I move: "That the Bill be now read a Second Time."
The Finance Bill before this House will provide a statutory basis for taxation measures which I announced in my budget on 28 January, measures which provide for real improvements in income tax allowances, excise duty increases, special tax concessions for farmers and incentives for capital development. Today, I am also introducing changes to facilitate the administration of the taxation system and in so doing reduce the scope for tax evasion and avoidance.
In my Budget Statement I emphasised this Government's concern and commitment to achieving a fairer system of taxation. Taken as a package, the various provisions incorporated in this Bill represent a major step forward in this direction. In the longer term, the Commission on Taxation, established by the Government, are specifically required to recommend changes so as to achieve an equitable rate of taxation for all.
There has been agreement that this debate should extend to general economic matters and I will deal with these later having first outlined the various provisions incorporated under the individual sections of the Bill.
Section 1 provides for increases in the general and age exemption limits announced in the budget. The general exemption limit is increased from £1,700 to £2,000 for single and widowed persons and from £3,400 to £4,000 for married couples. For those aged 65 years or over but under 75 years, the exemption limit is raised from £2,000 to £2,300 for single and widowed persons and from £4,000 to £4,600 for married couples. Revised exemption limits of £2,800 for single and widowed persons and £5,600 for married couples will apply for those aged 75 years or over.
Sections 2 and 3 are also concerned with the budget proposals. They contain provisions to increase the PAYE allowance from £400 to £600; raise the one-parent family allowance from £500 to £650; improve the incapacitated child allowance from £390 to £500; adjust the allowance, from £330 to £500, where a person is employed to take care of an incapacitated taxpayer or his incapacitated spouse; and increase the blind person's allowance from £330 to £400. In the case of married couples, where both spouses are blind, the allowance is raised from £660 to £1,000.
The 35 per cent income tax rate band is also extended by £500 for single and widowed persons and by £1,000 for married couples.
Section 4 ensures that certificates from officials of the Revenue Commissioners will be admissible asprima facie evidence in legal proceedings for the recovery of penalties under the PAYE regulations and section 5 provides a statutory basis for apportioning marginal relief where a married couple elect for separate assessment.
Section 6 confirms that, in certain circumstances, tax must be deducted at the standard rate from payments made to sub-contractors by a person who is not a builder but whose business involves the manufacture, treatment or extraction of construction materials. The purpose of this is to clarify construction and associated activities. The section also counters an avoidance device. Under section 7 the scheme of residence-related relief is extended for a further year and in section 8 the time limits for claiming specified reliefs are extended from one to two years.
Chapter II of the Bill provides for changes in the taxation of farming profits announced in the budget. During the course of my budget speech, I said that technical discussions were taking place between farming organisations and the Revenue Commissioners on the question of income averaging for assessment purposes for farmers. I am pleased to announce that agreement on the details of such a system has been reached and I am now making provision for its statutory implementation. In addition, I propose to provide for the tax exemption of the farming profits of charities.
Section 9 provides for an optional scheme of income averaging for full-time farmers. Under this scheme, tax liability in any year will be assessed on the average of profits for the previous three years. Once a farmer elects for averaging he will be assessed on that basis for a minimum of three years. After that period he may change at any stage. However, tax assessments for the two years preceding the final year of averaging will be subject to review. Section 10 provides for the exemption from income tax of the farming profits of charities with effect from the year 1974-75. Charities engaged in farming have generally been unable to show that they satisfy the existing conditions for exemption of trading profits of charities. I now propose that charities be exempted from tax on their farming profits where such profits are used solely for the purposes of the charity. This means that there will be no liability to tax in the normal course on farming profits of institutions such as schools and hospitals and religious communities.
The system for the payment of income tax by full-time farmers in two instalments which was introduced for 1980-81 is extended to the year 1981-82 under section 11 of the Bill. The first instalment of tax for 1981-82 is payable on 1 October 1981 and the second on 1 January 1982.
Section 12 removes the restriction on stock relief for farmers under which relief is granted on the excess of stock increases over 10 per cent of farming profits. Increases in stock values will now be completely free of tax. Section 13 in chapter III of the Bill, discontinues the resource tax with effect from 6 April 1981.
Chapter IV relates to corporation tax. It contains in section 14 arrangements for bringing forward by three months the date of the second instalment of corporation tax as proposed in the budget. I wish to emphasise again that there is no question of any increase in tax. The change is designed simply to bring the timing of tax payments by companies into line with the arrangements for other traders generally. The remaining section in chapter IV — section 15 — is of a technical nature requiring companies, when making returns of profits to the Revenue Commissioners, to include details of distributions received from other companies. This is necessary for the proper administration of the legislation on closely controlled companies and the 10 per cent rate scheme for manufacturing industry.
The contents of chapter V deal with a variety of different and mainly technical matters common to both income tax and corporation tax. Section 16 exempts from tax payments out of the employers' temporary subvention fund which was set up last year under the terms of the national understanding. Section 17 closes a loophole in relation to tax exemption of income from patented Irish inventions to ensure that, as was the intention of the original legislation, only inventions on which the underlying work is carried out in the State will qualify. In section 18 provision is made for continuation of stock relief for a further year. Section 19 corrects an anomaly in relation to distributions out of export sales relieved income, while section 20 ensures that as regards the tax charge on loans by closely controlled companies to their participators, such companies do not obtain unduly favourable interest treatment where they default on payment.
Chapter VI introduces the measures, outlined in my Budget Statement, to encourage greater private sector investment in capital development. In order to have the immediate effect of stimulating new activity these allowances took effect as from the day after budget day. As with the general proposals for increased participation by the private sector in capital development, these allowances are framed so as to provide investment opportunities for the private sector and at the same time represent reasonable value for the State. They will run for a three-year period and thus allow ample time for them to take full effect and for their impact to be measured.
Deputies will recall that there is a Government commitment in the national understanding for arrangements to encourage rented housing and comprehensive redevelopment by private property funds in major urban areas. In pursuance of this commitment I announced in my Budget Statement that a special new allowance of 100 per cent would be introduced in respect of expenditure on construction of moderate-cost rented residential accommodation. This allowance, which is provided for under section 21 of the Bill, and which will be set-off against rental income, will be available in relation to houses and flats within the size limits already applying to housing grants and in respect of which a certificate of reasonable cost has been granted by the Minister for the Environment. The amount of expenditure allowable will include actual construction cost and site development, though not site acquisition costs. I propose to introduce an amendment on Committee Stage to provide more specific criteria for the moderate cost aspect of this scheme. Section 22 makes the allowance available in respect of expenditure on the conversion of certain existing property into two or more residential units. I am confident that these arrangements will open the way for a big expansion of the rented accommodation sector and will make a very useful contribution to our housing programme.
I said in my Budget Statement that I was considering whether an incentive might be appropriate in relation to the provision by the private sector of multi-storey car-parks, toll roads and bridges. On further examination I believe that such incentives would be worthwhile and they are therefore being incorporated in the Bill. Section 23 provides for a 50 per cent initial allowance and a 4 per cent annual allowance on expenditure on the construction of a multi-storey car-park. This allowance will be available under the normal rules included in the Tax Acts relating to industrial buildings allowances. For the purposes of the allowance a multi-storey car-park must be wholly in use for the provision of car parking facilities for the general public.
Section 24 provides for an allowance of 50 per cent in respect of capital expenditure incurred by a private sector interest as part of an agreement with a road authority for the provision of a toll-road or bridge. The allowance will be offset against the income accruing to the investor from such an agreement.
Section 25 extends the 50 per cent initial allowance to persons leasing industrial buildings to the State-sponsored industrial promotion agencies for onleasing by them to industrial occupants. At present the allowance is only available to persons leasing such buildings direct to industrialists. The expansion of this allowance will, I believe, facilitate private sector investment in the provision of advance factories for industrial use.
Part II of the Bill is concerned with customs and excise matters.
Sections 27 to 32 confirm the budget increases in the excise duties on alcohol, tobacco products, hydrocarbon oils and television sets. These increases are necessary to help to pay for the many improvements announced in the budget. Further changes are also included in these sections. Section 28, for instance, allows for increases in the rebate payable to the smaller manufacturers of tobacco products. Section 29 provides a statutory basis for the Revenue Commissioners to repay excise duty on spirits which become unfit for human consumption. Two further changes are incorporated in section 31. This section ensures that the increased excise duty on road diesel, DERV, will not be imposed on scheduled road passenger services, principally CIE, while also providing for a scheme under which two pence a gallon will be repaid to sea fishermen in respect of duty paid on oil used in their fishing operations.
I announced in the budget that I proposed to extend the excise duty on table waters to squashes and cordials and this change is being made in section 33. The ordinary rate of duty, 37.2 pence a gallon, will apply in cases where the dilution ratio is less than 3½ to 1. Otherwise duty at the rate of 74.4 pence a gallon will apply. The section also increases the rebate rate to manufacturers of table waters. The present rebate is 12.4 pence on the first 20,000 gallons and 6.2 pence on the next 80,000 gallons I am proposing that, with effect from 1 June, a rate of 16 pence a gallon will apply to the first 40,000 gallons of production, and 8 pence a gallon will apply to the next 80,000 gallons of production. This change will be of particular benefit to the smaller manufacturers.
Section 34 reduces the refreshment house licence, from £50 to £10, with effect from 1 April. I am introducing this change in response to requests from small guesthouse owners who are anxious to have the opportunity to serve wine to their guests and who claim that the existing licensing requirements for this purpose are too expensive. Section 35 confirms an order whereby a small rebate of duty on beer was made in 1980 to brewers whose output for the home market did not exceed 175,000 standard barrels of beer in the preceding year.
Sections 36 and 37 are concerned with certain duties on motor vehicles. The budget day Financial Resolution increasing the annual registration charge on cars of 16 horse power and under from £10 to £20 is confirmed. This increase is limited, however, to £16.50 in the case of taxis.
Part III of the Bill contains a number of value-added tax provisions. Section 39 applies the low building rate of 3 per cent, backdated to the commencement of VAT, to prefabricated structures such as garden sheds. In practice these structures have generally been charged at the 3 per cent rate rather than the standard 25 per cent rate, and the proposed new provision will confirm this. Sections 40 and 41 eliminate an unintended anomaly in the VAT legislation relating to the recovery of excess refunds.
Section 42 in Part IV of the Bill deals with the liability to capital acquisitions tax in the case of certain marriage settlements and provides that a grandchild will be deemed to be the child of the disponer in such instances, thereby obtaining a much higher tax threshold. I am introducing this concession in response to requests from the farming and legal bodies who submitted to me that the existing tax provisions impose an undue hardship in some marriage settlement cases.
Part V of the Bill is concerned with stamp duties and provides for the continuation of three stamp duty measures which were implemented by Government orders in 1980. There is provision for changes in the legislation relating to conveyances made by way of sub-purchases in order to prevent the avoidance of duty by the abuse of certain reliefs.
The conditions for the granting of stamp duty exemption for new grant-type houses are amended in order to take account of changes in housing legislation, and the stamp duty increase on cheques from one penny to three pence is being confirmed.
The last part of the Bill, Part VI, contains a number of miscellaneous provisions.
The contents of this Bill clearly show that this Government have a consistent, well defined and fully planned approach to the management of our economy. We must, however, face the fact that we are going through a major international recession. Ireland has one of the most open economies in the world. For us to ignore what is going on in the world outside would be to live in a fool's paradise. It would also be misleading.
The Taoiseach has already informed the House, in his statement on the European Council at Maastricht, of the Community economic outlook as seen by the commission, and of the Government's view on the appropriate policy response.
There is a growing realisation internationally that the successive oil price rises are unlike other temporary setbacks to growth that have occurred over the last thirty years. The price of energy, as a factor of production, has permanently risen to a much higher level. I quote figures here to emphasise how accurate that is. Almost £900 million will be taken out of our economy to pay for oil this year — two-and-a-half times the figure of 1978, more than 12 times the figure of 1973. This is a deflationary factor which we, no more than the other western national countries, have been unable to avoid. It is a factor that we all should remember, its impact and seriousness for our open economy. Economic resources must be redirected to pay the higher bill for the oil we need. Much of the capital stock of industry internationally was built in the days of cheap oil and is now totally out-dated. It must be replaced. These necessary changes cannot be carried through overnight. However, any country which neglects to implement them at least as rapidly as its competitors will compound the damage already suffered. On the other hand, any country investing now to overcome these weaknesses will, when the recession lifts, reap the reward. For the young in particular, whose employment prospects in the years ahead depend on the investment decisions now being taken in the community, it is vital that the right decisions are taken and implemented. Putting them into effect means releasing the necessary finance and physical resources, and this is where the young rely on those already in employment being prepared to exercise restraint in seeking higher incomes.
The policies which this Government are following, and which are reflected in the budget and in the investment plan, make sound economic sense against the present international background and that of our social and economic needs. Their first aim is to support output and employment by offsetting, as far as possible, the impact on the economy of reduced international demand.
While coping with the problems facing us today, this Government are ensuring that our plans for social and economic development in the future are both sound and prudent, a fact recognised by reputable independent economic commentators. Every decision taken by this Government has been positive. Our economic policies have been both bold and imaginative. Without such policies the reality is that the numbers unemployed today would be far greater than they are.
This Government have placed their attacking emphasis on investment. The capital programme provision for this year is up 36 per cent. We are attacking our problems through an unprecedented programme of high investment. The government are very aware of the vital contribution which the private sector can make. For the first time a special effort is being made to encourage and promote private participation in public sector proposals.
The investment plan will provide a major improvement in our infrastructural services such as roads, telecommunications and energy supply. This will be of real benefit to industrial and commercial development and to the community as a whole. That is the reason why the Finance Bill I am at present introducing is specifically designed to include provisions to stimulate and encourage further investment. It will generate activity during its implementation. We will plan over and beyond it. It will help us, as a nation and a community, to avail of the economic upturn, when it takes place later on this year. There are many hopeful signs. It is heartening to note that, despite the severity of the world recession and the unfavourable international conditions, we have succeeded in significantly exceeding the job approvals target of 30,000 in both 1979 and 1980; in 1979 some 34,000 job approvals were registered, while last year 35,600 job approvals were achieved. We are confident that we can attain, if not surpass, the employment objective of an increase of 15,000 for 1981 contained in the second national understanding. The investment plan will result in the direct creation of 10,000 additional jobs in 1981. In particular this will give a powerful boost to the building industry.
We are still a developing economy, and we are coming through this recession with less damage to our economy than other more developed countries. Our policies are beginning to pay dividends and are widely regarded as being so. Most Western European countries enjoyed almost full employment from the fifties on, while we did not. In virtually all of these countries that happy position no longer exists. The increase in unemployment in those countries has been proportionately worse than here. This is particularly noticeable in some of the small European countries, Denmark and Belgium, for example, which, like us, depend heavily on international trade, and have therefore been badly hit by the recession.
In this country the number on the live register fell in the month to end-March. This obviously reflects the fact that the special measures taken by the Government last autumn and the investment plan are having a real effect. The overall improvement in the unemployment situation is also shown by the fall in the numbers on short-time working. I am aware of and am involved with certain areas of activity here which know that there is a gathering momentum of activity in our country at present.
During this recession, our record has been extremely creditable. We have achieved an employment increase significantly greater than the EEC average. This record should give us confidence in the basic strength of our economy and in the policies we are pursuing.
Regarding the current expenditure, we have set ourselves a target of reducing the current deficit this year to 5½ per cent of GNP and we intend to achieve it.
The Exchequer returns for the first quarter of the year were issued last week and some commentators interpreting these have suggested that the budget deficit is running ahead of target. These figures, however, do not represent the expected trend for the year as a whole because there are a number of important factors which did not come into play in the first three months. The pattern of receipts and issues so far is, in fact, generally in line with expectations. On the current expenditure side, 24.1 per cent or less than one quarter of the total amount budgeted for the year has been spent in the first three months. The impact of the revenue measures taken in the budget will not be felt until later in the year. The budget commitment to economies on expenditure will clearly take some time to have effect. The budget emphasised how necessary it is to exercise a rigid control to achieve reduction in borrowing which we require. This will be done.
Pay costs are, of course, of crucial importance and not simply because of their Exchequer implications. At a time of international recession when it is essential for us to improve our competitiveness in world markets, we cannot afford to allow public service pay to increase in a manner totally out of line with what is happening in the private sector. In the budget I allocated an additional £80 million to cover any increases in public service pay and pensions which had not already been provided for in the departmental estimates.
I must repeat my budget request to public sector employees to think carefully in their own and the public interest before pressing claims which they would otherwise consider justified.
Our position on public service pay is clear. That of the Opposition is not. On the one hand they criticise the size of the public service pay bill, while on the other they criticise the Government for not paying more in particular cases. They are constantly seeking increased services for various sections of the community. While they support the demands of a number of pressure groups, they have never once indicated how expenditure to meet these services and demands could be met.
We have recently heard the Opposition claim that the public finances are in chaos and that foreign borrowing is out of control, neither of which is true. However, if the Opposition believe that public borrowing is too high, they should indicate how precisely they propose to reduce it in a period of international recession. All cuts in public spending clearly must have a severe impact on the economy, and it is simply dishonest to say otherwise. Tax increases, be they direct or indirect, are not and cannot be economically neutral.
I rejected explicitly in my budget speech, recourse to direct taxation because such action would represent an economic disincentive of considerable danger at the present time and would be likely to neutralise the beneficial stimulus of the investment plan. The increases in indirect taxes were used almost exclusively to finance improvements in social welfare, but not, may I say, without complaints from those who would regard themselves as advocates of improvements in social services.
Our policy on public service pay is part of our approach to incomes generally. We have recognised for some time that there is a need for a new approach to levels of incomes and to industrial relations in the broader economic and social perspective. This is necessary as pay increases directly affect the economy, and jobs in particular, and also because workers rightly see that pay alone is only one element affecting their standard of living.
That is why this Government first introduced the concept of the national understanding. The Opposition have criticised the national understanding but have failed to suggest any practical alternative. Some Opposition spokesmen have gone so far as to imply that there is some unspecified simple formula by which the Government could ensure agreement with the social partners that increases in incomes should always be exactly in line with the needs of the economy. The true position is not of course so simple. Another Opposition approach is that the Government should provide extra tax concessions and introduce subsidies with a view to influencing wage demands. How is this to be reconciled with their call at the same time for greater tax concessions and for a substantial reduction in the current budget deficit?
I turn now to the situation in agriculture, and in particular to the prices settlement reached in Brussels last week. The effect of this is to increase prices for Ireland by nearly 14 per cent. Furthermore a special package of measures worth £51 million over two years to Irish farmers was secured. The commission is to examine the possibilities for further relieving Irish farmers' income difficulties in particular in the cattle sector, and to bring forward proposals so that the council can take decisions before 15 July 1981. My colleague, the Minister for Agriculture, will be outlining in detail the full package in Thursday's debate.
In the context of expansion it should be noted that the growth forecast for Ireland by the EEC Commission is in marked contrast to the fall in output in all other member states except France and Greece.
Prices in Ireland are heavily influenced by international developments. We cannot buy goods at less than the going international rate, and we cannot expect our producers to sell at home for less than they can obtain abroad. There are no means by which we could escape from the impact of accelerated inflation throughout the industrialised world, largely as a result of the succession of oil price increases in 1979 and 1980. The OECD average inflation rate rose from approximately 8 per cent in 1978 to 10 per cent in 1979 and to 13 per cent in 1980. Last year, energy price rises contributed 4 percentage points to the total increase in prices here at home. A more recent development outside our control has been notably the appreciation of sterling and the dollar.
Inflation, although high at present, is generally accepted as having reached its peak and will fall this year. The OECD and EEC both forecast that inflation will moderate, especially in the second half of the year, compared with last year, while the, EEC average inflation rate is expected to fall to 10½ per cent from last year's 12 per cent.
We have brought this economy through a very difficult period and all the indications show that we are on the right road. Our growth rate this year will be greater than both the EEC and the OECD average. The end of the international recession should, according to the international consensus, come later this year, and our economy, strengthened by the Government's commitment to a high rate of investment so as to increase employment and to raise our infrastructure to the level of our European partners, will be well placed to achieve a further substantial measure of economic and social progress.
I commend this Finance Bill to the House.