The success of last year's budget policy is illustrated by the near record rate of 7 per cent growth achieved in 1973. The 1973 budget was aimed at expanding economic activity in order to take up the slack which had developed in the economy over the preceding years. That aim has been attained. Industrial production forged ahead. The services sector continues to expand. Farmers' incomes rose in current terms by an estimated 32 per cent benefiting from the general increase in world food prices and from our accession to the European Community in 1973. Disappointingly, a sizeable growth of 34 per cent in merchandise export earnings was more than offset by a rise of 36 per cent in merchandise imports, mainly due to a sharp increase in import prices, and the balance of payments deficit rose from £56 million in 1972 to £86 million. Despite this higher deficit, the overall external reserves at the end of the year were marginally higher than their end-1972 level due to continued capital inflow, reflecting international confidence in the economy.
While inflation continued to be a matter of major concern during 1973, on the brighter side there was a welcome rise of 6,000 in total numbers employed in contrast to the drop of 9,000 in the previous year. The numbers employed in agriculture continued to fall but employment both in industry and in the services sector rose by 6,000 in each case. Overall, there was a drop in the number of unemployed compared to the preceding year and, as well as an increase in the total population, some net immigration took place.
Economic prospects 1974
There is general agreement that the economic growth of our trading partners will not be as buoyant in 1974 as in 1973. Even before the energy crisis, there were signs of a slowing down in the pace of international economic expansion but since then, because of the difficulties created by both the price and the supply position of oil products, it has become clear that most of our fellow-members of the European Community and of the Organisation for Economic Co-operation and Development are likely to experience rates of growth well below average this year.
The indications are that, on current trends, we can expect a growth rate of 3½ to 4 per cent this year, compared with about 7 per cent in 1973. While this is below what we would otherwise have achieved, it does represent a better prospect than seemed likely at the onset of the energy crisis.
Partly because of the likelihood of higher prices and the probable slowing down in economic activity, consumer demand in 1974 may not show much more than half the 6¼ per cent rise in volume which occurred in 1973. Investment, however, will continue to increase and should be helped by the substantial rise in the public capital programme to which I shall refer later. Assuming that our competitiveness is not seriously impaired by the increase in unit costs resulting from the third national pay agreement, industrial exports should expand quite strongly in 1974, though at a slower rate than in 1973. While conditions in external markets for agricultural products are unlikely to be as favourable as in 1973, agricultural exports are also likely to show a significant increase.
A further significant increase should take place in farmers' cash income while tourist receipts should also continue to rise this year.
The rise in the volume of imports should slacken significantly as a result of the slower growth in economic activity but the rapid rise in oil prices will increase the import bill considerably and result in a sharp rise in average import prices. When account is taken of likely import and export trends and also of the net current transfers from abroad, a deficit of the order of £140 million may emerge in 1974 as compared with an estimated £86 million in 1973. Most other non-oil producing countries are likely to experience a similar, if not, indeed, a greater, deterioration in their external accounts and it is internationally accepted as essential that means be found of financing these deficits without deflationary consequences.
Prices and inflation
Inflation continued to be a matter of major concern in 1973 and, indeed, it over-shadowed the encouraging performance in the economic field. The consumer price index rose on average by 11.4 per cent in 1973 as compared with 8.6 per cent in 1972 and, as in the previous year, food prices accounted, on average, for almost half of the increase. There was, however, a distinct improvement in the trend of food prices during the second half of the year. In the period between May and November the food element in the consumer price index rose by only 1.7 per cent—accounting for 12 per cent of the total rise— while in the previous six months it rose by 14.1 per cent—accounting for almost two-thirds of the total rise in the index. While this easing reflected the slowing-down in the rate of increase in meat and vegetable prices, a major factor was the removal of food from the scope of VAT, with effect from 3rd September last, as part of the Government's social and economic policies.
The dominant role played by external factors in aggravating the inflationary trends in the economy continued unabated in the past year. The substantial rise in our import prices, to which I have already referred, was some 20 per cent or about five times the rate of increase in the previous year, reflecting the higher cost of raw materials as well as currency changes and inflation abroad, which—because of our open economy—it is virtually impossible for us to avoid importing. External factors accounted for almost one-half of last year's increase in consumer prices.
The impact of import prices on the cost of living will be even greater in 1974 because of the widespread repercussions throughout the economy of the problem of world-wide commodity price rises of which higher prices for oil are only a part. Indeed, these effects are already apparent in the increased price of various oil-based products, including electricity and gas, and of other fuels the price of which has moved in line with that of oil. Thus between November, 1973, and February, 1974, prices of fuel and light rose by almost 30 per cent and accounted for about one-third of the increase in the consumer price index in that period.
The very big increase in incomes at home has also been an additional factor which fuelled the fires of inflation during the past year. The significance of the external factors to which I referred should not delude us into ignoring the fact that a rise in domestic incomes in excess of the rise in the volume of national output contributes in itself to a rise in consumer prices. Over the period since 1969 employee incomes have accounted for between one-third and one-half of the rise in consumer prices.
Most economic commentators are agreed that the average rise in consumer prices this year will not be less than 14 per cent, of which the direct and indirect effects of the rise in energy prices are likely to account for between 3 per cent and 4 per cent. Price rises of this order, whatever their source, pose grave economic and social problems for our community and the way in which we react to them is a clear test of our personal wisdom and of our sense of national responsibility. The Government are fully alive to the pressing need to shield the community as far as any democratic Government can from the harmful effects of inflation and they aim to achieve this by the pursuit in the coming year of appropriate economic and budgetary policies.
The wide powers of price control vested in the Minister for Industry and Commerce have been increasingly exercised and have, indeed, been strengthened. The new measures include the extension, from one month to two months, of the period of advance notice required before prices of goods and services can be increased, the freezing—at the level prevailing on 23rd June last—of the profit margins of importers, wholesalers and retailers on a wide range of commodities, and the fixing of maximum retail prices for various household goods. These controls can prevent unjustifiable increases in prices. Where however increased costs are unavoidable and cannot be offset by increased productivity they must necessarily be reflected in higher prices.
National Pay Agreement 1974
In my budget speech last year I said that the Government were committed to the principle that voluntarily-negotiated national pay agreements of a kind which met the economic and social objectives of the community were the best basis for economic development, stability and growth. The ratification of the 1974 National Agreement was the culmination of many months of hard negotiation. The income tax reliefs which I am announcing in a later part of my speech will serve to enhance the purchasing power of salaries and wages.
The new agreement is a complex and sophisticated one. By its imaginative and pragmatic approach it has virtually eliminated the problem of the widely differing terminal dates for various groups and thus should make for less complex provisions in the future. Now that the agreement has been ratified it is essential that all should co-operate fully in its implementation. The problems which the economy faces in the period ahead will become even more difficult if the terms of the new agreement are not strictly observed.
Many of these problems arise from external factors over which we have little or no control but the terms of the new national agreement, taken in their strictly economic context, will add to rather than alleviate the pressure on costs and prices. Although the economy's wage and salary bill for 1974 will be at least 17½ per cent higher than for 1973, the main effects of the new agreement will be carried through to next year when they will increase the wage and salary bill by as much as 14 per cent, if not indeed by more. In other words, wages and salaries are likely to rise by at least 14 per cent next year, apart altogether from any further increases that may be negotiated on the termination of the present national agreement. Increases of this magnitude cannot but make our industries less competitive unless they are matched by comparable increases in efficiency and productivity hitherto unachieved.
The new national agreement is not therefore a panacea for our problems What it does offer us however is industrial peace, an improvement in the relative position of low-paid workers and the elimination of sex-discrimination in pay. But it is essential that all sides should co-operate in enabling the very substantial pay benefits in the agreement to be matched by real increases in productivity and efficiency. Unless this is done the benefits will be eroded by price increases of our own making coming on top of those outside our control.
Status of women
The equal pay provision of the national agreement, 1974, will be applied to the Public Service in agreement with the staff. By the end of the present year over one-half of the former differentials will have been removed. Equal pay will be fully applied in the Public Service by the end of 1975. The Civil Service (Employment of Married Women) Act, 1973, removed the bar on the employment of married women in the Civil Service with effect from 31st July, 1973. The marriage bar has also been removed in the local authority and health services. The position of women in the social welfare code has also been improved and I shall be returning to this topic later.
New Department of the Public Service
The new Department of the Public Service was established last November. The Public Service Advisory Council, which I set up to survey the progress of the reorganisation of the Public Service, will report annually to each House of the Oireachtas. Its activities will provide a window through which the public can observe what is going on inside the Public Service. The public-spirited citizens who accepted my invitation to act on the council deserve the community's gratitude.
A major concern of the Department of the Public Service has been the application on an experimental basis of the separation of policy and executive functions in the Departments of Health. Transport and Power, Industry and Commerce and Local Government. The publication of the report on the restructuring of the Department of Health will soon be followed by reports on the three other Departments concerned. The question of extending the new structures will be considered in the light of the operation of the changes in these four Departments.
International monetary developments
The instability of the international monetary system continues unabated. At one time or another during the past year or so not only sterling but also the other major currencies have been in difficulty, largely or immediately generated by uncertainty, which resulted in large-scale inward or outward capital movements. These de-stablishing movements across the exchanges of the world are of great size and speed and are a relatively new, unwelcome and dangerous arrival on the monetary scene.
The persistent monetary instability, added to in recent months by a fresh set of problems thrown up by the energy situation, has held back progress on international monetary reform and also seriously affected EEC economic and monetary policy. Day-to-day uncertainty on the monetary front does not make for the speedy construction of a new international monetary system. Neither does it help greater co-ordination between groups such as the members of the European Communities, given their individual problems and the differences in their economies.
These unprecedented difficulties must be taken into account in assessing the lack of progress to date and in estimating possible future progress. The major immediate problem is of course the adverse effects of the inflated oil and other commodity prices on international payments. Considerable work, in which Ireland is involved, is being undertaken in the appropriate international bodies to find a solution to these complex problems. Even the most optimistic recognise that it will be a long haul.
Interest rates
Interest rates, as a consequence of international trends, rose by 4 percentage points in 1973 and are now at record levels. Unpleasant and unsuited to our requirements as these interest rate developments are, there is very little we can do to avoid them as they are determined by world influences. There are still strong forces tending to keep rates up, such as inflation, monetary instability, the energy crisis and balance of payments problems in many countries. The desirability of keeping interest rates here as low as possible is fully recognised and the position is being kept under constant review.
The conditions of the past year were particularly difficult for the building societies and there was a risk that sufficient funds would not be available to meet the demand for mortgages and that interest rates charged to borrowers would become unduly onerous. Measures taken by the Government helped to avert these dangers. The State subsidy made available in May, 1973, which is being continued for the time being, has made it possible for the societies to increase their rate of interest to investors by 1 per cent while providing mortgages at a rate of 1¼ per cent below what it would otherwise be. This represents a full year cost to the Exchequer of the order of £2 million.
Use of credit
The oil crisis has brought home to us recently the necessity for economising and for eliminating waste in the use of fuel and power. The rocketing cost of other basic commodities and raw materials which we must import for industry, for agriculture and for consumption makes it necessary for us to be frugal and selective in the use of all resources. Among these resources is credit, for capital is as basic and fundamental a necessity for economic development as oil or electricity. Industry and agriculture will have problems enough in financing essential investment without the community adding to the difficulties by improvident expenditure on luxuries and speculation. There has been an insufficient observance by financial institutions of the Central Bank's guidelines for credit. Some of the funds required to increase the productive capacity of the economy have been diverted to facilitate the few who engage in speculative purchases of property and securities. If there is not a more genuine, wholehearted. voluntary reservation of credit for productive purposes, new measures will have to be taken to ensure that credit is used in the public interest.
Programme for economic and social development
The preparation of an economic and social programme covering the four-year period ahead has been under active consideration for some time. The task could not be approached on the basis of blueprints for previous programmes; planning for the future has to be adapted and redefined to meet the changing conditions of the seventies. Uncertainty is the catchword of the present world-wide economic scene. For months past the dominant characteristics have been those of uncertainty and instability in relation to such factors as the supply and price of basic commodities including oil, the international monetary system, the likely pace of inflation and more recently the future evolution of the EC.
These and other uncertainties are expected to have a profound and pervasive effect on the economy and underline the necessity for a fundamental review of planning methods. As it is too soon yet to assess their likely full impact in the coming years the Government have decided that it would not be possible to publish a meaningful programme pending a reassessment of medium-term planning in the light of the current unsettled world economic situation. Meanwhile the Government will continue with their reappraisal of the strategies on which economic and social planning should be based.
The recently established National Economic and Social Council have now presented their first report. I am confident that the council's advice will be of great assistance to the Government, and I should like to thank the members for their participation in this important work. As the Government will wish to have the views of the NESC on future economic and social developments, I will be consulting the council in the course of the preparatory work on the new programme for economic and social development.
Budgetary outturn 1973
Last year's budget—which, as I have already mentioned, was deliberately aimed at the expansion of the economy—envisaged a nominal current deficit of £39 million. I use the word "nominal", because I specifically recognised that raising the growth rate would bring in more tax revenue and reduce the deficit. This is what happened, although I must admit that the process was assisted by the higher-than-expected price increases which boosted VAT receipts. Although expenditure was somewhat greater than expected, the actual deficit was £10.4 million.
The public capital programme, which is of critical importance in promoting economic growth, was fixed initially at a figure of £305 million, representing an increase of 23 per cent on the previous year's outturn. During the year, as a further boost to economic activity, the allocations for housing, telephone development, agricultural credit and industrial credit were increased. The provisional outturn for the year—at £319.7 million—represents a record increase of 28.7 per cent on the previous year. Details will be found in the recently published booklet Capital Budget, 1974.
Exchequer capital
Although receipts from the Exchequer's normal capital resources continued at a high level in the past year, they were below earlier expectations, possibly because the unsettled state of capital markets encouraged some potential investors to remain liquid. In these circumstances the Central Bank agreed, as an exceptional measure, to provide some funds for the Exchequer-financed portion of the capital budget by purchasing Government stocks to the value of £20 million.
It is desirable that as much as possible of the Government's capital requirements should be met from domestic sources. The interest rates payable by the Post Office Savings Bank and the Trustee Savings Banks were increased by 3 percentage points during 1973 and substantial improvements were also made in the terms of Savings Certificates, Investment Bonds and the National Instalment-Saving Scheme. The returns on savings placed in these schemes compare favourably with those available elsewhere and I hope that the recent upturn in receipts will be maintained.
A substantial amount of foreign borrowing was necessary last year, both on the international capital markets and from the European Investment Bank and the World Bank. Ireland's membership of the EC makes us eligible for long term loans from the European Investment Bank for specific projects. A number of such projects have already been approved and the funds received.
Nine months' transitional financial period
The Exchequer and Local Financial Years Act, 1974, provided for the change of the Exchequer financial year and the local authorities' financial year to the calendar year. The year 1975 will be the first calendar financial year for both Exchequer and local authority purposes. The period from 1st April, 1974, to 31st December, 1974, will be a transitional financial period which will have, in so far as the Exchequer is concerned, its own current and capital budgets and Estimates for Public Services.
As regards the timing of parliamentary business—about which I intend consulting the Committee on Procedure and Privileges of this House and that of the Seanad—no change will be needed in 1974, except that the expenditure estimates for the nine-months' period will have to be passed before the end of December next. From 1975 onwards the timing of the budget, of the Estimates for Public Services, of the consideration of those Estimates and of the annual Finance and Appropriation Bills will be altered. For the future, if the former pattern of timing is retained, the budget will be introduced in January or February. I might remind the House that the income-tax year will continue for the present to be the year commencing on 6th April: changing the income-tax year requires more lengthy preparation and this will be done as soon as practicable.
This year's current and capital budgets therefore refer to the nine months' period from 1st April to 31st December, 1974, as also does the Estimates volume published recently The Estimates for Public Services were settled in the first instance on the basis of the 12 months' period from 1st April, 1974, to 31st March, 1975, and were then converted to the nine months' basis. A summary sheet has been included with the Estimates volume showing the underlying figures for the 12 months' period. This will enable comparison to be made on an annual basis with the 1973-74 voted provisions, particulars of which, of course, appear in the volume. Similarly, in the case of the White Paper on Receipts and Expenditure, the capital budget booklet and the current budget tables, figures for the 12 months' period ending 31st March, 1975, have been provided for comparison purposes.
Capital budget 1974
The 1974 capital budget covers the period 1st April to 31st December, 1974. This year's public capital programme was first settled for the 12 months ending March, 1975, and then converted to a nine months' basis. The 12 months' total of £384.4 million is £64.7 million, or 20 per cent more than the outturn for 1973-74. The nine months' programme amounts to £281.6 million, or 73.3 per cent of the 12 months' estimates.
The main item in the overall increase of £64.7 million in the 12 months' programme is an increase of £18.7 million in total in respect of building and construction. Nearly half the increase relates to local authority housing and will ensure progress towards the Government's target of an output of 8,000 new local authority houses by 1975. Expenditure on sanitary services, educational and hospital building and the State building programme accounts for a further £8.3 million. The estimated requirement for the ESB for 1974-75 is £9.5 million or almost 30 per cent up on the preceding year and will cover new generation, transmission and distribution projects including the first instalment of expenditure on the new nuclear power station. Almost 40 per cent more than in 1973-74 is being provided for telephone development. Other significant increases are—industry £6.9 million, industrial credit £6.5 million and agricultural credit £4.5 million. Fuller details of the outlays and the financing are contained in the capital budget booklet.
The increase in the public capital programme will make an important contribution to the growth of national investment and production and is a vital element in the Government's budgetary policy of stimulating the economy, to which I will again refer.
Opening position of the current budget 1974
The period covered by the 1974 current budget is, as I have mentioned, the nine-months' transitional financial period 1st April to 31st December, 1974. The revenue for this nine-months' period is estimated at £669.2 million or only 17.1 per cent of the receipts which would flow in during the 12 months to 31st March, 1975. On the other hand, current expenditure for the nine months—at £716.3 million—is a significantly higher percentage—74½ per cent—of the estimated outlay in the 12 months. This difference is due mainly to the fact that, while expenditure takes place relatively evenly over the four quarters, about 30 per cent of tax revenue on average is collected in the last quarter.
This concentration of revenue in that quarter is attributable mainly to the deferment of certain customs and excise duty payments, to the timing of certain payments of Schedule D income tax, mainly on profits, and to the fact that two of the two-monthly value-added tax payments fall to be made in that quarter. As a result the opening deficit for the transitional nine-months' period, at £47 million, is over £25 million higher than that for the 12 months to end-March, 1975, which is estimated at £21.8 million. I should mention that claims for anomaly increases under clause 18 of the national agreement have been received on behalf of various groups in the Public Service. To the extent that such claims were settled, they have been provided for where possible in the Estimates volume. Some others have not yet been disposed of and, as the outcome cannot be predicted at present, no provision is being included in respect of this contingency in the budget arithmetic.
In the 12 months to 31st March, 1975, tax revenue will show an increase of £126½ million, or 19 per cent, mainly because of the strong buoyancy of income tax, which is likely to rise by one-third and of value-added tax—up by 21 per cent.
On the expenditure side, the Central Fund Services for the 12 months' period show an increase of 22? per cent, mainly due to the increased cost of servicing the public debt. The non-capital supply services show a full-year rise of £113 million or 17 per cent. The main increases are: £28½ million to cover the net additional cost of the National Agreement, 1974; Health: £28 million; Social Welfare: £13 million; Education: £13 million; Local Government: £9½ million; Posts and Telegraphs: £7½ million.
A sum of £10½ million is included to cover the cost of the phased transfer of the health charges and housing subsidies from the rates to the Exchequer. Thus local rates have been relieved of £30 million as a result of the transfers provided for in last year's and this year's budgets.
As the Estimates volume was circulated last week, Sir, I do not think it necessary for me to describe its provisions in detail to the House. The main item of expenditure being provided for in the budget—additional to what is included in the Estimates volume—arises in relation to social welfare and I shall outline later the Government's proposals in this field.
Budgetary policy 1974
The improvement in employment and the striking growth of the economy in the past year would have probably called for a neutral budget this year, were it not for the energy situation, unfavourable movements in world prices of raw materials, and recession in the economies of many of our most important trading partners. However in present circumstances it is clear that budgetary measures will be needed to maintain the real growth of the economy at a level close to full utilisation of capacity. It is particularly important to avoid creating a situation where a dampening of demand induced by the oil crisis and other countries' difficulties would be aggravated by domestic fiscal measures.
The increase in this year's public capital programme will contribute substantially to national output. Present indications however are that without a further budgetary stimulus the economy is likely to grow by only 3¾ per cent this year. This rate is better than that expected by most European countries but it is less than our capacity growth rate and will make little if any contribution to increasing net employment. The Government have therefore decided in line with advice received from a number of organisations, including OECD and the National Economic and Social Council, to give a further boost to the economy by not increasing taxation in this budget to cover the opening deficit or the tax reliefs and increased social welfare benefits which I will be providing.
This is the second year in which I have used fiscal policy to stimulate the economy by presenting a deficit budget. The results last year fully justified this approach and I am confident that this year's policy will similarly be justified in the event. But I wish to strike a note of caution. This policy has involved increasing public expenditure at an exceptionally rapid rate which, if unchecked, could pose problems for the future. Taken in conjunction with the expansion of the public capital programme, it involves a very large increase in foreign borrowing at a time when there are many calls on an uncertain international capital market. Furthermore, while it is proper that this year's large external deficit—which indeed will be increased by the budgetary stimulus—should not be regarded as a restrictive factor, it would be imprudent not to take into consideration the problems which could be posed next year if the deficit had not been reduced, or if satisfactory international measures had not been devised to finance the so-called oil deficit.
Another factor to be taken into the reckoning is the present high level of prices and the need to consider the trade-off between economic stimulus on the one hand and restraining the domestic causes of inflation on the other. There is finally the inescapable fact that, even if there are no further increases, wages and salaries will rise by about 14 per cent next year. All this points to the obvious conclusion that future budgetary policy must be carefully assessed in the light of the prevailing circumstances and that it is essential to bear in mind that, just as an expansionary policy is considered appropriate this year, a neutral or deflationary budget may be required in future years.
Before turning to the taxation reliefs which I am providing, I wish to refer to the general question of tax reform and measures to combat tax avoidance.
Second White Paper on Company Taxation
A further step on the road to reform of the entire taxation system was the publication recently of the White Paper on Company Taxation which contained the Government's proposals for a corporation tax at a general rate of 50 per cent, but with a reduced rate of 40 per cent in the case of small companies. Provision will also be made for an imputation, or credit, of a proportion of the corporation tax borne by dividends equal to income tax at a rate of 35 per cent. In other words, dividends which are paid out of profits which have borne corporation tax will not, in effect, bear further income tax in the hands of a shareholder unless he is chargeable to income tax at a rate higher than 35 per cent.
The proposed system of corporation tax recognises the need for higher savings by shareholders as well as by companies, virtually all of which have to resort to some degree of self-financing for investment purposes. The scheme of corporation tax now proposed also includes valuable reliefs sought over the years by various bodies and is an earnest of the Government's desire to promote further investment and growth in the corporate sector. The system of corporation tax proposed by the Government, which will come into operation on 6th April, 1975, is fully in accord with the EC Commission's acceptance of the "imputation system" as the most appropriate basis for a harmonised system of company taxation throughout the Community.
Taxation of mining profits
The Government have given long and careful consideration to the tax treatment of profits from the mining of non-bedded minerals. Whatever the reasons underlying the introduction of the 20-year tax exemption for such profits, it has become perfectly clear in the light of the present state of development of the industry that this exemption is now unnecessarily generous and that the same economic benefits could be secured for the country, together with additional benefits from increased tax revenue, by less prodigal incentives. The 20-year tax exemption is, as announced in September last, therefore, being repealed and replaced by a scheme of tax allowances which is designed to meet the specific needs of the Irish mining industry and on lines similar to those applicable in comparable economies.
The Government and the mining industry were anxious that the scope of the new allowances should not be finally determined until mining interests had an opportunity of making representations on an appropriate scheme of taxation. I have received submissions from the various mining interests which I discussed with them during the course of a series of meetings in recent months. Following consideration of the representations, the proposals announced last October were modified in some respects. The new scheme is given legislative form in the Finance (Taxation of Profits of Certain Mines) Bill, 1974, which was circulated to Deputies this week.
Briefly, the new tax provisions provide that the profits from non-bedded minerals will be liable, with effect from 6th April, 1974, to the normal rates of taxation after deducting a number of valuable incentive allowances. These allowances include immediate relief for 120 per cent of capital expenditure as it is incurred on prospecting and exploration and on new plant and machinery. The full cost of developing deposits of non-bedded minerals will also be allowed as the expenditure is incurred. To ensure that full pre-production expenditure in relation to mining operations is allowed for tax purposes, the cost of acquiring non-bedded mineral deposits is being allowed over the life of a mine, or twenty years, if shorter. Special provisions enable relief to be claimed in respect of certain capital expenditure incurred by existing mining companies before the commencement date of the new scheme and further relief, by way of tax abatement, is being provided in the case of marginal mines to ensure that they can continue to be worked economically. I am satisfied that these new tax allowances will provide the incentives necessary for the full development of our non-bedded mineral resources while at the same time ensuring that the mining companies will contribute their fair share in taxation for the social and economic needs of the people of Ireland.
Capital taxation
The Government's White Paper on Capital Taxation, published last February, proposed the replacement of estate duty and the present legacy and succession duties by a new package of capital taxes consisting of a capital gains tax, an annual wealth tax and a capital acquisitions tax on gifts and inheritances. This fundamental reshaping of the capital taxation system, which was promised by the Government before taking up office, is designed to bring about total or substantial relief for a very large proportion of people now potentially liable for estate duty, a greater equality in the distribution of wealth, and a more equitable sharing of the burden of taxation. Only those who realise, own or acquire significant amounts of capital will be asked to pay.
In accordance with the promise I gave in my budget speech last year, I have invited the views of all interested persons and organisations on the proposals contained in the White Paper. These views and representations must be received by the end of June this year if the legislative measures necessary to replace estate duty and to make the new system operative are to be introduced and passed during the present year. In response to this invitation, comments have already been received from a number of organisations. These and others received will be carefully considered and implemented where a good case can be made for them.
It is proposed that the present three death duties will be abolished in respect of deaths occurring on or after 1st April, 1975. As a corollary, the inheritance tax element of the proposed capital acquisitions tax will come into effect on that date. The annual wealth tax will also come into effect as from the commencement of the income tax year 1975-76. Capital gains tax will take effect from the 6th day of the present month while, to prevent avoidance, the gift tax portion of the capital acquisitions tax will affect gifts made on or after 28th February, 1974—the date of issue of the White Paper.
Thus only some of the new capital taxes will be in operation in the current tax year. The initial yield is likely to be small since the machinery of assessment and collection is unlikely to be in force until the last quarter. In the case of capital gains tax, as gains will have to be realised before revenue can arise, there will inevitably be a time lag between April, 1974, the commencement date for liable gains, and significant tax yields. I have estimated the yield for these taxes at £½ million in the 12 months to March, 1975, but, for the reasons I have mentioned, this is clearly not an indication of the yield from the new capital taxes when in full operation.
Tax avoidance
An important aspect of tax reform is measures to counter tax avoidance and evasion. Last year, when bringing in a number of anti-avoidance provisions, I said that one of the reasons why our rates of income taxation are so high is that a great many people who ought to pay a lot of tax pay little or, indeed, none at all.
I also referred to this question when replying to the debate on income tax allowances which took place in this House on February 19th last. As I then indicated, it is my policy in the interests of fair play to take firm action against tax avoiders and evaders and to ensure a more equitable tax system.
I have already announced that as from 10th January, 1974, the Finance Bill will restrict to a maximum of £2,000 a year the amount of interest on borrowings allowed to qualify for tax relief but that borrowings for genuine business activities will not be affected. In the light of the examples I gave, in last February's debate, of people with incomes of £13,000 and £24,000 a year claiming relief in respect of interest payments of £14,000 and £33,000 respectively, I think, Sir, further comment is hardly necessary.
Certificates of deposit
Interest payable on the maturity of certificates of deposit is chargeable to income taxation in the ordinary way, but a number of depositors have avoided the tax charge by selling the certificates before maturity date and obtaining what was, in effect, the accrued interest in the form of a capital sum. There will be provision in the Finance Bill to counter this avoidance device. It will apply to certificates of deposit which are acquired after today and to the appreciation after today on existing certificates disposed of before maturity.
Land development profits
I also propose to terminate two tax avoidance devices which are in operation in relation to land development projects. The first relates to section 20 of the Finance (Miscellaneous Provisions) Act, 1968, which was designed to prevent avoidance of tax on land development profits. Such avoidance could previously be effected by selling the shares of the company instead of selling the building constructed. The section, which refers only to the construction of a building, does not cover development achieved by alteration, extension or reconstruction.
The second device in this area is where a company, by leasing an underdeveloped property at a nominal rent, can contrive a situation under which it can claim relief under section 81 of the Income Tax Act, 1967, in respect of interest on borrowed money and certain other payments made in the development period. By charging these expenses against the nominal rent in the development period, the lessor creates deficiencies which may be set off against surpluses arising when the premises have been developed and occupied at an economic rent.
Transfer of assets to tax havens
The Finance Bill will also contain measures to close off a loophole in the taxation code which has been used by some wealthy people in recent years to avoid income taxation. A feature of the arrangements I am referring to is the transfer by an individual of funds to a company specially set up by him in a country—a tax haven—which charges little or no tax on income. The arrangements made have the effect that liability to Irish taxation on the income from those funds is completely avoided. To close this particular loophole, I am proposing that, with effect from 1974-75, where an Irish resident has power to enjoy income from assets transferred abroad by him, such income shall be treated as his income for Irish tax purposes. Genuine commercial transactions will, of course, be excluded from the scope of this anti-avoidance measure. This loophole will also be closed in the capital taxation legislation.
Yield of anti-avoidance measures
The measures I have outlined to combat avoidance will ensure that revenue, which should properly accrue to the Exchequer, will not be lost. The amount to be gained by the Exchequer from these provisions will be in the region of £2 million in the 12 months to March, 1975, and £0.5 million in the nine months to December, 1974, but if these devices were to be allowed to continue they would soon become more widespread and the loss to the Exchequer in future years would be considerably greater.
Reform of personal income taxation structure
I now come to tax relief. Last year, in my financial statement, I adverted to the need to examine critically our present structure of personal income taxation. The aim of this was to devise a reformed structure which would be simple enough for taxpayers to understand and to produce a reasonably stable system which could develop, but whose basic structure need not be fundamentally revised for a considerable period. There are two major causes of confusion and misunderstanding regarding the present system. In the first place, it is not generally appreciated that the standard rate of income tax, at present 35 per cent, is effectively not more than 26.25 per cent for those with earnings up to £2,000 which qualify for earned income relief. Secondly, our progressive rates of income taxation are based on two forms of taxation, income tax and sur-tax, with somewhat similar, but not identical, charging rules and reliefs. Simplification which dealt with these and other difficulties could be approached in a number of ways yielding different results. A detailed examination showed that whatever approach was adopted, radical simplification of the structure would so affect the existing distribution of tax paid by taxpayers that the position of some taxpayers would be worsened in the absence of a subvention from the Exchequer. Therefore, a scheme designed to simplify the personal income taxation structure which would be acceptable to taxpayers generally, in as much as it did not worsen their existing tax position, must include an element of tax relief.
Apart from achieving the goal of simplification, I was also anxious to ensure that the tax burden would be distributed as fairly as possible in accordance with ability to pay. Taxation paid directly out of income has grown steadily heavier over the years mainly because of inadequately adjusted personal income tax allowances. The Government have publicly acknowledged the inequity caused by this defect in the present system and they are committed to a policy of reviewing the personal allowances at frequent intervals. As a first step, it has been decided to incorporate in a new simplified personal income taxation structure substantial increases in the main personal tax allowances which will give relief to every taxpayer with effect from 6th April this year.
In addition to increasing the single, widowed and married persons' tax allowances, I am simplifying the structure of personal income taxation by abolishing the concept of earned income relief. To achieve the same objective as earned income relief, the basic rate of income tax chargeable under the new structure on the first band of taxable income will be reduced from 35 per cent to 26 per cent. In the case of taxpayers whose taxable income falls within this band, the different personal allowances, if not modified, would be less valuable in terms of tax relief than before. To offset this, it is necessary to increase the allowances by one-third. However, in making this particular adjustment, I propose, as I have said, also to give relief to all taxpayers by increasing the single, widowed and married persons' allowances.
The main personal allowances under the new structure will be £500 for a single person, £299 at present, £550 for a widowed person, £324 at present, and £800 for a married person, £494 at present. The personal allowances of persons aged 65 or over will be further increased by £25, if they are single or widowed, and by £50 if they are married. These simplifications and allowances adjustments will apply to all taxpayers.
