I welcome the opportunity to speak in Seanad Éireann on a motion dealing with wider share ownership. I am a strong believer in the merits of promoting such ownership as a means of generating more investment and more employment. This will ultimately create a situation in which everybody owns a stake in the wealth-creating sector of the economy. I see this not so much as a desirable option but rather as a necessity, if we are to achieve the scale of growth in the economy that we need in the years ahead.
What I want to set, therefore, are targets we can achieve. I want to put in place a system to monitor progress. I want to find out what the obstacles there are to faster progress. I want to talk about how we can stimulate action to surmount these difficulties. I hope, indeed I am confident, that the debate here in the Seanad will be a help to me in all of these four regards.
We are all here agreed on the need to develop a strong indigenous industrial base. We all recognise there is potential for investment in new sectors of the economy. We are beginning to get a stronger appreciation of the valuable role which small business can play. It behoves us then to develop policies which will maximise our potential and open up new opportunities.
Some other countries have a stronger tradition of risk investment than here. In Ireland people, unfortunately, have preferred to invest in gilt-edged securities with a guaranteed return. A consequence of this has been that there has been insufficient capital for productive investment. This is especially true in the case of small industry.
We have seen over and over again, instances of small businesses, with definite potential, struggling, and in many cases failing, because of their excessive dependence on bank borrowing. They are unable to cope with the volume of debt. Interest bills come when they are least able to be met. They would have much more flexibility if a higher proportion of their capital was provided in the form of shares rather than bank borrowing. One only pays the dividend on a share when there is a profit but one has to pay interest whether a profit is being made at the time. This is an essential economic and industrial argument in favour of share-ownership and is why it is so important to promote it.
Wider share ownership opens up the possibility of another source of investment for the developing company. Such investors are likely to take a close interest in the fortunes of companies into which they have put money. They may also be a source of further funds as the company expands. They may have some special expertise to bring to bear, or they may have contacts which can aid the company's progress.
If you have a small company employing, perhaps, 15 or 20 people set up by somebody who, for instance, has a production background producing some engineering product, for example, he may have no expertise in marketing or in the accountancy area and his business may fail subsequently for lack of adequate marketing or lack of adequate financial control. If he had gone looking for capital early in the life of his company there is a strong possibility that under the business expansion scheme one of the people who had a high income and who might have invested in his company might be the marketing director of a large local co-op or other business. That person would then go on the board of directors and in addition to money he would bring the specific expertise the company lacked. Likewise, another person with a high income wishing to reduce his income tax by investing under the BES might be a local accountant and if he came on the board of directors of the company he would provide a very valuable free service to the company in the form of consultancy at board meetings through his membership of the company. That is a very important reason why wider share ownership should be seen not just as a means of getting extra capital but also as a means of bringing extra expertise into the company.
I have spoken of the clear need for investors to get away from the idea of limited returns on relatively risk-free investments. Firms must lessen their dependence on restrictive and expensive loan capital. There is a wider dimension. There is justifiable debate at the present time about poverty in this country. I know that is a subject which frequently engages the attention of Senators. Poverty takes many forms. The most obvious is lack of funds to support an adequate living standard but a more pervasive and equally damaging form of poverty is the sense of non-involvement in society. Those who are unemployed, sick or housebound suffer not only some material deprivation but an even greater sense of being cut-off from the main stream of society. The aim of social policy must be to address not only the sense of material loss but also the sense of isolation that is suffered by so many at the present time.
The concept of wider share ownership is one way of bringing more people into the mainstream of economic activity in Ireland. The sense of being involved in a company as a part owner is a very important way in which people can play a part in society. That is something that can be undertaken by people of all ages and stages in life. The level of involvement in the company can be fitted to suit their capacities at a given time.
I see the promotion of wider share ownership as a key element of social policy, not just an economic issue. If we can get more people involved in the wealth creation sector of our economy, we are removing one of the major perceived senses of inequality and grievance in our society. This is the sense of being excluded from the important wealth creation activities of our society. It is obviously important that those who work in firms should, as far as possible, own a share in the company in which they work, but it is equally important that those who have retired from firms should continue to hold shares in that company after they are no longer actively employed. This is not a substitute for a pension, but it is a basis for continued involvement by retired people with the firm in which they worked. This can be very important as the sense of being useful one day and rejected the next is frequently felt by those who retire.
It is equally important that people should also own shares in companies with which they have no working connection. It is prudent that people should own shares in a wide range of companies rather than have all their shares in one particular firm, putting all their eggs, so to speak, in one basket. It is equally important that people should have an interest in different sectors of the economy.
We have to take new initiatives quickly to speed up economic growth and employment. We are in the unenviable position of having the highest budget deficit and the highest unemployment in the EC. Creating new jobs in the public sector is no solution and would simply magnify our problems in the longer term. We need self-sustaining, self-financing jobs which generate their own wealth. This is not a choice but a necessity. These jobs presuppose investment in the private sector in particular.
We have introduced here in Ireland the best set of tax incentives for share ownership in the manufacturing sector that exists anywhere in Europe. They are designed to make it tax efficient to do what is patriotic from a national point of view. People can pay no income tax at all on money they invest in shares in a manufacturing company. The maximum income tax they will pay on any dividends they receive from those shares will be 24p in the £, compared with 58p in the £ paid by many people. This is a really attractive tax package and should, as I intend it will, make a major impact to broadening share ownership in Ireland and reviving the manufacturing sector of our economy.
Some say it is wrong to confine these incentives to manufacturing but it should be remembered that Ireland is an exporting nation. We can, of course, develop our services sector, but we suffer the inherent disadvantage that people have to travel across two stretches of sea from continental Europe to get to Ireland. It is easier for goods to travel than it is for people. Thus, Ireland is likely to retain a larger dependence on the manufacturing sector because of its physical isolation than other countries more centrally placed in Europe who can more easily provide services. Ireland, therefore, is right to put the accent on development in manufacturing. It is concentrating on that area in which we have a comparative advantage.
However, it should be stressed that these incentives are not in all cases confined to manufacturing. They also include traded services, but it would make no point to extend the tax incentives to non-traded services. All that would then happen would be that new firms would be set up, with the aid of the tax incentive, to displace old ones. In other words, we would have new jobs replacing old ones and we would be no further on. No extra jobs would be created. By confining the incentives to the traded sector, whether it be manufacturing or services, we are ensuring that the emphasis will be on extra jobs, not the displacement of existing ones.
There is a great deal of concern in Ireland about our failure to develop the food industry and other aspects of our material resources. The real problem here is marketing. We have the raw materials. Our fresh food is better than that produced in most other countries.
What we lack is sufficient investment of money in marketing. We have not invested enough in quality control, in after sales service, in advertising, in research into new markets and new products and all the other factors that go to make the difference between a good product that is left on the shelf, and an equally good product that is a runaway best seller.
Investment in marketing to achieve this has a long lead time. You cannot develop a new market over-night. Thus bank finance is unsuitable for the development of markets. Bank finance requires interest payments to be made virtually from the day the money is available. This is no use for a long term project with, initially, a low return. Indeed it is worth noting that banks are not interested in financing marketing because there is no physical asset to provide security for the bank in a marketing programme whereas there is in a building or a machine. That is another reason we must seek other forms of finance if we are to develop our full marketing potential.
On the other hand the provision of equity in the form of shares under the business expansion scheme is ideal to financing marketing. It provides capital that only seeks remuneration when the marketing programme has been a success. It is essential that the food industry use the business expansion scheme to the full to develop new food products in Ireland. I have stressed this time and time again at every opportunity. Most recently I addressed the Irish Co-operative Organisation Society, ICOS, at their annual meeting and urged them to use these schemes to fund food marketing, rather than relying unduly on bank finance.
I also believe that, with the development of specialist foods for particular market niches, farmers themselves will be able to avail of the business expansion scheme to develop food products. New products are going to be required, and there is no reason why farmers, with an income tax liability, should not use the business expansion scheme to fund companies to develop the marketing and processing of products on their farms. This is particularly relevant to the development of alternative forms of agriculture in areas that are not surplus in the EC at present.
I have asked the Irish Farmer's Organisation and the ICMSA to see how their members, who have an income tax liability, can use this scheme both to offset the tax liability and develop new products for the market place. It is only through developing new products which do not rely on EC subsidisation that Irish agriculture will achieve its potential.
The special package of tax incentives which has been incorporated in the 1986 Finance Act to stimulate private investment are, of course, selective. They can and do involve a loss of revenue to the State and consequently it is important to ensure that the benefits will outweigh the immediate revenue loss. If they are too generous or too wide in their application, they can cause serious distortions, as well as being very expensive.
The main incentives are: the business expansion scheme; the research and product development scheme; a reduced tax charge on dividends for manufacturing companies; and selective reductions in capital gains tax rates. The take up of the business expansion scheme in recent months has increased dramatically and this is in a sense to the point made by Senator Hillery. Ten companies received £1.53 million in investment in 1984-85. In the following year to April 5, 1986 29 companies and investments of £3.7 million were approved. Since then the rate of growth has been spectacular.
By the end of August last a further 17 companies and £1¼ million of investment has been approved. In the past two months alone 24 more companies have been approved with investments of over £2½ million. Inquiries are now being processed from another 102 companies. I can see every prospect of this scheme alone producing £15 million or more of new investment in 1987 as against £1.5 million in 1984-85 and £3.7 million in 1985-86.
Clearly firms, investors and specialist finance houses are now becoming fully aware of the possibilities of the BES to generate growth and expansion and, at the same time, earn very generous returns. The life of the scheme was extended to 1991 in the Finance Act and I fully expect that, long before then, it will be making a major impact on investment.
A number of the other changes made this year will help to accelerate the use of the scheme. In particular, the reduction in the rates of capital gains tax to a flat 30 per cent for shares disposed of on the smaller companies market of the Irish Stock Exchange will have a twofold benefit. It will encourage companies to come to that market and, at the same time, increase after-tax returns for shareholders realising gains. The capital gains tax rates for gains on shares acquired under the BES are also being reduced to that rate. This is important because people frequently say: "Yes, it is a good idea to buy shares in the business expansion scheme company but how can you get rid of them? If you want to realise your gains, if you want to sell your shares how can you do it?" Some of these companies are too small to get a full quote on the Stock Exchange. That is why the smaller companies market is an important disposal mechanism for the business expansion scheme. The knowledge that such a disposal mechanism exists, suitable to small companies, is a very good incentive to people to go into these companies as shareholders in the first place because they know that, as the companies develop, there will also be a means of disposing of those shares, selling them to somebody else who will bring in other money instead.
The research and product development scheme which was newly introduced in this year's Finance Act is designed to widen the range of methods open to investors to become involved in investment and research. This new scheme also enables trading companies, known as sponsoring companies, to have much needed research and development done specifically for them without diluting their own capital base or taking on expensive loan finance. Again research and development are more suitably financed by equity than by loan finance. The scheme is a complicated one but experience with the BES suggests that once investors, their advisers and firms, become familiar with the "workings", its use will spread rapidly as it is spreading now two and a half years after its initial introduction.
I have been concerned during the past few months to publicise the value of these schemes. I have done this consciously because the need for action is so great. We just have not got the time any longer to wait for incentives to be gradually adopted. We need not only to bring about change but to bring it about quickly. I should like to refer to a point made by Senator Browne in his contribution. He referred to the tax relief for patent income. It is only now that people are beginning to take an interest in the fact that if you get a patent in Ireland, the royalties you receive from it are entirely tax free. That scheme was introduced by the then Minister for Finance Deputy R. Ryan in 1976. It is only now that it is really being taken up. We certainly cannot wait ten years for these incentives to deliver their full fruits. That is why it is very important that a debate like this should take place and that every means should be used to bring to the public mind the availability of these incentives. We cannot afford to have good incentives lying dormant in the Statute Book when the need for innovation and investment is so great.
That is why I have approached the opinion makers in the financial and commercial world to throw their weight behind these schemes. The banks have undertaken to distribute promotional literature on the schemes at branch level. Some banks have advertised loan finance for investors who wish to become share owners. I have approached the chambers of commerce of Ireland to set up a designated fund. I have referred to approaches I have made to the IFA and the ICMSA. The chambers are working on this at the moment and I am hoping for a positive outcome in the next few weeks. The chambers organisation can provide a powerful motivation at local and regional level for practical steps to create jobs.
These initiatives to encourage investors are balanced by a package of measures to stimulate employee participation in bringing about the success, and enjoying the fruits of the success, of the firms in which they work. We need to get past the stage of talking about improving the industrial relations atmosphere. My contribution is not on theory but on the form of practical changes.
Some of our best talent in Ireland is wasted in industrial relations conflicts. The idea of two "sides" in industry is a time-wasting phenomenon. If workers were share owners as well as the providers of labour, both management and unions would be on the same side. Both would have exactly the same interest, which unfortunately they do not have at the moment, in the development of the firm. They would not be looking at it from different angles with different demands.
My ideal would be a society in which trade union officials were participating actively as representatives of member shareowners in the development of new policies that will increase the profitability of the firm in which their members work. This would be a much better, and a more fulfilling use of the talents of our trade union officials than the current adversarial system. It requires a revolution in trade union thinking but worker share ownership also requires a revolution in traditional management thinking as well. These tax incentives provide an opportunity for both so called "sides" in industry to meet one another half-way and develop a common interest.
The fundamental employee participation incentive is that for profit sharing. This term is something of a misnomer because the actual incentive is concerned with wealth sharing and only secondarily with profit sharing. Under it, firms are encouraged to allocate shares, that is part ownership, to employees. Employees may obtain full income tax relief on the value of the shares allocated and the company may deduct, for corporation tax purposes, the cost of providing the shares. This scheme encourages employers to give and employees to look for not just an interest in their company but a say in their company as shareholders. The upper limit on allocations of £5,000 a year is very generous.
The growth rate in the use of this scheme is phenomenal. In 1983-84 after two years in operation only £1.8 million worth of shares had been allocated to workers share owners. In the following year a further £2.9 million was issued. In 1985-86 the figure rose to £8.2 million. Up to the end of 1985-86, 15 company groups were approved. In this year so far a further 11 companies have been approved or are under active consideration. I want to see the number of firms operating profit sharing schemes this year doubled.
At this point I wish to refer to a point raised by Professor Hillery. He referred to foreign-owned companies not being open to use the profit sharing schemes. There are two profit sharing schemes in existence. One originated in the Finance Act, 1982, and another separate scheme originated in the Finance Act, 1986. The 1982 scheme is one which allows companies to distribute profits to employees in the form of shares in the company. That scheme is available both to domestically-owned and foreign-owned companies. The problem referred to by Senator Hillery does not arise in that scheme which, incidentally, is the most commonly used of the two schemes. There is a restriction in regard to the 1986 scheme which allows companies to allocate not shares out of their profits but actual money to employees to enable them to buy shares as distinct from the company giving them shares. That second scheme, and one can use both, is confined to Irish-owned companies. It is no harm to give a little bit extra to Irish-owned companies because it is our common objective in the Houses of the Oireachtas to promote a little bit more the idea of indigenous, Irish-owned companies.
A parallel scheme covers share options where completely new tax arrangements have been introduced this year. These arrangements will facilitate firms in attracting and holding on to key staff. We frequently hear in debates on Finance Bills and elsewhere representations on behalf of high tech firms that they cannot hold on to key research personnel, that these people are being attracted by fantastic salaries to Silicon Valley, in California or somewhere else, or even to England, where not only is the salary higher but the tax level is lower.
Obviously it is not possible in a country where the entire PAYE revenue has to be devoted to paying interest on debt to introduce big cuts in income tax for top taxpayers in general to keep a number of key personnel in the country. That is not on; it is not on in grounds of equity and it is not on in practice. This share option scheme provides an alternative route where profitable companies, instead of allocating money, can give options to people to buy shares on tax advantageous terms. If any firm complains to Senator that they cannot keep key executives he should refer them to the share option scheme. That is designed and targeted specifically at profitable manufacturing enterprises to enable them to keep staff, without giving a general tax concession to doctors, accountants and all the rest in society to whom one might wish to give such concession but which simply cannot be afforded.
Another new measure, this is one I have already referred to, gives full income tax relief to an employee on money used to buy shares in his company. The limit here is £750. Supporting these measures is a tax relief referred to by Senator Browne on interest on loans used to acquire shares. This I think — and I summarise now all the elements in the package — represents an unprecedented set of co-ordinated measures to stimulate the creation of wealth and, secondly, the equitable distribution of that wealth among investors and employees as stake-holders.
Wealth creation should not just be an option for the very few. The opportunities and the right conditions are there for everybody to take part. The measures introduced are extended in this year's Finance Act and are intended to bring all these elements together. I am asking the House to support these measures and I call on the key institutions in the State to actively promote them in the interest of creating and maintaining jobs.
There were one or two points referred to by Senator Hillery I would like to refer to although I am not sure whether they were relevant to this debate. The Senator rightly pointed out that the profit level is a key factor. He referred to input costs and naturally enough — I presume he might have got some information from the Confederation of Irish Industry — he picked out the areas where we are disadvantageous in terms of industrial costs vis-à-vis our competitors in Europe. It is important to put this context by pointing out a few things. First, most European countries do not offer manufacturing the general range of grants for marketing, for technology acquisition, for research and machinery that we offer. This is a very important means of reducing costs. Secondly, no European country offers a 10 per cent corporate tax rate to manufacturing companies, as we do. Thirdly, most other European countries have higher rates of social security taxes on employees than we do; much higher in some cases. Fourthly, cost of labour is considerably less in this country than it is in other European countries.
While some costs are higher, partly as a result of the fact that Ireland is an island off another island off the mainland of Europe and cannot enjoy the benefits, for example, of an electricity interconnecter for producing electricity, there are other areas in which the Government and the trade union movement make up that disadvantage. In relation to the report on industrial input costs, the position is that it will be the subject of a meeting in the near future between the Taoiseach and the Confederation of Irish Industry who initiated the report.
Senator Hillery referred to the Deposit Interest Retention Tax and suggested that this was a move in the opposite direction to all of these incentives. I beg leave to disagree with the Senator. If you want something done, you apply a combination of the stick and the carrot. One of the things we do not want is money lying dormant in bank accounts or in gilts. If you have the Deposit Interest Retention Tax that gives people encouragement to look around for another form to which they will put their money that will not be subject to that tax at 35 per cent. Clearly, therefore, the Deposit Interest Retention Tax encourages people to take their money out of bank deposits and put it into shares in the directly productive sector so, far from it having the negative consequences Senator Hillery referred to it could be argued that it is consistent with the general move of trying to get people to put their savings into the risk sector rather than the saving sector of the economy.