who have applied for the grant. If one starts one’s building work before one applies for the grant, one will not get the grant. The Minister for Finance could make things easier by making a tax relief of this nature available to ordinary people who want to make changes to their homes. One should be able to apply for a tax relief rather than a grant. Every one of us has received a letter from the Revenue Commissioners pointing out how we might be able to claim additional tax relief on the taxes we have paid. It would be easy to slot a tax relief of this nature into the existing structure. If people can claim tax relief on medical expenses, union fees and bin charges, they should also be able to claim tax relief on the installation of energy efficient systems.
The Minister, Deputy O’Dea, has claimed that Ireland is a low tax economy. While it may be a low income tax economy, it is not a low tax economy overall. VAT is paid on almost everything in this country. I notice that the only reduction in VAT that is being made is on condoms. VAT is paid at an extremely high rate on everything else. Most medical equipment has a VAT rate of 21%. If people decide to buy an automatic defibrillator for their community, they are charged a VAT rate of 21%. Excise charges are extremely high as well.
Fuel prices have been increasing at a rapid rate, especially over the last 12 months when the price of oil has doubled. The largest contributing cost to the price of each litre of fuel that is sold at the pumps is excise, VAT and Government charges. The Government gets the largest percentage of the money paid for petrol and diesel. If it wishes to improve the economy, it should consider how much it is taking from consumers at the petrol pumps. It is fleecing people.
Any suggestion that this country is a low tax economy is rubbish — it is a low income tax economy. The Government gets tax revenues in many other ways. The high rate of VAT that is charged on many everyday things imposes additional costs on those who can least afford them. People on low incomes end up paying some of the highest prices as a result of VAT.
The Minister for Defence spoke about the changes which will affect people who are earning more than €200,000 per annum. Such people will not take much notice of the proposed vehicle registration tax and motor tax changes. It will not hurt them to have to pay an additional €300, €400, €600 or €1,000 per annum. People on lower incomes will be affected to a much greater extent. The measures in this year’s Finance Bill are the subject of a great deal of spin. Fianna Fáil’s new coalition partners, the Green Party, knows that if it does not go along with the farce of greening the economy, it will be seen to be achieving nothing in government. If we delve deeply into it, we will see that it is all a bit of a farce. If the Government is serious about making changes to our culture in the interests of greening the economy, it needs to make changes which affect everyone, including Ministers, who should not be exempt from the environmental changes to the economy which we will all have to endure over the coming years.
Deputy Willie O’Dea Deputy Willie O’Dea
Deputy Willie O’Dea: Doctors should not be exempt either.
Senator Liam Twomey Senator Liam Twomey
Senator Liam Twomey: We may have to wait until Report Stage before we can consider some of the other points made by the Minister in his opening speech. He spoke about making changes to employee share ownership plans and personal pension schemes. The value of private pensions has decreased dramatically over the last 12 months, which is affecting those who are planning to retire over the next few years. I have heard nothing about the Government’s plans to assist such people. One in five people in this country benefits from a Civil Service pension. Every Member of this House will benefit from the excellent public pension system. Unfortunately, the vast majority of people have no pension or have a private pension. Private pensions have gone down in value substantially. While there has been a great deal of debate about pensions — the Government has published a Green Paper on Pensions — nothing has been done to assist those who have experienced a significant reduction in the value of their pensions. The downturn in the international economy has affected the many pension funds which are based on equities. Nothing has been done to improve the circumstances of those who have private pensions and are approaching retirement in the next five or six years, although I expected something to be done. In the longer term, it is possible things may improve and people will get the benefit of that. However, there is nothing in the Bill in that regard.
There are also issues around tax reliefs such as the mid-Shannon corridor tourism infrastructure investment scheme. I thought that from now on the Department of Finance would do cost benefit analyses of any major changes and expenditure. No cost benefit analysis of that scheme has been published. I have no problem with the giving of tax reliefs as long as they are transparent and are of benefit to both the taxpayer and recipient.
I refer to capital gains tax exemptions in respect of a parent who gives a child a site. There is no mention of a brother or a sister who gives a sibling a site. Do the same exemptions apply? Are there proposals to change that? Parents often hand over the farm to the eldest son or daughter who, in turn, may give a sibling a site at a later stage. That issue should be addressed. It is not always the parent who gives a site to a child.
There probably will be more in-depth discussions on some of these aspects on Committee and Report Stages. The Finance Bill 2008 does not do all the Government said it would do for business. Most small businesses will not see major improvements in 2008 on the basis of this Finance Bill and due to the mismanagement of the economy, they will not reap too many benefits in 2009.
Senator Marc MacSharry Senator Marc MacSharry
Senator Marc MacSharry: I welcome the Minister, Deputy O’Dea. I am delighted to have the opportunity to speak on the Finance Bill, which is the Minister’s fifth, and I also welcome many of the measures therein. Since the budget the context has changed slightly. Economic growth has performed below trend but the economic outlook is still positive. The Government is taking into account the changing environment and is prudently ensuring we maintain our competitiveness and our robust economy.
I am always amused when debates such as this take place. I suppose it is the nature of the Opposition to say the economy has been mismanaged and that there has been under-investment, over-taxation and a blindness to the real issues of the day.
Senator Feargal Quinn Senator Feargal Quinn
Senator Feargal Quinn: Is that what Senator MacSharry is saying?
Senator Marc MacSharry Senator Marc MacSharry
 Senator Marc MacSharry: No. When debates such as this take place, it is perhaps the nature of the Opposition — as was the case when Senator Twomey was speaking — to accuse the Government of all these things. It seems to be a common mantra when debates on the budget, the economy and all matters financial take place. I feel, therefore, compelled to point out our mantra in that context, which the facts back up. No Administration in the history of the State has done more than the consecutive Fianna Fáil-led Administrations to deal with the issues Senator Twomey mentioned, such as reducing the tax burden on all people — the less well off and the well off — taking the lower paid and those on the minimum wage out of the tax net, investing in our infrastructure through consecutive national development plans and starting a process of regulatory reform.
I know Senator Quinn would share my views on regulatory reform in that much more needs to be done in this regard. I am cognisant of the point he made recently about the University of Jerusalem’s findings that Ireland is 49th out of 50 countries in terms of over-regulation. That is a challenge of which the Government must be cognisant as it plans for the future. In regard to the points made by Senator Twomey, no Administration in the history of the State has contributed more financially, legislatively and practically through the State agencies, to improve this nation than consecutive Fianna Fáil-led Administrations.
There is no doubt, however, that the international economic environment has changed substantially. There has been a move towards more sustainable levels of house building here. The property market needed to correct itself and I suggest it began to do so approximately a year too late. We have seen substantial slowdowns and an increase in the live register, most notably in February. We have noticed that even in County Sligo. Notwithstanding that, unemployment levels remain extremely low and we are the envy of most other countries, with close to a full employment scenario. However, there are concerns and we must keep a close eye on how matters develop.
The Finance Bill 2008 is based on sound fiscal policies which, as the Minister outlined, are to encourage economic growth while at the same time promoting care of the environment and protecting the less well off in society. In regard to care of the environment, Senator Twomey said we should engage in some type of gimmickry and that Ministers should pay for the miles they drive while working on behalf of the State. Such talk is ridiculous in the extreme. Much of the ministerial fleet has moved to hybrid Lexus-type cars which make a contribution.
Senator Liam Twomey Senator Liam Twomey
Senator Liam Twomey: That is wrong.
Senator Marc MacSharry Senator Marc MacSharry
 Senator Marc MacSharry: It is not wrong. A number of Ministers use hybrid Lexus cars. Perhaps we could see improvements with the whole fleet being changed to such cars. It would be a waste of money to change all the cars at once but as they need replacement, there is no question but that more environmentally friendly vehicles should be purchased, and that is happening. One need only look at the ministerial cars to see that. People, including politicians, doctors, etc., should do all they can for the environment. I must improve in that regard because I drive one the gas-guzzling vehicles to which Senator Twomey referred. I will have to take steps to improve my contribution in that regard.
The Bill includes a range of business-friendly measures which will support continued growth and job creation in a climate of economic slowdown and a period of below trend growth, although a period of growth nevertheless. Independent economists, including Ernst & Young, predict growth of 2% to 3% in the year ahead. That would still be the envy of most of our neighbours in the European Union.
The various measures aimed at combating tax avoidance and criminal tax activities are welcome. The Minister went through a number of them and Senator Twomey acknowledged that we will have the opportunity on Committee Stage to go into them in more detail if people so wish.
The Finance Bill has brought forward a package of measures underpinning those in the budget which will allow business to thrive and ensure those who are less well off in our society are properly looked after. In a period of economic slowdown, we should invest, through modest borrowing, in maintaining our capital programme through the national development plan which is key, particularly when we see a fall-off in levels of house building and private sector driven construction. That would serve us well.
I refer to the international environment. Many of the conditions which currently prevail are substantially outside the control of anybody in Ireland. We must be cognisant of that if we are to make a real contribution on this issue. In recent times, the banking system internationally has ceased to operate as before. Banks are not lending to each other at present, other than providing very short-term loans. That is very significant. Recently, the US Federal Reserve loaned $200 billion to ease tight liquidity. In recent weeks, the financial markets have been extremely unstable.
The strength of the euro against the US dollar is not good for the Irish economy. I suggest that the ECB verbally acknowledges that the euro is perhaps overvalued against the dollar. American tourists coming to Ireland are valuable to our economy. This year it will be 10% more expensive for Americans to go to places like the Killarney Park Hotel or other places that depend to a large extent on American tourists. In the past five or six years it has become probably 100% more expensive and this is without taking into account our inflation rates or rising prices. This is a real concern.
The ECB has limited tools available to it but I suggest that at least verbally we could begin to acknowledge that this is the case and Mr. Trichet could do then act. The alternative is given that there has not been any intervention in the foreign exchange markets on this side of the Atlantic for some time, perhaps our purchase of a significant amount of US dollars could be considered in order to weaken the euro and strengthen the dollar.
These are some suggestions. I am sure greater minds than mine could put more meat on that argument but foreign exchange is a real issue. I instance an example closer to home. If someone in Derry is planning a night out in Letterkenny, it will be 10% more expensive to do so. These are facts which are substantially outside our control as our only mechanism is through the Central Bank of Ireland communicating with the ECB. I hope the Government would use any tools open to it to impress this issue upon the Central Bank. I assume it is well aware of these issues but I would like to see a little more action.
The fundamentals of the economy are in very good shape and it is the envy of our partners. We are now in a different environment which will require prudence. I believe we should continue, no matter what, provided we stay below the 3% threshold of borrowing. We should borrow to ensure our capital development programmes continue. This is important for balanced regional development and in the context of maintaining our competitiveness. There is no question but there are many serious challenges. Employment is still high, notwithstanding that we have seen changes in the statistics for January and February. This is understandable given developments in the building and construction sector.
The demographics are still positive. The worker to dependant ratio is still very good and is the envy of Germany, France and Belgium. The maintenance of the national development plan is crucial.
I welcome the Bill. It would be impossible to debate every section. I have outlined the three factors of high employment, the right demographics and maintenance of the national development plan in an environment where our public finances are still reasonably sound. There are challenges ahead but I am confident the Minister for Defence, Deputy O’Dea, his colleague, the Minister for Finance, Deputy Cowen, and the rest of the Government, supported by this House and others, will steward the economy through these difficult years.
Senator Feargal Quinn Senator Feargal Quinn
Senator Feargal Quinn: I welcome the Minister, Deputy O’Dea, to the House. Senators are given the opportunity on the day of the budget to debate it within minutes of it being delivered. I spoke in that debate on two previous occasions.  Last year I spoke like a school examiner when I awarded the Minister marks for the budget and he earned a pass with the comment, “Could do better”. This year he earned an honour, admittedly a low honour rather than a high honour, because I appreciate the sort of points made today by Senator MacSharry when he referred to investment in infrastructure and the concept of the business-friendly environment which the Minister is attempting to develop.
I met the Secretary of the US Department of Commerce last year. The words used by the Secretary were that his responsibility was not to create jobs but to create the environment so that the market could create the jobs. This is how a business-friendly environment is created and better regulation plays a large part. This is the reason I gave the Minister a low honours.
I wish to focus my attention on a matter which is not covered in this Finance Bill but which I believe should be. I hope that in briefly raising the issue now, I will encourage the Minister and his officials to think of it for next year’s Bill. I am not expecting a reaction today.
One of the positive sides of the Celtic tiger period was that it created a massive upsurge in the amount of personal wealth held by individuals. Not everybody thinks it is necessarily a good thing, but the reality we have to deal with is that this wealth was created during that time and the issue therefore arises of how best to encourage these new high-worth individuals to share their wealth with the rest of the community.
The principal task of the Department and the Minister has been to avoid the anomalies which arise from the operation of tax incentives. Until recently, it was possible for some very wealthy individuals to avoid paying tax altogether if they invested enough in certain property investments. It is clear that over the years the Government decided it wanted to encourage people to invest in car parks, nursing homes and various other schemes. This worked very well. However, Deputy Joan Burton of the Labour Party severely criticised the fact that some very wealthy individuals paid only very little tax or none at all. The Minister reacted by a provision in the Finance Bill 2006 which introduced a cap on the amount of tax that could be clawed back in this way. This ensures that no matter how much a person invests in property, he or she may still be required to pay a certain minimum amount of tax. This was a good solution, and I think it was widely supported by all sides and by the public in general.
Unfortunately, the law of unintended consequences came into play in the operation of the measure; at least I hope that was what happened and that it was unintended. I will work on the basis that it was unintended. The cap on spending allowed against tax applied not only to investments by the taxpayer, but to all spending, including donations to charity. By including charitable donations under the cap, the Act failed to make a fundamental distinction between investing money for one’s own later profit and giving money away for the greater good of others. I argue that there is a world of difference between the two and that it is in fact in the interest of the State to encourage people to give away their money in support of good causes. However, by applying the cap to charitable donations, the State is actively discouraging people from giving away their money and is therefore preventing a great deal of good that would otherwise be done, and at no cost to the State.
I am not suggesting that the role of philanthropy is simply to take on burdens that would otherwise fall to the State, but in practice this often happens. I refer to one obvious and dramatic example, the many millions that were poured into providing new university buildings in the 1980s and 1990s by that remarkable man, Mr. Chuck Feeney. This allowed our third-level system to develop at a pace that the State simply was unable to provide. Mr. Chuck Feeney was unaffected by the Irish tax regime one way or the other, but the same cannot be said for our indigenous wealthy who are now in a position to succeed him, but this cap puts a very effective block in their way. I believe this was unintentional. This approach puts Ireland in a unique position. In the UK, for instance, all charitable donations are simply exempt from tax. The British Government clearly recognises the value of philanthropy to the country and seeks to encourage it. In the United States not only are all charitable donations totally exempt from tax, but a whole raft of other incentives is also in place to encourage individual giving.
Two weeks ago, the American ambassador, Mr. Foley, hosted a day which he called A Dialogue on Philanthropy. In his opening remarks he stated, “We are here to explore what we can take from the American with philanthropy as Ireland builds its own philanthropic model”. An ambassador must never appear to interfere in the affairs of his host nation but in this case the American ambassador stated this was a system he believed could be of value to Ireland. He gave examples and those of us in attendance met many people who were fund-raisers for American institutions such as universities, hospitals and others. It was clear that the American system encourages a high level of philanthropy. The provision in the Finance Bill 2006 has put a block on such a system here.
By maintaining this cap on charitable donations we are shooting ourselves in the foot. I believe we fell into this situation accidentally, as the by-product of a very proper anti-tax avoidance device, but knowing the consequences, this provision should be revisited. There is an urgent need to unlock among Ireland’s new rich the spirit of generosity that people in general have demonstrated so clearly and consistently on many occasions over the years. The Government should help, not hinder, that process.
There was no real wealth in Ireland 20 years ago. It was brought about by the Celtic tiger and by successive Governments doing the right thing. We now have a situation in which there are wealthy people and we have seen what a number of them have done, very generously. By imposing that cap on two years ago, I believe we have closed the door and made it less effective. I urge the Minister to take that into account. I do not expect action on it today, but I believe it should be considered for next year.
Senator Dan Boyle Senator Dan Boyle
Senator Dan Boyle: The Finance Bill gives legal effect to many of the budget provisions announced in December, with a few additional measures that subsequently have been approved by the Minister for Finance and the Cabinet. The Short Title of the Bill describes it as:
An Act to provide for the imposition, repeal, remission, alteration and regulation of taxation, of stamp duties and of duties relating to excise and otherwise to make further provision in connection with finance including the regulation of customs.
This does not make the legislation very understandable to citizens, and part of our job within the political system is to translate many of the legal technicalities in legislation such as this, to show how it will improve the economy and hopefully the lives of our citizens.
The Finance Bill this year is largely a repetition of the measures announced in the budget. Unlike other Finance Bills in recent years, it is not an entirely new exercise of additional measures. There were very few new measures announced, as opposed to what had already been unveiled in the budget. However, there are significant measures and the one I welcome most is the provision of tax relief for companies seeking to purchase plant and machinery that will result in energy efficiencies. This will help to meet our greenhouse gas targets and work on two levels. It will reduce the cost base of many of these industries while helping to promote the idea of a green economy within the Irish economy. It will promote those who are seeking to develop and sell this technology throughout the economy, which is a measure especially to be welcomed.
Unlike many others who tend to look at the bleakest prognoses for the economy, I believe we are not in a recession, as is, to all intents and purposes, the United States, and this will impact on us. We are not in a slump, in the sense of reduced economic indicators. At worst, the Irish economy is undergoing a slowdown in that the rate of economic growth is slower than what it has been in the past. The rate of economic growth in Ireland has been historically high. We need to make adjustments in that regard, but we need to acknowledge that this rate of economic growth is still consistent with a sustainable economy and is much better than competitor economies are doing, in Europe in particular.
Despite the international climate, the Irish economy is still in relatively good shape. At this time of readjustment we must look at how the economy is structured. Much of the added value of the past 15 years in particular has come from the construction sector. While that has given a short-term impetus, it was never a long-term solution towards wealth creation and sustained growth. Now we must come up with a different make-up to the economy, in terms of supporting indigenous industries, research and development and the provision of the tax relief in the Finance Bill supporting in particular green economic measures which will give a better balance to economic activity into the future.
The Finance Bill covers a number of areas which are to be welcome, after the budget announcements. In introducing any type of improvements in the financial regime sometimes new difficulties are encountered. A number of smaller measures are meant to help the lot of particular sectors in society. For instance, the tax relief for the decommission of fishing vessels helps those whose fishing was based in the open seas, the oceans, but does not offer relief for those involved in draft net fishing in our harbour areas. When we create dichotomies of this type, we must face challenges in dealing with such changes in the future.
There is a provision as regards the capital gains treatment of farming couples whose partnerships are being dissolved. An argument could be made, given the changing nature of Irish society, as to how this might apply to married couples in any line of business within the economy and how it may be addressed in the future. Senator Quinn referred to the need to better recognise the role of philanthropy and how it might be restricted by the overall cap on tax reliefs. To a certain extent, I agree with him. However, even with an improved approach to philanthropy in the future, we should discourage the idea that Irish citizens who do not even pay minimal tax in Ireland believe they can still contribute in terms of philanthropic donations. There has to be a correct mix in terms of the responsibility of being a citizen allied to the ability to recognise philanthropy, and I am not sure if we have attained that particular balance.
The tax system already contains the ability to make charitable donations to bodies that are recognised by the Revenue Commissioners, and there are similar reliefs for trade union membership. There is an anomaly, however, in terms of environmental campaigning that I should like to flag, and have addressed in next year’s budget. In view of the charities legislation which is being addressed in the House, organisations dealing with children such as the ISPCC or Barnardos are entitled to tax relief through people making individual donations. Thirty years ago, the then Minister for Finance, Richie Ryan, inserted a provision to allow organisations which deal in human rights to claim such exemptions as well, therefore, bodies such as Amnesty International are covered. However, it is anomalous that organisations such as Greenpeace and Friends of the Earth, which are not involved in any profitable activity whatsoever, are not entitled to the same concessions under the tax system. I will be seeking changes in that regard.
There is a provision in the Agreed Programme for Government that wherever possible the higher rates of VAT on environmental goods and services will be reduced. I should like to see this done as soon as possible, because it will provide a further impetus towards the green economy. I sense there is a reluctance in this regard within the Department of Finance, and there is talk of the EU VAT directive. I am satisfied that the protocol in that directive which refers to reducing VAT rates for social purposes applies to environmental goods and services. It is a road that has been followed by other EU member states and I should like to see this as one of the centrepieces in next year’s budget and Finance Bill.
Overall, the Finance Bill ties together a very balanced budget dealing with an adjusting economy that, in European and international terms, is still performing better than most other similar economies. We can be satisfied that the economic management of the country continues to go well and that the economic future, as a result of that management, will proceed in a healthy manner.
Senator Alan Kelly Senator Alan Kelly
Senator Alan Kelly: I welcome the Minister, Deputy Willie O’Dea, from a neighbouring county of mine. It is regrettable that the Tánaiste and Minister for Finance cannot be with us. He might give us the pleasure of a visit at a future date, as I am sure there is a requirement on the horizon to discuss the economy. I take this opportunity to comment on the economic situation in which Ireland now finds itself but in doing so I do not want to be accused of talking down the economy. This is an old line usually trotted out by Fianna Fáil and the Government when Members of the Opposition seek to have a reasoned debate on the economic situation, which is what I seek. It is amazing how Fianna Fáil always takes credit for the economy when it is on the way up, but fails to take any criticism when it is on the way down, or when there are changes in its momentum. We are suddenly being asked to believe external factors, such as the downturn in the US economy, are at fault, as demonstrated by the Taoiseach in his recent comments. We are told none of the Government’s policies is at fault. One cannot have it both ways. Let us face the fact that our economy is at a critical juncture.
Let us debunk the myths and begin by dealing with the facts as they stand in March 2008. The housing market is dead as a driver of the economy. Many of us are of the opinion that the fall off in the housing market has led to a downward spiral in the economy and has infected many other sectors. Some analysis is required regarding how this has been allowed happen under the watch of the current Minister. The level of growth in the domestic housing market over the past eight to ten years led us to a false dawn. We may well see that many of the elements that it has fostered will have a long-term negative impact on the very economy it was supposed to be helping to advance.
While the housing market was booming, we were in reality eating our own flesh from an economic point of view. The housing market boom did not contribute to exports and it inured many of us to any form of international competition. We did not feel we had to compete in many sectors as the migration to the construction industry and the consequent production of massive sprawling housing estates had us in a cocoon. Now that we are in the fresh air, we are struggling to stand on our own feet again. The very immune system of the Irish economy has been attacked by this Government, its policies and, most of all, its failure to act to diversify domestic housing construction as a driver in the economy.
It is said that for every 10,000 houses that will not be built, we will be reducing our growth rate by 1%. It is estimated that approximately 45,000 house will be built this year. More importantly, the decline will deprive thousands of people of work. Thousands of tradesmen, in all constituencies, are now being made unemployed. To date, the figure amounts to approximately 20,000 people.
We need re-skilling programmes to bring many unemployed individuals back into the workforce and the Government is way behind in this regard. These people should not be the ones to suffer due to the mismanagement of the housing sector. Neither should construction workers suffer through their wages, as the Construction Industry Federation wants, nor should the unfortunate young people who have 100% and 105% mortgages and who are now possibly facing negative equity be made to suffer. Surely, if people must suffer, it is those who made tens of millions of euro from construction. However, we should not be at this point in the first place.
We must learn from this experience collectively. It is unfortunate that the Minister for Finance did not learn a lesson quicker. We need to get back to basics. The Government is continuously pushing down the expected growth rate for the economy. It is now estimated at 2.3%, according to the Minister for Enterprise, Trade and Employment on Sunday. The revenue yield is down substantially and tax receipts have dropped dramatically. Statistics for February showed disappointing tax returns, yet there are budgetary increases in capital and current spending of 12% and 8%, respectively.
A worrying trend is that it is not just a drop in stamp duty that is contributing to this decline; corporation tax is down by €100 million, VAT receipts are down by €200 million and capital gains tax receipts are down by 34%. Inflation is raging, at almost 50% more than the EU average. Consumer confidence is very low. There are now almost 200,000 people, or 5.2% of the workforce, on the live register and this is the highest figure we have seen in over eight years.
Redundancies in January have increased by almost 30% by comparison with the same period last year. There have been significant losses for investors and pensions in the Irish stock market. Between 1995 and 2000, export volume grew by 20%. We now face an increase of 5%. The competitiveness indicator shows we have slipped 17 places in the past five years. The strength of the euro vis-à-vis other currencies is having a dramatic impact on the potential of our companies to export and it is also having a great impact on our tourism industry, as will be clear from this year’s performance. House repossessions have increased by 350%. As a nation, we have one of the highest levels of personal indebtedness in Europe. We have high fuel prices. The price of a barrel of oil has increased by $51 dollars in a year. I will let the Minister off with that.
The Minister, I regret to say, has presided over the worst deterioration in Irish public finances ever. He has turned an Exchequer surplus of €2.3 billion into a deficit of €4.9 billion in a short period. If current trends continue, with revenue decreasing and spending continuing on its current course, we will be facing a deficit of €8 billion.
We need to be innovative in order to turn this economy around but, unfortunately, given the Minister’s track record, I do not have any faith that he will be able to deliver. We need the Minister to stand up and be counted because, despite his seemingly huge presence within Government, it is not happening for him at present. His non-activity on the economy is practically killing it.
We need to get back to basics, by which I mean we need to focus on what we are good at, where we can compete and the techniques we can use to foster growth in specific high-economic-yield sectors. As the commentator David McWilliams might have said, we need to begin creating value again.
We need to put in place policies that will support high-value business services, be they in the areas of insurance, risk management, computing, IT or financial services. This sector of the economy has performed remarkably well over recent years and we have seen an almost tenfold increase in the volume of exports in this area. However, given the educational profile of our young people and the increasing demand for these services, this area can grow much further. We must provide incentives to push this sector.
We need to promote research and development in the area of renewable energy. Recent moves in this area are welcome but more needs to be done. The €200 million that has been allocated is not enough. The point is that we should have been doing this years ago. This is a key point that needed to be addressed in respect of competitiveness. We all know we need to consider alternative green technologies to lower our dependence on imported fuels. We are almost 90% dependent on them at the moment. The Minister should focus more on wind energy, and particularly wave energy, in order to make us more competitive.
We need to change dramatically the way in which we promote the technology sector. This is the most important point I want the Minister to address. If we are not more innovative in our policies in this area, we will not be able to turn this economy around as we desire. A divine trinity of components comes into play when promoting the technology sector. These include education, infrastructure and investment policy and techniques. We have catered for education in that the Waterford and Dublin institutes of technology and other colleagues are producing great graduates with IT backgrounds. Unfortunately, we do not have the appropriate infrastructure. The roll-out of broadband is the single largest national infrastructural issue facing us and the Government’s record in this regard is a disgrace. I will not dwell on this matter because I could use up all my time on it alone.
The third component comprises investment techniques. We need to increase considerably the quality and volume of incubation services for SME-type IT companies that will allow us to foster new ideas across a range of technology disciplines. Unfortunately, the day of the big catch from the IDA in the technology sector is gone. In my constituency of Tipperary North, the Shannon Development-IDA parks need to be filled with technology start-up companies. It is sad that Shannon Development has recently revealed to me that it cannot obtain a site to develop the “e-towns” project for SME technology companies. Land prices are too high when the owners see Shannon Development calling. This has been happening for years and must be stopped as it stymies growth. I know many SME companies in the sector that would love to move into such facilities.
We now need to foster our own wealth indigenously. I was very disappointed the Minister failed to make advances in the technology area in light of the budget. We need to find ways in which we can support technology-orientated SMEs bringing in medium-risk investment from the domestic market in a friendly way. We need grant schemes and tax incentives that will work. We have seen so many of them in the past from Fianna Fáil that have not worked and only promoted the interests of its patrons. Workable incentives are needed now more than ever for the technology sector because SMEs find it much more difficult to gain access to investment capital from banks, which are putting the squeeze on them.
In the IT sector, we should encourage development of embedded computer systems and devices. Why are we only investing €1 million in an EU joint technology initiative in this area? We should also encourage investment in mobile integration services, digital advertising, intellectual property rights and their management, second-generation and third-generation web technology development and gaming technologies. This is not rocket science. Most IT gurus could compile such a list better than I could, I have merely selected some of the areas with which I am familiar from my background.
We need to examine our techniques for generating investment from abroad. We need Keynes-type economic strategies in order to get our economy moving again in the direction we desire. We cannot just sit on our hands, as is happening at present.
I welcome the increase in VAT thresholds in the Finance Bill, but we need to consider total VAT reform for small businesses. We need to fast-track the national development programme and broadband roll-out and integrated ticketing in particular. When considering public sector reform, we must consider in particular developments at management level and ensure that we measure performance and achieve accountability. The HSE is an obvious target but we must also consider tourism and job creation agencies. Fresh regional investment policies that achieve positive discrimination are required.
On the specifics of the Finance Bill, I do not agree with the sly privatisation of the construction of hospice care facilities by the Minister through capital tax allowances. Will the Minister finally put us out of our misery in respect of decentralisation? We have exceeded the deadline and we have only witnessed a 10% increase. On the issue of pensions, we need to consider the merits of offering tax relief at the current rate. Up to half the population do not have a pension fund. Why are we still imposing VAT on defibrillators at a rate of 21%? Why are we not doubling the capitation grant to primary schools? Why are the tidy towns organisations not being accorded charitable status?
I welcome a number of points in the Finance Bill but I do not have time to address them, and there are other points I do not welcome. I will move amendments to the Bill on Committee Stage.
The gains made by the PAYE worker in the budget are already rendered meaningless by inflation. If someone earns approximately €35,000 and does overtime or gets a bonus, he or she must pay tax on it at a rate of 41%. The Minister will soon have a salary of €270,000. With that salary comes responsibility, and in this regard he is not measuring up. His self-delusional and non-interventionist attitude is not working. He is acting like the kid who thinks he knows something all the rest of us do not.
Senator John Paul Phelan Senator John Paul Phelan
Senator John Paul Phelan: I must ask Senator Kelly to finish.
Senator Alan Kelly Senator Alan Kelly
 Senator Alan Kelly: I hope the Tánaiste does, but like the kid in the playground he knows much less than he thinks he does and now we will find out that to the country’s cost. I thank the Acting Chairman for his indulgence.
Senator John Hanafin Senator John Hanafin
Senator John Hanafin: It is interesting——
Deputy Willie O’Dea Deputy Willie O’Dea
Deputy Willie O’Dea: Who writes Senator Kelly’s scripts?
Senator Jerry Buttimer Senator Jerry Buttimer
Senator Jerry Buttimer: Who writes the Minister’s Sunday Independent articles?
Senator Alan Kelly Senator Alan Kelly
Senator Alan Kelly: I write my own.
Acting Chairman Acting Chairman
Acting Chairman: Senator Hanafin without interruption.
Senator John Hanafin Senator John Hanafin
Senator John Hanafin: It is interesting to hear someone state he will not talk down the economy and then spend the next ten minutes, rather than eight, doing so.
Senator Alan Kelly Senator Alan Kelly
Senator Alan Kelly: That is the standard line drawn out.
Senator John Hanafin Senator John Hanafin
Senator John Hanafin: This year there will be growth of 2.3% in the economy.
Senator Alan Kelly Senator Alan Kelly
Senator Alan Kelly: Previously they stated it would be 3.5%.
Senator John Hanafin Senator John Hanafin
Senator John Hanafin: For an economy that has doubled in size twice in the past 15 years, there is a simple mathematical equation called the 72 rule to work it out. One divides the growth rate into 72 to get how many years it takes to double the size of an economy or of one’s investment.
The economy has doubled in size twice in the past 15 years and on top of that it will grow by 2.3% this year. Notwithstanding the fact that the euro is at a very high level, the American economy is going into recession and the price of oil has risen to $110 a barrel, it is a remarkable robust economy that is still growing at 2.3%. The fact that it will continue to grow shows the solid stewardship of this Government. At a time when there is a slowdown, the Tánaiste ensured in the budget that those who were less well off were looked after. The social welfare provisions in the budget are to be commended.
The Finance Bill deals with supporting enterprise, innovation and employment to advance sustainable development and to ensure a fairer tax system. The fact that the top 1% in this country pay 25% of the income tax shows there is a fair tax wedge. The reality is that a single worker on average earnings in Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the entire OECD. This is a balanced budget and this Finance Bill proves it. It deals with issues that needed to be dealt with.
Since the 1960s we have had the largest and most consistent development in economic terms of which we know. What we are doing is modulating that growth. I will explain what I mean. The construction industry was powering ahead on its own steam. When a slowdown came the Tánaiste took the opportunity in this Finance Bill to increase mortgage interest relief so that a single person can get the advantage of another €33 a month and a married couple can get €66 a month. The Tánaiste has within his capacity to increase that. He could have given marginal relief at top rates. There are many measures the Government can take to ensure the economy is modulated and there will not be a significant slowdown. He has also decreased the term in which owner-occupiers must refund the benefit they accrued from preferential stamp duty rates if they let their house from five years to two years, in this Finance Bill. This is because of the movement in the economy and the way people live now.
I suggest there will be continued growth and we will continue on an upward trajectory. From the 1960s, notwithstanding a recession in the 1970s and the oil shock in the 1980s, there was a continuing line. This Government has continued to see to growth. There is a provision for research and development for ten years so that such activity, which is at the higher end of the market, can continue. We are still looking to the future and to the times when we will continue to grow at the rate of growth we had previously.
There are other positive measures within this Bill. The employee share ownership trust, which allows persons the benefit of more tax relief to borrow to buy shares in their own companies, ensures wealth is spread throughout the country.
I suggest to the Tánaiste, now that the UK has introduced a tax on persons of significant wealth and there are those in the UK who might feel an objection to this by virtue of their residency, that there might be an opportunity in the next Finance Bill for us to look to attract some of those people to this country. I am certain there will be an innovative approach by this Government in the future and now that this opportunity has presented itself this year, perhaps that is something that the Tánaiste might bear in mind.
I also commend the Tánaiste on increasing the amount of tax that will be paid by companies drilling for oil. We have a gas industry in this country but not many people know that significant amounts have been expended yearly which have not produced any returns. However, in times past the Tánaiste was generous in his allowances on corporation taxes. Now that events have changed in the world market, the Tánaiste has reflected that by increasing the tax to ensure those companies which benefit significantly from an oil or gas find will pay an appropriate rate, given that billions have been expended with little enough return in many instances.
There have been significant changes in stamp duty and in the way VAT is charged. In the budget the Tánaiste took the opportunity to tidy up many of the outstanding issues for evasion. He also took the opportunity to increase certain reliefs, including the rent-a-room relief, so that the attractive nature of these remained.
By and large, at a time when the economy was uncertain, the Tánaiste took the prudent approach and did what I would expect him to do. He decreased the burdens on business in terms of red tape, increased taxes where they were necessary on windfall profits on oil companies, ensured people who were less well off received significant increases, and ensured workers would continue to pay the lowest marginal rates in the EU and in the OECD. I could only commend the Tánaiste on his work to support enterprise, innovation and employment, to advance sustainable development and to ensure a fairer tax system.
Senator Jerry Buttimer Senator Jerry Buttimer
Senator Jerry Buttimer: Cuirim fáilte roimh an Aire, an Teachta O’Dea. I feel a little like the fiddler on the roof, but having to pick a pocket or two. The Members opposite are probably smiling graciously at themselves and stating that they are in a great world. I was watching the “The Vicar of Dibley” the other night on television and I feel a bit like that here because the world in which I live is not the one in which the Members opposite are living.
Senator Jim Walsh Senator Jim Walsh
Senator Jim Walsh: Remember the 1980s.
Acting Chairman Acting Chairman
Acting Chairman: Senator Buttimer without interruption.
Senator Jerry Buttimer Senator Jerry Buttimer
Senator Jerry Buttimer: The 1980s were a time when the party opposite played politics with everything.
Senator Jim Walsh Senator Jim Walsh
Senator Jim Walsh: Senator Buttimer’s party played havoc with the economy.
Acting Chairman Acting Chairman
Acting Chairman: Senator Buttimer without interruption.
Senator Jerry Buttimer Senator Jerry Buttimer
Senator Jerry Buttimer: When my party inherited the situation, we were financially prudent and when we left office we continued with the Tallaght strategy. Perhaps there could be consensus.
Senator Jim Walsh Senator Jim Walsh
Senator Jim Walsh: That was after the International Monetary Fund was going to come in to pick up after them.
Senator Jerry Buttimer Senator Jerry Buttimer
Senator Jerry Buttimer: The Finance Bill is presented to us at a questionable economic time. As Senator Hanafin correctly stated, the US economy is in recession even though President Bush says it is not. Senator Kelly referred to it. Perhaps we would say Ireland is in neutral or perhaps moving backwards, although the Members opposite might not agree.
There are serious questions raised about the competitiveness of the economy at this time and it is against this backdrop we debate the Finance Bill. The threats are that our competitiveness has decreased and continues to do so, our rate of inflation is ahead of that of other European countries, and our market share of exports is low. The Tánaiste and Minister for Finance, Deputy Cowen, had a surplus and now there is a deficit, which begs the question about his prudence in managing the economy.
Senator Hanafin spoke of housing starts. Total house completions for the fourth quarter in 2007 were down on the same period the previous year. Unemployment, inflation and headline crime are all up and our gross domestic product growth is only half what it was last year. Let us have a realistic debate about our economy and how it is managed.
Whether we like it or not, the Government has blown the funds that resulted from the boom. It has gone berserk. An example of the net result is that in Cork South-Central there is no National Roads Authority road programme. There is a crying need for an upgrade of the N20 to accommodate movement from the port of Cork to Ringaskiddy, but nothing has been done. We have traffic gridlock as part of the Ballincollig-Bishopstown access. Promises were made by the Minister for Enterprise, Trade and Employment, Deputy Martin, with great fanfare, to the effect that new flyovers that would be included in the roads programme, but ten years later we still have nothing at this time of so-called economic prosperity. Perhaps the Minister for Defence, Deputy O’Dea, is delivering for Limerick but Deputy Martin is not giving much to Cork South-Central. Perhaps the Minister, Deputy O’Dea, will have a word with him. I know the Minister is a man of great influence in Cabinet. Given his articles in the Sunday Independent, people will listen to him. Perhaps he can talk to the Minister, Deputy Martin, about delivering the roads programme for Cork South-Central.
With regard to the Finance Bill, we have seen complete incompetence by a Minister who has been handed a cash cow. This week is national neurology week, yet there are 22 vacancies for neurosurgeons. We have waiting lists for treatment and have doctors refusing to send people for treatment because it is a pointless exercise on account of the endless waiting lists. Three reports were commissioned, but nothing has happened as a result. What does that tell people and patients?
Senator Hanafin referred to rented accommodation in his remarks. The situation now is that the Private Residential Tenancies Board has closed its full-time office and is no longer open to the public. Landlords rent out rooms, claim all the credits, there is little accountability and the public is left with nothing.
I wish to take issue with sections 69 to 81, inclusive, which deal with measures regarding off-licences. There is a marginal increase from €250 to €300 for an off-licence fee. This is very disappointing given the fact that our alcohol consumption pattern has increased dramatically. Senator O’Reilly mentioned there has been a retreat from pub drinking to drinking in the home. This has been led by growth in the off-licence industry. It is time the nation said “Enough is enough” with regard to the sale of alcohol in off-licences, shops and petrol stations. The situation has gone beyond a joke. Statistics demonstrate that between 1986 and 2006, average alcohol consumption per adult was 10.1 litres. This has risen to 13.36, which is a 32% increase. This is a staggering increase by any stretch of the imagination, yet there has only been a marginal increase in the fee for an off-licence.
I welcome the measures in the Bill with regard to palliative care. I urge the Minister, Deputy O’Dea, to approach the Minister, Deputy Martin, on another issue. This week in Cork the Minister, Deputy Martin, opposed the co-location of a hospital, a proposal which is promoted by Government policy. Section 26 of the Bill proposes tax incentives for co-located hospitals. What would happen if the Minister, Deputy Martin, were Minister for Health and Children? I would like to hear whether they would go ahead.
Senator Kelly referred to the issue of defibrillators. The situation in this regard needs to be addressed urgently. There is a 21% VAT rate on defibrillators, which is unfair. Many voluntary and community groups raise money to buy defibrillators, but they are penalised with VAT. I urge the Minister to remove the VAT on defibrillators.
I am disappointed that the Cork docklands development has not been included in the provisions of the Finance Bill. We were told by the Minister’s colleagues in Government who are from Cork that it would be included. We were told previously that it would be included in the budget provisions, but that did not happen. Tax breaks are essential for this critical project. I appeal to the Minister, Deputy O’Dea, to return to the Minister for Finance and the Minister for Enterprise, Trade and Employment, Deputy Martin, to urge them to include tax breaks for Cork. Howard Holdings published its plans for the docklands this week which propose significant innovative regeneration for the city. We need further debate on balanced regional development with an emphasis on Cork as our second city. Cork is losing out as a result of the access from Dublin to Belfast. We need to redress the imbalance. I know I will be told that EU regulations restrict this but I think that is a red herring introduced because of the failure to make the required provisions in the Finance Bill.
I thank the Chair for the opportunity to speak on this. I hope those of us who seem critical of the economy are not seen as talking it down. As Senator Kelly said, pointing out the errors of the Government’s ways does not mean we are talking it down, rather, we are pointing out the errors of the Ministers’ ways.
Senator Jim Walsh Senator Jim Walsh
 Senator Jim Walsh: Ar an gcéad dul síos ba mhaith liom fáilte a chur roimh an Aire Cosanta, an Teachta Willie O’Dea, go dtí an Teach chun an Bille tábhachtach seo a phlé. Undoubtedly, although the Opposition may be slow to acknowledge this, around the world the economic fortunes of Ireland are seen to have improved beyond all expectations over the past ten to 15 years. Most economists were caught unawares by the significant growth patterns we achieved.
We are now entering choppier economic waters globally. There is a domestic aspect to this also in that our construction industry, which in recent years was a driver of growth rates, was primed strongly. This is no longer sustainable and we have now come to a downward spiral in that regard. This is not to say it is coming back to more realistic levels. Many of us would have argued some years back, when there was a reduction from the 10% and 11% growth we experienced at one stage in the early part of the decade, that it was not sustainable and that all infrastructure was coming under stress and strain as a consequence. The move we are experiencing now is a challenge and must be managed. We will do that from a position of having created a much stronger wealth base than the country has ever seen.
I was taken by the comment made by Senator MacSharry about the currency situation. This is one of the issues which impacts on economic growth, not just here but across Europe. The dollar is still a strong currency used as a barometer and financial tool for business in many industries. Europe showed, particularly 15 to 20 years ago before we got the common currency of the euro, that the economic and monetary union worked very effectively. We had a basket of currencies which, through certain disciplines, were able to fluctuate within certain well-defined bands. I am not sufficiently expert in this area but it strikes me that this system might be a model that could be applied to a global basket of currencies, such as the dollar, the euro, the yen and perhaps the yuan. An international effort should be made — perhaps the European Union could be the vehicle that would pursue this — to see if we can remove what is a risk factor in conducting business which is outside of the control of all businesses and is really an issue of market forces. While market forces in the main can be good, robust and healthy for business, sometimes they need to be tapered. Perhaps that could be done in this instance.
I agree fully with the comments made by Senator Quinn with regard to philanthropy. There is a compelling case to be made for charitable donations to be exempt from taxes. Certain very wealthy people, some of whom are tax exiles, get considerable credit for being philanthropic. I am much more taken with those who remain resident in this country, pay their taxes and still make their contributions to philanthropic causes. This should be equally recognised.
In his speech, the Minister underlined the tax equity that has taken place over the past decade in bringing in people who possibly escaped the tax net because of various tax avoidance schemes. It is a welcome development to see that the top 1% of income earners pay 25% of the income tax. The Minister said that this is up from 15% in 1997. The Minister and Senator Hanafin spoke about developments affecting the single worker. I remember that the tax wedge was a major issue when I entered these Houses. The tax levels deducted from people were an impediment to them doing overtime or any sort of additional enterprising activity. It also succeeded in putting people into the black economy.
Other measures I welcome include the continuation of the business expansion scheme seed capital fund and the research and development tax credit, which is a major area for investment and which will be a driver of the economy going forward. There is quite a long time-line in respect of getting the benefits from it. The Ministers for Education and Science and Enterprise, Trade and Employment, who spearheaded the importance and recognition in this area and came together to get a package of investment in the area, deserve commendation.
I will make some suggestions. Mortgage interest relief should be allowed at the marginal rate for purchasers of new homes. It is an anomaly that people who invest in section 23 properties and other such schemes can get relief at their marginal rate of 41% while those buying their first home cannot avail of that.
There is a case to be made for abolishing the 20% surcharge on undistributed profits in closed companies because it is anti-enterprise. There is a real need to exempt children from inheritance tax. It is only exempt between married couples. There is also a case for looking at exemption in the case of siblings where the threshold is very low at just over €40,000. Other groups are now looking to get the benefits that married couples have. It would be incongruous to think that children would be put in a prejudicial position in that regard. I am saying this from the point of view that if one leaves the wealth with the people, they will employ it more productively in assisting the economy than the State.
The Department of Finance is failing to tackle the large amount of what some would call waste across the public service. Up to €4 billion is being wasted annually. A colleague who works in the public service told me recently that he reckons that the amount is double that. One of the great successes that was initiated was the National Treasury Management Agency. We should have a national public expenditure cost efficiency agency to tackle this area. If we can generate savings from the waste we all see throughout all sectors of the public service, we will have the money to invest in areas which will prime the economy in a focused way that will increase the growth we seek to achieve.
Senator Pearse Doherty Senator Pearse Doherty
 Senator Pearse Doherty: Cuirim fáilte roimh an deis labhairt ar an mBille Airgeadais 2008. Níl dabht ar bith ann nach bhfuil eacnamaíocht na tíre seo chomh láidir is a bhí sé sna blianta atá thart. Dá bhrí sin, is am oiriúnach é seo chun an díospóireacht seo a bheith againn.
I welcome the opportunity to speak about the Finance Bill. There is no doubt that we have entered a time of economic uncertainty. The slowdown in the construction sector has become even more pronounced. We have seen that the rate of unemployment rose to 5.2% in February, which represents the highest number of people signing on since August 1999. On Monday, the Central Statistics Office revealed that employment in the construction sector has fallen by more than 10% in the past year. Even the Taoiseach now accepts what many of us have known for quite some time, namely, that the economy is facing much more challenging times. We have also seen a string of job losses in recent months. These include three companies that closed down in rural Ireland, one of which, Contact 4, shed 34 jobs in my parish of Gweedore, 36 in Achill and 38 in Dingle. A total of 108 jobs were lost in rural Ireland in one day.
The economic difficulties we now face were in part avoidable. The Government failed to address the issue of declining competitiveness. Under this Government, the construction sector was allowed to become overinflated and the economy was allowed to become overly reliant on it. There has been a clear absence of intervention to retain vulnerable workers, especially in the construction sector where, according to the Higher Education Authority, 80,000 workers have only second level education.
The vulnerabilities in the economy and their implication for public finances have long been clear. There was a recognition that a likely decline in the property sector would have serious implications in terms of tax take. That is why Sinn Féin argued in the run-up to the general election that the Government could not afford to cut taxes and maintain, let alone improve, public services and provide essential infrastructure. That is why proposals from the Government parties were deeply irresponsible. Time has shown that Sinn Féin’s analysis was correct, that the Government parties’ analysis was wrong and that they were out of touch with the economic realities that were clear to be seen. I believe they deliberately did this to hoodwink the public in the run-up to the general election.
The Government’s failure to plan for the future of the economy no doubt will have serious consequences for the Exchequer. Revenues across a range of taxes are down while the burden on the social insurance fund is set to rise as a consequence of an increased number of redundancies and a growing level of unemployment. We see that receipts for January and February, which were 8% lower than those for last year, were €516 million below the tax target set for the first two months of this year. In two months, we have already seen a deficit of €516 million so we can understand and appreciate the implications of how this will expand over the rest of the year. The consequence of all this for the ability of this State to meet public spending demands is a matter of serious concern. The social insurance fund needs to be able to cope with these increased demands. For that reason, it is crucial that there are no cuts in PRSI contributions.
There are measures in this Bill that are to be welcomed. While Sinn Féin welcomes the new measures to tax the profits of oil, gas and mineral exploration companies, we believe they do not go far enough and that we need to implement a revenue structure more in line with that which exists in countries such as Norway and other states which have benefited greatly from the exploitation of their natural mineral resources.
We are also concerned about the fact that this tax will not apply to exploration licences granted before 2007. We saw how, in the run-up to 2007, there was a significant increase in the number of licences granted to such companies. These licences will not meet this criterion to be subject to this tax measure.
Sinn Féin welcomes the overdue reduction in the rate of VAT for non-oral contraceptives from 21% to 13.5%. Such a reduction should also be applied to defibrillators. My colleague, Deputy Arthur Morgan, moved an amendment to this effect in the Dáil. This change would ensure that a life-saving piece of equipment becomes more affordable for sports clubs and organisations throughout this State.
Sitting suspended at 1.30 p.m. and resumed at 2 p.m.
An Cathaoirleach An Cathaoirleach
An Cathaoirleach: Senator Doherty has three minutes remaining. As he is not present, I call Senator Burke.
Senator Paddy Burke Senator Paddy Burke
Senator Paddy Burke: I welcome the Minister, Deputy O’Dea, to the House. In his speech the Minister stated:
Section 122 amends the stamp duty regime for owner-occupiers who benefit from preferential stamp duty rates so that they are liable to a claw-back of relief if they let the house in the five years after purchase. This is being reduced to two years [I welcome that]. In addition, in respect of first-time buyers, an anti-avoidance provision is being introduced to address certain abuses that have come to light.
In the past ten or 15 years people found they were in breach of tax regulations and were required to pay back tax and in some cases very hefty penalties, which might have exceeded the original principal. People with money in accounts with foreign addresses or in accounts they did not declare paid large penalties. I ask the Minister to spell out the type of avoidance that is taking place which gives rise to the change in section 122 as he stated that “an anti-avoidance provision is being introduced to address certain abuses” within that section. We do not want to have another revelation in ten years’ time whereby we might need to go back over certain abuses again. It should be spelt out clearly for the people who may be abusing the system without being aware and this is an opportunity for the Minister to do so.
The Minister outlined certain guidelines regarding tax administration, particularly increasing the existing surcharge of 10% to 20%, which is a very large increase and heavy handed. In recent years the Revenue Commissioners have been applying the regulations to the letter of the law. We are now seeing a 10% increase in a surcharge. People who unknowingly abused the system were required to pay large sums of money, in some cases considerably more than the original principal. Going from 10% to 20% will increase it further. If the Minister has some other view on the matter, he should outline it to the House.
As pervious speakers have said there is a downturn in the economy. Job losses and unemployment rates have increased. The unemployment rate has reached 5.2%, a significant increase in the past 18 months. Small businesses are under pressure given the environment in which they operate. The majority of small businesses are in the services industry. The stealth taxes include rates, water and sewerage charges, parking charges and others. There are major problems for small industries and particularly in the services sector. It should be streamlined where possible.
Local authorities will be also under serious financial difficulties if they keep going down the road they are. In recent years they have received considerable funding from development charges. With the decrease in the number of houses being built the amount of money coming into the local authorities’ coffers will decrease significantly. My local authority, Mayo County Council, has applied a large increase to water and sewerage charges. The refuse system in the area is privatised. Business people are paying more than €10 per 1,000 gallons, which is a major cost for any business and particularly for small businesses. The pharmaceutical company, Baxter, in Castlebar is a large user of water. Given that the water and sewerage charges are applied on a water-in water-out basis, this is significant for any big employer, like Baxter. The local contribution, which in most cases now is 20% to 30% whether it is a small sewerage scheme or a small water scheme or an extension to mains drainage, is a significant cost for local authorities. The business community is required to pay for the commercial end of it. There will be serious problems down the road.
Some of the chickens are coming home to roost. In the past ten years the Government wasted €1 billion on the “Bertie bowl”, PPARS and other projects. If that money were in the system, as Senator Twomey has said, we would have completed at least one interurban route.
IDA Ireland has outlined the difficulties in attracting investment. However, it has had some significant gains also. In the past ten years IDA Ireland created 48 jobs in my county, Mayo, which is the third largest county in the country, which tells its own story. It indicates that the Government is certainly not delivering to County Mayo, as was made clear in the reply to a parliamentary question tabled by Deputy Kenny which stated the IDA Ireland created 48 jobs in County Mayo. We are not getting our fair share. I notice there is an announcement nearly every month in the Cork region, which shows that a Minister brings a certain amount of weight to the area he is from. I heard Senator MacSharry raise an issue in regard to Sligo on the Adjournment debate last night. If the Government is serious about delivering to every area, it should also consider this one.
Deputy Willie O’Dea Deputy Willie O’Dea
Deputy Willie O’Dea: I sincerely thank Senators for their comments and will try to address each of them as best I can.
First, however, I want to outline to the House the economic context of the legislation. The Bill is being presented against the backdrop of more modest growth in the Irish economy. As is well known, this reflects the significant reduction in house-building activity we are currently going through in terms of adjusting towards more sustainable levels of activity in this sector. In addition, it also reflects a more challenging international economic climate. On foot of these developments, the budget day forecasts envisaged that GNP would grow by 2.8% this year. Others have taken differing views with the range for growth extending from 2% to 4%. Regardless of where one is on this scale, this represents a slowdown compared to recent years, but is still a healthy rate of growth compared with our major trading partners.
The more modest economic growth which is in prospect for this year will have implications for the public finances and for the labour market. I would like to briefly elaborate on those. In terms of the fiscal situation, it is clear that our overall public finances remain strong. We have carefully managed the public finances over the last decade and have delivered general Government surpluses in ten of the past 11 years. General Government debt is forecast to be about 26% of GDP at the end of 2008, one of the lowest ratios in the euro area. When account is taken of the build-up of assets in the National Pension Reserve Fund, the debt-to-GDP ratio, net of those assets, is estimated to be around 14% at the end of 2008, which is a historic low.
This year, the budget is based on a general Government borrowing requirement of 0.9% of GDP. Thus, we are planning for some modest borrowing which is prudent as it will allow us to implement the National Development Plan which will, in turn, enhance our productive capacity and thereby lay the foundations for future improvements in living standards.
Tax revenues are projected to grow by the order of 3.5% for this year. Taxes to the end of February were €516 million or 6.4% below expectations and 8.3% down on end-February 2007. While it is too early to draw any firm conclusions from the first two months’ data, the weakness — in particular, in capital gains tax — is of concern. The Department of Finance monitors tax receipts and expenditure on an ongoing basis and as more data become available during the year, any significant changes to the expected Exchequer position in 2008 will be signalled and presented at the end of each quarter.
Turning to the labour market, the rate of employment growth is expected to slow this year. This is a reflection of lower levels of output in the new house construction sector, which is a labour-intensive sector. Overall employment growth is expected to remain positive, however, and a net increase in employment of 24,000 or 1.1% is expected. The strong labour market performance in the final quarter of last year, when employment rose at an annual rate of 3.2%, supports this assessment. While some increase in the unemployment rate appears likely — we are currently seeing this in terms of live register developments — it is expected to remain below the European average.
In terms of wider economic developments, while short-term prospects are undoubtedly more challenging than we have become accustomed to in recent years, it is important to emphasise that our medium-term prospects remain favourable. This is not just the Government’s view, it is the view of most economic commentators. Our population is young and dynamic, while the labour force is flexible and increasingly well educated. Sound fiscal policies have enabled us to reduce the burden of taxation on both capital and labour, and to keep public indebtedness low. We also have an efficient regulatory environment. Our markets are flexible, adaptable and responsive to change.
Moreover, as part of the National Development Plan we are investing in infrastructure in order to bring Ireland’s public capital stock more in line with that of other developed countries. Within the framework of the NDP, capital spending as a percentage of national income will remain at high levels — both by international standards and as a percentage of national income — for many years to come. We are deepening the skills pool through investing in education at all levels, within the NDP framework. The skills level of the population will become an even more important factor driving living standards in an increasingly globalised economy.
All of these factors will support productivity growth, boost competitiveness and enhance the productive capacity of our economy. In addition, once short-term difficulties are overcome there are grounds for optimism regarding housing market developments. This is because the underlying demand for housing remains relatively high, supported by a relatively young population, continued inward migration together with a relatively low per capita housing stock. It is estimated that the underlying medium-term demand for housing is around 60,000 units per annum. This level of activity is equivalent to levels prevailing at the beginning of this decade, which is still fairly high in both historical and international terms. In these circumstances, once confidence is restored to the market, therefore, the medium-term prospects are reasonably solid. In this regard, the stamp duty measures contained in the Bill the Tánaiste announced at budget time should underpin this confidence.
It must be also recognised that other parts of construction continue to perform well, especially spending on infrastructure under the continued roll-out of the NDP. Outside construction, other sectors of the economy are performing well. Services exports have recorded annual growth rates of around 10% in each of the past five years, with exports of financial services, computer and business services recording particularly strong growth. As a result, services exports now account for nearly two-fifths of total exports and Ireland is now the fifth largest exporter of commercial services in the world — an astounding figure for an economy of our size. The shifting of resources into internationally traded, high value-added services reflects the next phase of development for the Irish economy. In an increasingly globalised economy, internationally traded services will become the main source of highly-skilled, high-paying employment and this is where Ireland’s competitive advantage will be. With the exception of the new house building sector, the headwinds into which our economy is now facing are external in origin. We cannot change these; instead, we must build on our strengths in order that we are in a position to benefit from the global recovery when this emerges.
Full implementation of the programme of investment in infrastructure and education under the NDP is an important first step. Maintaining flexibility, prudent management of the public finances and the promotion of a pro-business environment with a low burden of taxation are also crucial. A shared sense of understanding, as embodied in the consensus approach to policy formation, is important too.
The benefits of this approach are clear and the facts speak for themselves. Since 1997 the economy has grown at an average annual rate of more than 7%, one of the best economic performances in the world. Annual employment growth has averaged 4% since 1997, with the number of people at work rising by nearly 700,000 over this period. Immigration has replaced emigration. Economic success has enabled us to improve public services without putting a strain on the public finances. Our ratio of public debt to GDP remains one of the lowest in the euro area. We have developed a substantial export sector, particularly in knowledge-intensive sectors such as IT, chemicals and financial services. In summary, therefore, it is clear that this Government is best placed to address short-term economic challenges and that the economy is doing so from a position of strength. The fundamentals of the Irish economy are strong as a result of key policies implemented by this Government.
I will now address a number of points that have been raised by Senators. Senator Twomey said the Government was introducing new tax incentive schemes without any appropriate cost-benefit analysis study. This is simply not true. In budget 2006, the Tánaiste made it clear that any proposals for the introduction of new special incentive reliefs should, as far as appropriate, be time-limited and be subject to an assessment of costs and benefits prior to their introduction. Since then, the mid-Shannon scheme was subject to an independent cost-benefit analysis before it was introduced, and the film relief scheme was subjected to an independent cost-benefit analysis before it was extended. Therefore, the Senator’s assertion that no cost benefit analyses are being conducted is simply not true.
Senator Twomey also raised the issue of the capital gains tax exemption where a parent gives a site to a child to build a house. The Bill provides for an increase in the exemption threshold from €254,000 to €500,000 and this reflects the substantial increase in the value of building sites in urban areas. In rural areas, the problem of acquiring sites in family situations is not as problematic and there are no plans to expand the current provisions. The changes introduced in the Finance Bill can be regarded as pro-family. They allow parents and their children to live close to each other, which will help people in urban areas to secure houses in their home neighbourhoods.
Senator Twomey also alleged that this Bill was doing nothing for business, whereas in fact there are a number of measures which support business. For example, section 24 finalises the legislation, already provided on a temporary basis, for the revised seed capital and business expansion schemes. Having been approved by the European Commission under state aid rules, these schemes will now be available to support innovative enterprise up to the end of 2013. In addition, we are providing a further ten-year look-back period from 2014 onwards.
There also has been a substantial increase in the VAT registration threshold and in the threshold for payment of corporation tax. These measures will simplify the regime for business and make the transaction of business easier. There are a number of other measures in the Finance Bill which benefit businesses. The Finance Bill enhanced the existing research and development tax credit scheme by extending the current base year of 2003 for a further four years to 2013, which is an increase over the current six years. I have already mentioned what will happen after that.
The Finance Bill contains provisions, in section 31, aimed at reducing CO 2 emissions from vehicles used for business purposes by directly linking the level and availability of capital allowances to CO 2 emissions. This will be done by restricting or removing the amount of tax relief available for high CO 2 emission vehicles while increasing the relief for certain low CO 2 emission vehicles. This should act as an incentive to business to purchase or lease lower emission vehicles. The changes will also apply to leasing expenses on business vehicles, thus ensuring businesses will get the same benefits as private individuals.
The Bill introduces measures to reduce administrative red tape for companies by negating the requirement to estimate the amount of preliminary tax due in the current year. This is done in two ways: by an increase of €50,000 in the small company tax liability threshold from €150,000 to €200,000, and by companies opting to pay preliminary tax on the basis of 100% of previous year’s liability rather than 90% of the current year’s liability. The changes cover an additional 550 companies out of an estimated 2,700 companies who do not have the small company option. It is estimated that 97% of companies have the small company option. The new company threshold was increased by €50,000 from €150,000 to €200,000. The Finance Act 2007 relieved these companies of the obligation to pay preliminary tax in their first year of operation.
The Bill introduces a new incentive based on accelerated capital allowances aimed at supporting investment by companies in new energy efficient equipment. It follows from work undertaken by consultants on behalf of Sustainable Energy Ireland which suggests a role for Government intervention in providing supports to businesses to incentivise investment in energy saving technologies. The incentive will assist in improving companies’ cost competitiveness and should lead also to a reduction in overall energy demand and help reduce carbon emissions. The incentive is being restricted to companies to contain Exchequer costs while seeking to change behaviour in this area. It should be viewed as a pump-priming exercise. It is proposed to limit its operation to three years. It is hoped that over time companies, business and people generally will see the ongoing value of investing in energy efficient equipment in terms of improved economic returns for them and environmental benefits for society in general.
The Bill also provides for an extension of capital allowances to camping and caravan sites to encourage this sector of tourism. Senator Twomey criticised measures taken in respect of income tax. The tax treatment of employees in Ireland compares favourably with the treatment of employees in all other OECD countries. New data from the OECD which have become available in the past fortnight highlight the low tax burden faced by workers in Ireland. These data indicate that a married, one income couple on average earnings and with two children continues on the lowest average tax rate in the entire OECD. For the sixth consecutive year, when cash benefits from the State are taken into account, such families face a negative tax burden, receiving more money in cash transfers from the State than they pay in income tax and social security contributions.
In addition, for a single person in receipt of the average wage, Ireland continues to have the lowest tax wedge in the EU and one of the lowest in the OECD. A low tax wedge makes it easier for employers to take on new employees. The fact our unemployment rate is one of the lowest in the EU is no coincidence. These figures do not take account of the further improvements made in the budget for 2008.
Senator Quinn mentioned tax reliefs for philanthropy. The Senator will be aware that section 848A of the Taxes Consolidation Act 1997 provides for tax relief at the marginal rate on donations made by individuals or corporate bodies to eligible charities and other approved bodies including first and second level schools and third level institutions, including universities. This is a generous scheme by any standards. Following the introduction of the restriction on the use of tax reliefs by high income individuals in the budget for 2006, the Tánaiste received a number of representations on the inclusion of the donations scheme on the list of reliefs to which the measure applied and carefully considered the arguments put forward. The issue was also discussed in some detail in the Dáil on Committee Stage of the Finance Act 2006. The views of political parties were divided on the issue. The Tánaiste decided that, on balance, the donations scheme should remain on the list.
Removing the scheme from the specified reliefs list would reduce the effectiveness of the restriction, the aim of which is to increase the effective tax rate of those on high incomes towards 20%. Given that the proportion, even of high income individuals, who are affected by the restriction is relatively small, it is expected that the socioeconomic objectives of the donations scheme will still be met. In addition, where relief under the donations scheme has been denied in any one year as a result of the restriction, it can be carried forward to the next year and following years, if necessary.
Senator Twomey also referred to the changes to the scheme of capital allowances and leasing expenses for business cars and sought to link this to Ministers who in some way should be liable for costs in this area. I should clarify that the scheme referred to is a relief for business and has no application to Ministers or private individuals. The scheme is being amended to restrict tax relief for high CO 2 emitting vehicles while rewarding business with higher reliefs for purchasing lower cost, lower CO 2 emitting vehicles. These are appropriate policy aims. This incentive is aimed at supporting investment by companies in new energy-efficient equipment. It follows from work undertaken by consultants on behalf of Sustainable Energy Ireland, SEI, which suggested a role for Government intervention in providing supports to businesses to incentivise investment in energy-saving technologies. The incentive will assist in improving companies’ cost competitiveness and should lead also to a reduction in overall energy demand and help reduce carbon emissions. The incentive is being restricted to companies to contain the Exchequer costs while seeking to change behaviour in this area. It should be viewed in the nature of a “pump-priming” exercise and it is proposed to limit its operation to three years.
The Green Paper on pensions published last year and currently undergoing a period of public consultation sets out the range of challenges facing us in the pensions area including, the advantages and disadvantages of extending the flexible approved retirement fund option available to some and not to others. It has begun the debate on the options we should take over a range of pension related issues. Whatever decisions are taken must be made in an integrated and planned way and not in a piecemeal fashion. This is what the Government, in conjunction with the social partners, intends to do.
Questions were raised in respect of VAT rates in Ireland. Having regard to the claim that Ireland operates a high level of indirect taxes, specifically VAT, I point out that Ireland operates a zero VAT rate and a reduced VAT rate which, in terms of the range of goods and services to which these rates apply, compares favourably with other member states. On Ireland’s standard rate of VAT of 21%, I note that the level of the standard rate across the EU ranges from 15% to 25% and averages at a level of 19.5%.
On the increase in the price of oil, the excise yield does not increase as the price of oil increases as excise is set at a nominal amount. On the other hand, the yield from VAT, as VAT is set as a percentage of the price, increases as the prices of fuels increase. It should be borne in mind in this regard, however, that to the extent that spending in the economy is reallocated to petrol and other oil products and away from other VAT liable spending and to the extent that the overall level of economic activity is reduced by higher oil prices, there may be little or no net gain to the Exchequer.
ECOFIN has at various times during the past two years considered increasing oil prices. It has concluded that reducing excise duties on fuels was an inappropriate policy response to increasing oil prices. Excise rates on petrol and auto-diesel in Ireland are around the EU average and are lower than many of our main competitor countries, in particular the UK.
The Tánaiste has used the tax system to promote environmental policies. Measures introduced in recent years include excise relief for bio-fuels of more than €200 million over five years from 2006. This will contribute towards meeting the 5.75% transport fuel market penetration by bio-fuels by 2009 and stimulate activity in the agricultural sector. Other measures are the inclusion of recycling companies in BES seed capital schemes from 2007 and tax relief for corporate investment in renewable energy. The Bill also provides for significant reform of the VRT system to take account of CO 2 emissions and introduces tax initiatives for energy efficient equipment. It provides also for a reduction, from 21% to 13.5%, in the VAT rate applicable on certain supplies used for the agricultural production of bio-fuels. In addition to the incentive provided in the bio-fuels excise relief schemes in the budget for 2007, the Tánaiste provided funding for a national top-up of the EU energy crop payment from €45 per hectare to €80 per hectare. This payment is operated by the Department of Agriculture, Fisheries and Food and provides farmers with a further incentive to grow energy crops.
The VAT treatment of goods and services is governed by EU VAT law with which Ireland must comply. As for the VAT rate which applies to defibrillators, under the VAT directive, member states may retain the zero rates on goods and services which were in place on 1 January 1991 but cannot extend the zero rate to new goods and services. The zero VAT rate therefore cannot be applied to defibrillators which are subject to the standard rate. As for the application of reduced VAT rates, such rates may be applied only to those goods and services which are listed in annex III of the VAT directive.
In the case of medical equipment, the VAT directive provides for the reduced VAT rate to be applied to medical equipment for the exclusive personal use of a disabled person. However, it is not possible under EU VAT law to apply a reduced rate to defibrillators for general use. Therefore, the reduced rate cannot be applied to the supply of defibrillators. Exemptions from VAT are also governed by EU law and under the VAT directive we are not permitted to exempt the supply of defibrillators. Therefore, the only rate of VAT that can apply to the supply to defibrillators is the standard VAT rate, which is 21% in Ireland.
Senator Kelly said that we need to focus on high value added sectors such as financial services. The Bill contains a number of measures aimed at supporting financial sectors where Ireland is a market leader such as banking and treasury, funds management and insurance business.
Senator Kelly also referred to privatising hospice care. The Tánaiste was careful in ensuring that the section providing for capital allowances for capital expenditure on specialist palliative care units specified that the pre-approval of any proposed development in this area by the HSE with the consent of the Minister for Health and Children is a prerequisite in order to benefit under the scheme. This means that any proposed development which seeks to avail of the approval of the HSE and the Minister for Health and Children must be in line with the plans and needs assessment of both those organisations for the development of palliative care facilities in the State. By putting this pre-approval in place, we can ensure that existing voluntary services will not be undermined through competition. Senators will be aware that representatives of the Voluntary Hospice Managers Group are in support of this scheme and have publicly made the point that the Opposition has got the wrong end of the stick in its criticism of it. What is intended by this scheme is to ensure that it will help with the planned development of necessary palliative care facilities in the State in order to bridge the gap between supply and demand for these facilities in certain parts of the country.
Senator Kelly mentioned extending tax relief for donations to charitable organisations to tidy town organisations. I point out that a number of tidy town organisations already enjoy charitable tax exempt status, the first of which was approved some 20 years ago.
Senator Boyle mentioned issues around human rights organisations gaining access to the charitable donations scheme. I point out that certain human rights bodies can already avail of the tax exemption provisions of section 209 of the Taxes Consolidation Act 1997. They can also qualify for the donations tax relief scheme under section 848A. However, these sections only cover bodies for the promotion of the Universal Declaration of Human Rights and the implementation of the European Convention for the Protection of Human Rights and Fundamental Freedoms. To qualify under this provision a body must have consultative status with the UN or the Council of Europe. The position is, therefore, that human rights bodies, per se, do not currently qualify for charitable tax exemption status. This is a policy of long standing and relates to issues around their role in political advocacy, which traditionally has not been regarded as a charitable activity.
Senator Boyle raised the issue of the provision that is being introduced to deal with the break up of farm partnerships and suggested that the issue of the break up of married couples and other couples needs to be examined in the future. The Tánaiste and Minister for Finance has mentioned previously that in regard to the tax treatment of cohabiting couples, the Working Group Examining the Treatment of Married, Cohabiting and One-Parent Families under the Tax and Social Welfare Codes, which reported in August 1999, was sympathetic, in principle, to changes in the tax legislation to address the issues raised relating to cohabiting couples and it concluded that the options that it set out should be considered further. However, it acknowledged in regard to the tax treatment of cohabiting couples that a key issue is whether tax law should proceed ahead of changes in the general law.
This Bill introduced a number of measures aimed at assisting the ICT industry. Section 50 enhanced the existing research and development tax credit scheme in the ways I already mentioned. Section 47 reduces administrative red tape for companies by changing the definition of a small company for corporation tax purposes and other purposes. In addition, companies engaged in the ICT sector can avail of the pro-business measures introduced in the Bill. These measures include the availability of capital allowances for business which are aimed at reduce CO 2 emissions.
Senator Buttimer referred to Cork Docklands. He criticised the Tánaiste for not including tax incentives for the project in this Bill. The Tánaiste, when introducing Second Stage in the House reiterated his recent comments on the use of tax incentives for the development of Cork Docklands. As the Senators may recall, he stated that the Cork project is at the beginning of a process of evaluation and that we would need to assess how best to devise proposals that would meet with European Commission state aid requirements. He went on to say that the docklands is an exciting project, but at this stage it is still very much a work in progress. He also indicated that an early announcement may not assist in clarifying some of the outstanding issues that have yet to be resolved between the various stakeholders. He said that the Cork Docklands Forum is expected to report by the middle of this year and that he remains open to examining ways in which the tax code can be used creatively to encourage investment and change behaviour.
It should be noted that the Tánaiste appreciates that, due to its unique location and potential, the regeneration of Cork Docklands is both a regional and a national priority. However, it should be borne in mind also that any decision to provide tax incentives for any specific location such as the docklands must take a number of factors into account such as the overall policy context underpinning the provision of tax incentives as previously set out by the Government; the general economic situation in the State; the position of the property market nationally and regionally; and the overall Exchequer position and the amount of taxation that would be foregone though any such incentive.
In regard to sales of alcohol, I assure the House that the Government is as concerned as anyone regarding the availability of alcohol and the problems to which it gives rise. Senators will be aware that the Government alcohol advisory group, recently established by the Minister for Justice, Equality and Law Reform, is examining, among other things, the increase in the number of supermarkets, convenience stores and petrol stations with off-licences, and the manner and conditions of sale of alcohol products in such outlets. The group has invited submissions from the public and is required to report to the Minister for Justice, Equality and Law Reform by 31 March 2008. The group is examining the issue of off-licences. The Tánaiste will therefore await the group’s conclusions and make any necessary legislative changes in the Finance Bill next year.
Senator Burke raised the question of the increase in the surcharge from 10% to 20%. I do not have a note on this but I understand it is an incentive measure. If a person sets up a system to avoid paying tax and if the scheme fails, that person is penalised for setting up the scheme in the first place by the imposition of a 10% surcharge, namely being liable for the payment of 10% extra of the tax that is ultimately found to be due. If the person challenges the decision, there will be a change in the balance of proof. The onus in that respect will be on the person, if the tax inspector could have come to his conclusion reasonably. That would makes it difficult for the person to succeed in the event of an appeal. This can be avoided if the person issues a protective notification to the Revenue Commissioners in advance advising of his or her intention, or if he or she does so within 90 days of putting the scheme in place. To encourage people to give such notification, the surcharge has been increased from 10% to 20% in the event of failure to notify the Revenue Commissioners in advance. If a person gives such advanced notification to the Revenue Commissioners, they have an obligation to take a decision on whether this is a tax avoidance mechanism within two years. In other words, a decision must be made in that timescale. The Senator also raised another matter of tax avoidance by first-time buyers——
Senator Paddy Burke Senator Paddy Burke
Senator Paddy Burke: Yes, I asked about the type of abuses that have taken place.
Deputy Willie O’Dea Deputy Willie O’Dea
Deputy Willie O’Dea: I will get the data on that and forward them to the Senator.
I thank the Senators for the constructive debate we have had and I hope I have addressed some of the points raised by them.
In accordance with Standing Order 131, I request the Cathaoirleach to direct the Clerk to make two minor corrections to the Bill which are of a formal or verbal nature. In section 24, page 32, line 7, the reference to “section 496(2)(xii)” should read “section 496(2)(a)(xii)” and in section 43, page 67, line 30, to delete “(ii)”.
An Cathaoirleach An Cathaoirleach
An Cathaoirleach: I will so direct the Clerk to make those changes in accordance with Standing Orders.
Question put and agreed to.
Committee Stage ordered for Thursday, 13 March 2008.
Sitting suspended at 2.40 p.m. and resumed at 3.30 p.m.
Seanad Éireann 188 Finance Bill 2008 ( Certified Money Bill ) : Second Stage.