We need a leader to lead this country out of the recession and not into a depression – Pat Breen T.D. speaking during the Debate on the Finance Bill

November 28th, 2008 - Pat Breen

I am delighted to have the Minister for Finance and the next Minister for Finance in the Chamber.  Former President Harry Truman once said “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.  As the current economic crisis rages throughout the world, many analysts are describing the situation as the worst financial crisis to hit the global economy since the 20s.

  I was at a Council of Europe meeting this morning where we had a hearing on the world financial crisis.  We met people from the IMF, the OECD, a top banker from Société Générale and President Sarkozy’s economic advisor.  What the OECD had to say was interesting.  The representative said we could expect the recession to be deep and long, worse than the recession of the 80s, and that it will be at least 2010 before things get better and return to pre-turmoil levels.  In the meantime, unemployment will rise sharply, the housing market has some way to go before it hits a low and the only positive news is that oil prices are down and this will help things along the way.

  The representative said we are entering a new period of globalisation.  G7 has become G20 and it met last week in Washington and identified the problems.  One of the interesting comments was that only 18 or 27 EU countries have bank liquidity rules.  We have an extraordinary crisis and a major challenge.  The OECD representative said that countries like Ireland would feel the pinch much more and get more pain because of our dependance on the housing sector.

  We were talking about recession; unfortunately, this Government has turned it into a depression.  One of the greatest tests of leadership is the ability to recognise a problem before it becomes an emergency.  The Government has shown little leadership and as a result Irish people have lost trust in the Government and in the Minister.  The budget targeted the most marginalised and vulnerable people in our society.  It was full of half-baked proposals. As a result it was forced to do many U-turns.

  No sector of society has escaped the crisis.  The inability to access credit is crippling many of our small and medium sized businesses.  The recapitalisation of our banks is necessary to ensure those businesses can get access to much needed credit. 

  Previous speakers referred to what happened in the United Kingdom this week when the Chancellor, Alistair Darling, reduced the VAT rates and announced a series of other measures to stimulate the economy.  As Deputy Deenihan said, we have already witnessed a mass exodus of people travelling across the Border where they are getting more favourable rates for the euro because of its strength against sterling. 

  That reduction in VAT rates is set to compound the problem here.  In recent days I received a number of calls from business people in County Clare who wanted to know what the Government was doing about the problem.  Many of them will be out of business by Christmas if something is not done about it but rather than introducing strong measures in the Finance Bill to assist those retailers, the Government has done the opposite.  It has introduced an income levy and increased the rate of VAT, which will make many Irish goods much more expensive.

  I welcome the strides in the Bill regarding research and development and the credit regime but I am extremely disappointed that regional development took a major hit in the budget, particularly the shortfall of €1.3 million in funding for Shannon Development, which could see grant aid to industries reduced at a time when those industries need extra support.

 

 Today we witnessed the effects of the open skies agreement, with Delta Airline’s announcement that it was ending its Shannon-Atlanta service from next summer.  The recent announcement of the US Customs and Border Protection facility at the airport is welcome but passenger figures are on a downward spiral in Shannon.

  The air travel tax was unwise, particularly with the downward trend.  The Belgian Government had to cancel its plans to introduce that tax.  I appeal to the Minister to re-examine this travel tax and the damage it will do to regional tourism.

  The cutbacks in the farm installation aid and the farm retirement scheme will have an impact on young farmers.  Many elderly farmers will be forced to continue working while, unfortunately, younger farmers may choose the emigration route.

  The EU President, José Manuel Barroso, announced today that the European Commission has proposed a €200 billion plan to revive EU economies.  However, it appears the Irish Government is to opt out of this proposal.  The Minister might comment on that when replying because it is an important issue.  I am aware it will be discussed at the EU Heads of State meeting on 11 and 12 December.  I ask the Minister to clearly outline the reason he will not sign up to those proposals.

  Does the Government have a strategy?  How does it intend to restore confidence in the economy?  The Minister said this Finance Bill contains a mix of measures which have struck an appropriate balance between the need to protect low incomes and restore stability to the public finances.  I believe it does neither.  There is no plan or strategy.  There are no ideas coming from the Minister’s side of the House.  The country needs a clear strategy.  Ordinary men and women throughout the length and breadth of this country are very worried at a time when we need a leader to lead this country out of the recession and not into a depression.  People need reassurances.  That is very important to them.  Sadly, the people of this country will have to continue to battle their way through the crisis without any leadership from this Government.

  We face an extraordinary crisis and a real challenge but with real leadership we can overcome that challenge, as many of the speakers said at the meeting I attended this morning in Paris.

 

   Minister for Finance (Deputy Brian Lenihan): In my reply I will respond as far as possible to the points raised by the Deputies in their remarks on the Bill.  I assure Deputy Breen that there will be leadership, we will stabilise the public finances, we will weather the storm and come through the difficult times.  If we take corrective action now we will ensure that Ireland benefits from the upswing when it happens.

  As the House is aware, Budget 2009 and the Finance Bill were prepared taking account of the difficult economic position prevailing both internationally and domestically.  The budget set out a medium-term strategy to stabilise balance in the public finances as soon as possible.  That required and obliged us to reduce public expenditure and adjust tax levels to reflect the changed realities of lower economic growth. Restoring order and stability to the public finances will underscore Ireland‘s well-earned international reputation as a good place to do business.  The Finance Bill continues this process and sets out targeted support to enterprise to assist economic recovery.

  There has been much discussion in recent weeks about the use of fiscal stimulus packages.  In particular, Deputies Bruton, Breen and several other Deputies referred to the proposed European Union Commission communication.  We welcome this communication as an important signal to EU consumers and business that member states, including Ireland and the Commission, are taking action to boost demand and support business in these difficult times.  The Irish Government is already taking corrective action in line with what the Commission is seeking from the member states.  For example, the budget provided growth in current spending of 3.6% and capital investment of €8.2 billion in 2009, over 5% of GNP. Viewed by any international standard there is a substantial stimulus package in this budget, as substantial as can take place having regard to the overall need to restore stability to the public finances.  Our relatively low tax rates for the employed are broadly consistent with the measures proposed by the Commission recovery plan but we do not have room for manoeuvre in terms of an additional fiscal stimulus beyond that envisaged in the budget.

  Current budget projections indicate that at least €45 billion will have to be borrowed between 2008 and 2011 to sustain the current level of public services, of which over €9 billion will be used to fund day to day expenditure.  This is not sustainable.  Debt servicing costs have a first call on resources and an increasing debt interest burden will reduce our productive capacity, increase unemployment, over-burden the taxpayer and undo past efforts to help the vulnerable.

  It is acknowledged by the Commission that not all member states have the same capacity for giving a fiscal boost and the impact on member states’ ability to borrow on the markets must be taken into account. The priority for small, open economies like Ireland with relatively high general Government deficits is to get our public finances back in order, otherwise the long-term competitiveness and international reputation of the economy will suffer.

  Throughout the debate Deputies raised various issues relating to banking and the challenges faced by small businesses.  The Government took swift and decisive action at the end of September to safeguard the Irish banking system to ensure that our financial system continued to meet the needs of the economy and in particular the needs of the small and medium-sized enterprises.  Over 250,000 small businesses operate in our economy and employ approximately 800,000 persons.  Access to credit and finance, including short-term credit, is the engine of the SME sector.  The Government is very conscious of the need to ensure that credit lines continue to be extended to viable businesses.  To support this objective and, more generally, to secure the stability of the major domestic credit institutions, this House introduced and approved the credit institutions (financial support) scheme.  The focus has been to promote confidence in the economy and ensure that the Irish banking system continues to be in a position to access liquidity and funding to meet the credit needs of the economy.

  In my recent discussions with the six guaranteed institutions, I pointed out to the institutions that the fundamental object of Government policy is to ensure that the banks continue to play a crucial part as motors of the economy and the giving of credit.

  As regards the income levy, I welcome Deputy Bruton’s contribution to the debate.  I am pleased that he has recognised the increased fairness of the income levy as constructed for the Finance Bill.  I believe the levy is a progressive and fair measure.  The exemption thresholds for those on low incomes and those over 65 years of age protect the vulnerable and the elderly.  Middle income earners will pay at 1%.  Income in excess of €100,100 will be levied at 2% up to a ceiling of €250,000.  Only income above this amount will be levied at 3%.  This is a very progressive levy.  As introduced in 1993 it was not nearly as progressive.  As I said yesterday, those who can best afford to pay pay the most.  In fact, the top 1% of income earners will contribute 20% of the levy yield.

  Deputy Burton asked for marginal relief at the exemption thresholds.  I presume this is the Deputy’s remedy to alleviate the position known as the “step effect”.  As I stated during my introductory speech, where the age-related or general thresholds are exceeded, the levy will be payable on all income.  To introduce a marginal rate system on top of the exemption limits would be both very costly and add an undue level of complexity into the system for businesses and payroll operators.

  It should be noted that there are step effects in our tax system which have been in place for a number of years.  For example, there is a step in the health levy and in the PRSI system.  There is no compelling evidence that these step effects have discouraged workers from accepting increases in pay, as Deputy Burton suggested. As the Minister of State, Deputy Mansergh and Deputy Michael Ahern said during the debate, there is a precedent for the income levy.  The income levy introduced by the Fianna Fáil-Labour Government in 1993 had a step effect, as did the income levy introduced by the Fine Gael-Labour Government in the early 1980s.

  I would like to clarify the position of the income levy for to the self-employed and farmers.  Deputy Fleming is correct in his assessment that the income levy is not applied on turnover.  The levy is applied after deduction of legitimate expenses directly associated with the performance of the trade.  He is also correct in pointing out that the use of the income levy is preferable to increasing the income tax rates.  As the Minister of State, Deputy Mansergh quite rightly pointed out yesterday, to provide the same yield as the income levy we would have to increase the standard rate by 1% and the higher rate by 2%.  This would mean an increase on middle-income earners of 3% and not the 1% as proposed.

  I would like to assure Deputies Ciaran Lynch and O’Donnell that the income levy will not be applied to the minimum wage.  The annualised equivalent of the minimum wage is €17,542 whereas the income levy exemption threshold is €18,304.  This is €762 more than the minimum wage annualised.

  I thank Deputy Cyprian Brady for his comments on the changes to the mortgage interest relief provisions.  This measure will provide real assistance to first-time buyers without placing an additional cost on the Exchequer.  Deputy O’Donnell pointed out this initiative will result in a reduction in relief for non-first-time buyers.  However, it is not possible to make this measure revenue-neutral without rebalancing the relief in this way and non-first-time buyers are not under the same pressure as first-time buyers.

  I welcome Deputy Noonan’s contribution and I am heartened that he appreciates the reasons why the health expenses relief has been reduced generally to the standard rate.  Uppermost in my thoughts when deciding this measure was the welfare of those in nursing homes.  I was aware that the nursing homes support scheme was being drafted but would not be in place by the start of 2009.  This is one of the reasons why I extended marginal relief for nursing home expenses for a further period.  My intention was to review the provision again in the context of a fully operational nursing homes support scheme.  However, in light of this debate and having reflected on the points raised by Deputies Noonan and Mitchell, I will consider an amendment on health expenses relief for nursing homes on Committee Stage such that the default position will be continuation of marginally rated relief for nursing home care rather than standard rating at the end of next year.

  On a related point, Deputy Bruton asked, regarding the scheme of capital allowances for specialist palliative care units, why provision is being made to allow qualifying capital expenditure under the scheme from the date of the enactment of the Finance Act 2008 through which the measure was introduced.  The reason for this is that the scheme will not be commenced until approval from a State-aid perspective is received from the EU Commission and I did not think it reasonable that legitimate capital expenditure on qualifying projects should be excluded from benefiting under the scheme in the period pending that approval.  My Department will continue to engage with the EU Commission in an effort to expedite the State aid approval process for the scheme.

  Deputies Bruton, Burton and Sherlock raised issues regarding the changes to the research and development tax credit scheme, in particular the availability of the credit for expenditure on buildings.  Since the scheme was introduced in 2004, expenditure on new or refurbished buildings used exclusively for research and development activities has attracted a tax credit of 20% of that expenditure paid over a four-year period.  However, data emerging from a review of the operation of the scheme being carried out by my Department suggests that this part of the scheme is not being used.  This reflects the fact that in many instances work on research and development takes place in production or manufacturing environments and not only in laboratory conditions.

  The Bill provides that a tax credit of 25% will be available from next year in respect of a proportion of the expenditure incurred on a new or refurbished building used in part for research and development activities.  In this way, we hope not alone to capture the benefit of additional research and development activities which may be undertaken in conjunction with production and other activities, but also have the opportunity to benefit from the fruits of that research and development with the potential for additional production activities to be undertaken here.  The provision requires State-aid clearance from the EU Commission which my Department will pursue.

  Deputy O’Donnell expressed concern about the time limit on companies making a claim in respect of a tax credit.  The Bill provides that such claims must be made within 12 months from the end of the accounting period in which research and development expenditure giving rise to the tax credit was incurred and applies to claims made on or after 1 January 2009.  This is a reasonable requirement for the future.  I realise, however, that the requirement will put pressure on companies and their advisors regarding claims for accounting periods ending in 2007 and prior years.  However the Revenue Commissioners have issued an eBrief in recent days advising tax practitioners and other interested parties that they can lodge, before the end of this year, protective claims in respect of any tax credit arising in the accounting periods ending on or before 31 December 2007.  Specific details on such claims can then be submitted thereafter.  This should relieve the pressure on companies and advisors on the claims deadline in the Bill.

  A considerable number of Deputies, including Deputies Crawford, Tom Hayes, Morgan, McHugh and Sherlock, have noted the differential in VAT rates existing as a result of the decision by the UK Government to reducing its standard VAT rate from 17.5% to 15%.  This measure has been adopted by the UK authorities as part of a fiscal stimulus package.  It must be recognised that our starting point is very different from that of the UK.  We already have a low taxation economy, especially in the area of direct taxation, both income and corporation taxes.  This lower starting position for direct taxation makes it more difficult to reduce taxes further.

  As I have already said, the Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP next year, which is twice the EU average.  As a small open economy, many of our standard rated goods are imported, and cutting the VAT rate would benefit the economies from which we import far more than our own.

  The Government increased the standard VAT rate by 0.5% as part of a general package of revenue-raising measures to fund key public services.  Already we are borrowing 10% of all day-to-day public services expenditure.  This is unsustainable and we faced difficult choices in bringing forward corrective measures.  Each percentage point reduction in our standard VAT rate would cost €450 million in a full year.  For Ireland to reduce the standard VAT rate by 2.5 percentage points, as has been done in the UK, would cost around €1.125 billion in a full year.

  Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, furniture, telecommunications, cosmetics, confectionery, soft drinks and adult clothing and footwear.  The effect of the increase in the standard rate means an increase of 8 cent on an item costing €20, or 41 cent on an item costing €100.  Approximately half the value of goods and services purchased in the State are not subject to the standard rate of VAT and therefore are unaffected by the change in the standard rate.

  The reduction in the UK standard VAT rate will have an impact on the price differential on some goods between the North and the South.  However the UK has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on those items.  Consequently there will be no reduction in the price of those products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%.  It is important that Members of this House recognise that the weakening of sterling has had a far more significant impact on relative prices than any VAT changes on the price differential between North and South of the Border.

  The provision on VAT and tour operators is being introduced as a result of an Appeal Commissioners’ decision which made ail tour operators liable to VAT.  The measure will regularise the VAT position of tour operators and bring their treatment into line with most other EU member states.  Several Deputies, including Deputies Gallagher and O’Donnell, raised the issue of the air travel tax.  In this regard, Ireland is not unique; the UK, France and the Netherlands all apply air travel taxes.  Our rates will be lower than those applying in most other countries.  Tourists to Ireland will be subject to the tax only on their return journey, so €2 or €10 in the context of a much larger purchasing decision involving hotel expenditures etc., should not have much effect on tourism.

  Time does not permit me to respond on all the other points raised but before I conclude I would like to acknowledge the support of Deputy Bruton on the amendments to betting duty in the Bill.  I welcome his understanding of the complex nature of the sector and the challenges it faces.  There is a clear need to widen the tax base for gaming and gambling activities generally.  I reassure Deputy Ciaran Lynch that persons who need to travel to work at unsocial hours and who have no reasonable alternatives to using their cars will not be liable for the car parking levy in those circumstances.

  Irish taxation policy has given us a significant competitive advantage in the last 15 years.  We have ensured that we have had the lowest levels of direct taxation on income; therefore we have had marginally higher indirect taxation.  That model of taxation has worked well for our economy and will be even more important now in leading us back to the path of economic growth.

  This year, for the sixth consecutive year, a married one-income couple with two children, on average earnings living in Ireland, has the lowest average tax rate in the OECD.  When cash benefits from the State, such as child benefit, 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.  After the Budget changes, we are still one of the lowest taxed economies in the EU and I look forward to Committee Stage where we will have the opportunity for a more detailed discussion on the measures contained in this Bill.