How much time have I?
Financial Resolutions, 1986. - Financial Resolution No. 13: General (Resumed).
Debate resumed on the following motion:
That it is expedient to amend the law relating to customs and inland revenue (including excise) and make further provision in connection with finance.
——(The Taoiseach.)
You have 41 minutes.
I want to give Deputy Foley time as well. Before Private Members' Time, I was putting forward ways in which the Government could create jobs. I was suggesting that a special supplement be paid to men with more than four children for whom at the moment under the social welfare code it would not pay to go to work. I was suggesting that PRSI should be levied on firms instead of on employees so that it would not be an effective payroll tax and disincentive to employ more people. At the moment there is no facility for people on unemployment assistance to be taken on a two or three day week basis. There would be huge administrative problems and they would be cut off unemployment assistance for the subsequent few weeks.
There are not 250,000 unemployed. My understanding is that there are 26,000 farmers drawing unemployment assistance and they are not available for work. Similarly, I understand that in Cork alone there are something like 1,600 women credit signing for optical and dental benefits. From those two examples alone there are areas where people are allegedly on the live register and part of the unemployment problem when in the case of agriculture it is an income supplement problem and a very bad way of dealing with their particular income needs through social welfare officers who often have a bias against them and assess notional incomes where no such incomes exist. All these combine to form a major disincentive to recruiting people for work. People will not take on staff. They will simply get somebody to do the work on a contract basis. In that way they do not have the fixed overheads of such employment. Unless we redefine administratively the structure of work, there will not be a major change.
I hope that the Government will act on the NESC report on designation. It sets out very clear, succinct criteria. It is most unfair that Roscommon, with the lowest level of unemployment, should be designated as a higher aid county and Wexford, the second highest in terms of unemployment, is not so designated. It is patently unfair, the NESC have reported on that and I hope that the situation will be changed.
I turn now to another proposal which has been very effective in creating jobs in the United States. It is called the job tax credit. If an employer takes on any extra employee, he gets a credit of $1,000 in the first year and $500 if he retains that employee for the second year. Basically, that is a credit against any of that company's tax liabilities, whether net VAT payments, employers' PRSI, profits tax or corporation tax liability. It is adminstratively possible at the year end to give such a credit for those who take on extra employees. The principle has already been adopted in terms of exemption of new employees for PRSI.
Two sectoral cases can be made that are irrefutable and one is tourism. Our tourist industry has enormous potential over and above any other sector because we have an opportunity to get an increasing share of the international market. Also, this will be the largest industry by the turn of the century. There are two levels of growth — growth that we can have within the overall breakdown of the sector nationally and growth even further in terms of the industry internationally. Furthermore, it should be remembered that it is estimated that 45p of every £ spent by a tourist, when meals, drink, accommodation and so on are taken into account, goes back to the Exchequer. This is not a business that can be done by robots. It is labour intensive. I very much welcome the changes made in the budget.
It is almost verging on criminal that our tourism policy should be dictated by seven people in the Department of Industry, Trade, Commerce and Tourism with, as their head, a principal officer with the same ranking as legal metrologist in that Department. We are giving the same priority to encouraging people to use litres and metres as we are to a £1 billion industry which is not a service industry but is wealth creating because of the overseas revenue it brings in. I am strongly of the belief that Bord Fáilte are part of the problem here. Even in the public service Estimates we see that the £28 million spent on tourism last year is down to £26 million this year by virtue of the fact that Bord Fáilte are a defensive, verging on paranoid, organisation that are self-sustaining and are not prepared to act like an IDA for industry to knock heads together in the Office of Public Works, local authorities, forest and wild life parks and many different areas and become a central arm in Government thinking that decides tax policy and expenditure policy. Real jobs can be created there. The changes in terms of VAT on meals and VAT rebates for tour operators must be welcomed and there was also the grant scheme last year. We must grasp the vital and vibrant issue.
The other area is construction. We have seen a drop in the output of construction from 18 per cent of GDP to 11 per cent. There are 60,000 people fewer working in the construction industry than seven years ago. I do not go along with the theory that we pump money in for the sake of doing so. The reality is that the ESB's programme is over with Moneypoint, that the accelerated development programme with Telecom is over, that we have a glut of office accommodation, that there will be 43,000 fewer pupils in our primary schools between 1984 and 1994, a drop in the primary school population of 7½ per cent. Let us not pump in money for the sake of doing so. We need to diversify into other areas such as much needed community facilities and country roads — these are in a desperate state in my own country, with a 32 year resurfacing cycle.
We have a construction guarantee of a minimum of 12 per cent to 14 per cent expenditure. This will be productive infrastructural expenditure that will give a long term rate of return. It is very important that we utilise that vehicle to get instant jobs, which give a great return to the Exchequer in terms of the tax contribution. The industry is labour intensive and will respond immediately to our job needs. Given those areas of expenditure, I should like to outline some areas from which we can get this money. I do not feel that we can get extra tax anywhere else. There are cuts that can be made without the painful consequences that we have seen with regard to some of the decisions made.
It is appalling that for every £100 which the State gives out, it spends £260 to administer that expenditure. I see no logic in it; I cannot understand it. If we go through the Book of Estimates we see on the current side expenditure of the type I have cited in the examples I have quoted. Take the disease eradication programme. In 1984 the total expenditure there was £37.09 million and in 1985, £46.2 million. The expenditure, not to vets, or farmers who lost stock, or for hardship funds, or out there in the field where it was needed, not in research, but in administration was £15 million per annum.
Whether or not we cut reactor grants or do a double round of testing that fixed overhead of £15 million needs to be cut down. SFADCo will spend £3.9 million in dealing with £6 million of grants this year. Údarás na Gaeltachta will be spending £3.2 million to administer £6 million of grants. I have picked those examples out of the productive sectors. I am not against those State agencies. I do not know the waste in the health boards or the other areas, but I am assuming that the ones I have chosen are the most efficient because they are business orientated.
Eight years ago the IDA had a ratio of 3:1 of personnel who were in the field helping small businesses to get started but now it is the other way round. It is now a ratio of 3:1 in favour of administration. The reality is that it is top heavy in administration. The IDA have a budget of £23.5 million in their ivory tower in Wilton Place, beautiful offices, to spend £156.8 million in grants. The position in regard to CTT is very interesting. They spend £12.6 million to administer £11 million of grants. Those agencies were set up to give incentives and aid and we should not let the money get fixed in administration where one cannot be flexible in terms of changes in schemes one wishes to operate. A rigorous analysis of absenteeism, management performance and all aspects of personnel management in the public service would reveal savings and potential for redeployment.
I note that the pay bill for the Revenue Commissioners for this year will be £87 million. That is an awful lot of wages. Sometimes I wonder if there is proper work efficiency there. The Office of Public Works will spend £63 million on administration and this year they will not be responsible for doing any work on primary schools, a role that has gone to the primary education section of the Department of Education. However, it appears that there was not any cutback in that Department. The Office of Public Works are primarily there to push paper. Therefore, we have on one side this expensive bureaucracy and on the other side people having to justify their jobs by creating a problem for every solution. How many TDs hours and man days are taken up trying to unravel this bureaucracy?
There is another tier where money can be raised and the Government need to bite the bullet on this. It is something that is very important and novel in its outlook. I am referring to our semi-State sector. At the moment we have 19 semi-State companies such as Irish Steel, NET, INPC, Irish Life, ICC, ESB, CIE, the Sugar Company, Ceimicí Teoranta, An Post, B & I, Bord Telecom and Bord na Móna. During the summer I did a study of those companies and discovered that 18 of them were set up between 1927 and 1947. Any company has its own business life cycle. It has a start up stage, an expansionary stage and then it stands alone on its own commerciality. My argument is that the losses incurred — I admit that the Government have done a great job to try to improve the balance sheet performance of these companies — have been staggering. For example, the Irish public sector debt as of December 1984 amounted to £22.5 billion. Semi-State bodies accounted for 18 per cent of that figure, equivalent to £4 billion. Their accumulated losses between 1979 and 1983 were £1,036 million, an absolutely staggering loss. I should add that that loss was just for six of the semi-State companies.
If one looks at the balance sheets more carefully and compares them to an ordinary business one will see that the debt equity ratio in those companies is crazy. Usually a 1:1 ratio is good but the debt equity ratio in those companies, because of their over-dependence on borrowing, is very weak indeed. If they were not State companies many of them would be in financial difficulties. My belief is that if we could look at a systematic change of policy in dealing with those companies we could raise £800 million over ten years without selling a majority shareholding in any of them. One can value a company in many ways, its net worth on a balance sheet, its net assets versus liabilities and when borrowings are repaid but I do not think that would be a fair book value. The way a company is valued on the Stock Exchange is somewhere between five and eight times its profit in the last trading year. Using that minimum conservative value of five times the profits of the ones that did make profits, one will see that there is a potential to sell companies.
The first category of companies would be Aer Rianta, Bord Gais Éireann, the ICC and Irish Life. For those alone there would be a market to float 49 per cent. The State could retain 51 per cent but the company would then be standing alone on its own commerciality. Even if we did not wish to do that to get the £800 million, we must remember that many of those companies will be queueing up seeking equity injections from the Government as we saw recently with ICC and ACC who made valid cases for that capital injection. For example, Aer Lingus need to replace their trans-Atlantic and European fleets. Why not let somebody else come up with this money? The saving could be used by the National Development Corporation to set up a new cycle of State industries. We should not let the existing lobbying and vested interests take any money that is going.
We do not have to look to Maggie Thatcher who did partial sales of British Telecom, Britoil, Sealink, Amersham, British Rail Hotels, British Aerospace, National Freight, British Sugar and who has BP on the line shortly for further privatisation. We can look at socialist Governments in Europe. We can look at Sweden where the Government sold Luxor, PK Banken, Sodra and other companies. In France they sold a 12 per cent subsidiary in General D-Electricite by way of public flotation. In Italy ENI sold 20 per cent of the subsidiary, Sapiem. My proposal is realistic. The consequences for full privatisation would be politically unacceptable but the consequences for going along as we are cannot be afforded by the taxpayer. However, joint venture is a realistic option. If we take the case of Aer Lingus it is worth mentioning that KLM Airways in Holland are 55 per cent State owned and 45 per cent privately owned while Deutsche Lufthansa are 82 per cent State owned and the rest privately owned. There is a real opportunity there to raise resources.
I suggest that the Department of Finance call in the ICC who have a record going back many decades of bringing companies to the market to float them to discuss this. As the State's merchant bank, the ICC should be asked to carry out a thorough analysis of the potential of the companies I have listed, those who can go in three to five years time and those who need a little more restructuring of their balance sheet and can go in ten years time. That is a realistic way of raising a lot of money without much hassle.
I should now like to turn to another area that is very dear to my heart, the way we can get the productive sector working. There were many references in the Minister's speech about getting investment into the productive sector and out of the secure financial institutions. He mentioned incentives for R and D, changing the mechanisms between investment in capital versus investment in labour. I should like to put forward a very simple proposal which would get the layman's money into industry. I am not talking about money from stockbrokers or complicated money but the punter's money.
I propose that in conjunction with the research and development tax relief the Government should set up a small business fund in units of £500 and that this should not be linked to manufacturing. It would be called the SDB and would work along the lines of the business expansion scheme. If, for instance, you became aware of someone in Cavan who was setting up a small industry where farmhouse cheese would be made and if there was a scheme on the lines I am advocating you could buy ten of the bonds for £5,000. Normally your tax would be 48p or 58p in the £ on that £5,000 of your income but in a scheme on the lines of the business expansion scheme the Revenue Commissioners would refund that tax to you. In other words, they would be underwriting the proportion you would have paid so that your net investment would be the amount you would have got after tax.
What I am proposing is a tax led investment scheme. This scheme could comprise a simple prepaid contract whereby one could approach the person setting up the industry and have the bond registered through the NDC or through the IDA with the money going into the company where it would be fixed for a five year period. The Exchequer could determine that there would be a maximum of £10 million tax relief in any one year, that no one could invest more than £10,000 and that the maximum per company that could be invested would be £50,000.
There are many people with lots of good ideas for setting up small simple businesses, businesses that might not set the IDA on fire, or that would not improve dramatically our balance of payments, but which would create self employment and other jobs. We need a simple structure to respond to the investment needs of such people. I am suggesting that the small business bond would be an ideal way of setting up that structure. I would have in mind an arrangement whereby there would be an option to convert the bond to equity after five years and the idea would be that the entrepreneur would put forward the proposed project with simple details of his plan, of the prospects of the market place and of his own experience of finance. The application would be vetted by, say, the IDA and if passed the person would then go to the Revenue Commissioners and make his arrangement with them.
Unfortunately the experience with the business expansion scheme, though the scheme is very welcome, has been that there has been too much bureaucratic involvement, too much red tape in order to qualify for the tax relief. That is why something on the lines of the US debenture would be a pragmatic and practical response to that situation and it would result in the direct creation of jobs.
As the Minister of State at the Department of Fisheries and Forestry is present, I would urge that the type of simple bond scheme I have outlined should apply also in the case of forestry. This would enable grandparents or parents to invest bonds of £500 for children. In that way the Department would be enticing the small savers's money into a long term investment but one that would appreciate because forestry involves a long waiting period in terms of a return.
I wish to turn now to the question of the financial sector in general because there are major ramifications in this area. For instance, there are the changes in life assurance taxation, the change in section 84 lending, the change in terms of capital allowances and the changes in the area of the retention tax. If we are to have growth in the economy we must first have the right climate and then we must ask ourselves how we can attract investment in order to prime the pump. When we consider investment in the productive sector we find £1,000 million is required annually to maintain manufacturing output at 8 per cent to 10 per cent growth rate. Unfortunately, the current investment rate in Irish manufacturing industry is of the order of between £600 million and £700 million, in other words, a £300 million shortage. Therefore, this Legislature and the Government must respond to the need to attract more investment to the productive sector.
We need badly to extend the 1984 business expansion scheme into the trade of tourism. We need also in the Finance Bill to simplify the legislation and we should allow companies to buy business expansion shares. The new development of over the counter dealing in shares on the Stock Exchange which is a much simpler method than applies to the equity market now is welcome, but this development should be eligible also for business expansion scheme relief. In addition, we must realise that if we are urging people not to invest in banks or in Government gilts, we must relate that to the way we tax dividends from equity investment. If we urge people to invest in the productive sector and if we do not get the desired response, we must ask why. One would have to come to the conclusion quickly that because of our tax rates in the form of corporation tax and the income tax subsequently payable on dividends, there is no incentive for investment in the productive sector.
In Ireland corporation profit tax varies from between 8 per cent to 50 per cent so that in manufacturing industry 64 per cent of dividend income is payable by way of the combination of corporation tax and income tax. In non manufacturing industry 71p is payable in every £ by way of taxation. That is a real disincentive to investment in that sector. If the Government are saying we must alter the tax bias and must alter the investment bias in order to create jobs, to improve growth output and to improve our exports, they must amend this area. A very logical step forward in this direction would be to follow the Canadian example whereby the first $1,000 of dividend income is tax free. We should allow a similar tax credit for both manufacturing and non manufacturing industry. All the arguments point clearly to the fact that advance corporation tax with its small yield of £5 million has not been a way of screwing money out of wealthy companies but has been effectively a disincentive to people to invest in companies.
In the light of the effort in this budget to tackle the financial institutions, we should go a step further and provide incentives for people to invest in manufacturing industry in a way that would yield real income. To that extent I urge that the Canadian concept be examined and that we reconsider the matter of advance corporation tax.
I wish to deal now with an area that is very close to my heart, that is agriculture. This industry is experiencing a very difficult period. This is because Europe is self sufficient in food and because there are surpluses in many areas. Regardless of what Joe Rea or anyone else may say about the Government, the fact remains that the CAP is falling apart and that is the root of the evil. However, farmers should take solace from the fact that at least they do not have to contend with high inflation of the kind that would put them in the cost price squeeze they were in when Fianna Fáil were in office.
We need to consider some of the sectoral problems in agriculture. In particular we need a proper marketing authority. Bord Bainne have done a good job in the marketing of milk but in the areas of horticulture, of beef and of sheepmeat, our efforts have been fruitless. I understand that the stamp duty exemption available for family farm transfers is not available where people avail of the installation premium within the farm modernisation scheme. I trust that arrangement can be reconsidered.
I would like to make two points in relation to agriculture. I should like to note the change in the land tax. I predicted it would happen, but unless there is self-assessment there will not be results until the turn of the century. Farmers know what their adjusted acreage is and if they want to get that scheme going let them adjust their acreages. If they are above or below it they can be refunded or pay back tax.
I wish to refer to capital allowance restrictions. Section 26 of the 1974 Finance Act put a 30 per cent restriction on capital allowances. That is unfair and is having a negative effect. In manufacturing industry there is 100 per cent capital allowance. Under section 26 one can write off only 30 per cent of capital expenditure and it is hitting the agricultural machinery industry and the construction industry particularly. At a cost of only £2 million we would have a worthwhile step forward if we removed that restriction. I assure the Government of my full support in their resistance to the proposals on the CAP.
I will turn now to a very important area in which I do not think my party in Government are getting their way. That is in relation to offshore oil exploration, quite a complex matter. Offshore exploration is in a very formative stage in Ireland and I should like in simple terms to explain the dilemma of oil explorers as to why the third round was so unsuccessful and exactly what needs to be done. It does not mean less of a State take in oil wells. Basically, it means a slight modification to ensure that we will get drilling.
There are two potential drillings off the coast in my constituency and I suggest that we must grasp this opportunity. I hope, a Leas-Cheann Comhairle, that you will listen to this point and convey it to your party leader. At the moment, if you and I are oil explorers and we want to drill off the coast, we must first take the value of a barrel of oil. At the moment it is $20. The State's royalty on that would be 10 per cent, two dollars out of the 20 dollars. The operating costs — putting up the drill, paying the employees, and all the day-to-day expenses — would be five dollars out of the 20. The depreciation on big equipment would be six dollars. That leaves seven dollars out of the 20 per barrel.
The 1975 White Paper produced by the then Deputy Keating, as Minister, provides that the State may at its own discretion take 50 per cent participation. If the State took 50 per cent participation, of the seven dollars left out of the 20, you are left with 3.50 dollars. Out of that you have to pay 50 per cent profits tax, leaving you with 1.75 dollars out of the 20p. In those circumstances the State would take 80.6 per cent and the licensees 19.4 per cent.
If we looked at it differently and the State taxed the licensee to the hilt but did not take a stake in the well, instead of 1.75 dollars being left after paying all taxes, the licensee would be left with 3.50, the State getting 5.50 dollars out of the 20 dollars. Then the State take would be 61.1 per cent and the licensee would get 38.8 per cent.
Under the White Paper, the Minister would have discretion. Therefore, if oil companies find a field that has 75 million barrels, the minimum for commercial drilling, the licensees would be quite happy if they were to get some clarification as to whether the Government would opt for a 50 per cent participation. If the potential reserve is 200 million barrels the licensees would be quite happy to let the State in. I am suggesting that the Minister would turn around and opt for a sliding scale. The oil people just want the rules defined and clarified. They do not want the State to write off a national public asset.
We could compare the current position in Ireland and in the UK. At the moment, if we found a field of 50 million barrels, the development cost would be 400 million dollars. The State participation would be 50 per cent, tax would be 21 per cent and royalties would be 6.5 per cent. That is in Ireland. In the UK, the same field at the moment would allow the licensees to get 65 per cent. Would any offshore oil explorer in his right mind opt for exploration off Ireland when he can get that kind of arrangement in England? If we look at a larger field in Ireland, of 200 million barrels, with development costs at one million dollars, the licensee would be left with 21.2 per cent, but in the UK would be left with 40.6 per cent.
My point is very simple. Here, the licensees are left with 21 per cent whether the field is 50 million barrels or 200 million barrels. The economics of the comparable oil fields are completely different. If there is a lot of gravy going around it is in the licensees' interest that the State would give the maximum so that they could get on with the job.
The people's interests are served not only by the tax revenue but by the pocket of oil revenues. The important thing is that it would improve our balance of trade beyond all imagination and put us in a very healthy surplus position vis-àvis our current £300 million deficit.
I beseech you, a Leas-Cheann Comhairle, to use your good offices with the Tánaiste to say this is not an issue of giving the explorers a bonanza, not a case of the State saying we will write off a public asset. What we want is to lay down clear guidelines. At the moment it is at the discretion of the Minister, and businessment do not go into an open-ended situation, because it would be bad business. The fact that we are not getting oil ashore is bad for the country. I do not think the Department of Energy have served the interests of my constituents well in this regard. I hope the review now taking place will prove to be fruitful.
The bottom line of this budget table is that we are providing £8 billion for current expenditure. We cannot do anything about 20 per cent of that because it is debt re-payments. Fifty-five per cent of it is for basic social services, health, social welfare, housing and so on. We cannot cut there. Deputy Woods and other Fianna Fáil spokesmen called for cuts in taxes and for increased expenditure. They did not look at the last page of the budget table. They would see that we are spending only 8 per cent of total current expenditure on the productive sectors of the economy. That is the dilemma which must be overcome. It is a scandal, for instance, that we spend £250 in administration costs to give out £100 in grants. That does not make sense.
I welcome the opportunity to speak on the budget. I cannot recall on occasion on which a budget could be so clearly identified as a direct outcome of a political situation; nor has there been any occasion when such detailed political background has been known to the general public. It was obvious that the budget was decided on the basis of a political compromise formula rather than on the basis of what the economy required. The political battle began around the Cabinet table with regard to cuts in current expenditure and raged through an unending series of Government meetings until it became clear that nothing could be agreed. This is why we have a budget without a strategy and without financial objectives. It is a political compromise which does not respond to the needs of our economy. Action could not be taken to deal with our economic problem because we have a divided Coalition Government.
Nineteen eighty five was one of the most disastrous years in the history of the State. Unemployment stands at 240,000, investment has fallen, the building and construction industry is at a standstill and consumer spending has also declined. The endless procession of factory closures has seriously undermined our industrial base. To some extent this development resulted from the worldwide recession but that recession was greatly assisted by the mistaken policies pursued by this Government in their 1985 budget. The Government policies inflicted widespread hardship, which has persisted in the community. The policies have been particularly severe on social welfare recipients and on lower income families. Middle income families were affected for the first time. These families were faced at every turn with increased taxes, higher prices and many local taxes, such as water and refuse collection charges and so on. There was an attack on living standards so that for all but the small privileged sections of the community the struggle to make ends meet became a grim everyday reality. All the unemployment and hardship was endured for nothing. The whole book-keeping exercise turned out to be one of the greatest mistakes in our economic history.
The targets set out in Building on Reality were not met and have now been abandoned. The national debt has increased out of all proportion. The damage done to the economy by the strategy pursued in the 1985 budget has been clearly expressed in this present budget. The unemployment figure of 240,000 dominates this budget. In his Budget Statement last year the Minister for Finance said that unemployment, taking account of the impact of special employment measures should begin to level out and that given moderation in pay developments there should be some pick up in employment. At that time the figure stood at roughly 225,000 unemployed. The position has since worsened. We must face the situation, for instance by setting up an all-party committee to formulate a new strategy to set the country back on the road to economic recovery.
Because of the numbers of business closures, their impact on employment has been disastrous. We need a complete review of the present system with a view to formulating a programme of action to help firms which could be helped in order to keep them open. If we had a committee to investigate the various companies from time to time they could earmark companies getting into difficulties with a view to implementing an early warning system. When Fianna Fáil were in Government there was an early warning system to assist and advise firms heading for trouble. If the Government adopted this principle it would eliminate unexpected closures in many cases, it would help industrial relations and help to reduce the massive unemployment figures.
A feature of this budget was the introduction of the withholding tax of 35 per cent which applies to interest paid on deposits in banks and in financial institutions. This is not a new tax on the banks but a direct tax at source on the general public who have already paid tax on their investments. This is an unreasonable proposition as it only means bringing forward revenue in the form of income tax that would normally be paid in the following year. We saw the result of this decision, since the budget, in increasing bank and building society interest rates. A feature of this tax is that it will affect children with investments and many old people with savings. Most old age pensioners, from July next, will have in the region of £5,000 a year for a husband and wife and a tax allowance in the region of £6,300 which means that they would have a surplus allowance of £1,300 which should not be liable for tax. The Government should set a ceiling on such deposits without delay as many of the people concerned, especially the weaker sections are worried about it. I hope for an amendment shortly in this area.
A disturbing feature of the budget is that the VHI board will in future be compelled to disclose personal financial information about patients and doctors. The VHI provide an excellent health service and the basis of their success was the confidential basis on which they operated. The VHI board will now have to disclose the private medical history of a patient to the Revenue Commissioners on request.
The Minister announced a new child benefit scheme to replace children's allowances but this does not represent an improvement because the weaker sections of the community are again hit as the 4 per cent increase does not extend to child dependents. The £100 child tax allowance has been abolished; the increase of 4 per cent is an insult as it will not be paid until the third week in July. It is a 2 per cent increase over a period of 12 months. A reduction in food subsidies is contemplated in April which will mean a further increase in the cost of living. Overall, the weaker section of the community deserve better.
VAT on new houses has been increased from 3 per cent to 10 per cent since 1982 and private house building has dropped. Employment in the construction industry has reached an all time low. Fianna Fáil have given a commitment that, on return to office, they will invest an additional £200 million in the building and construction industry to get it moving and the building industry have responded by giving a guarantee that they will create thousands of jobs within a very short period. This would take many workers off the dole queues.
Roads throughout the country are falling apart through lack of finance. Many local authorities have appealed to the Government for extra funds, even for remedial work. Bad roads are a serious drawback in all counties but particularly in tourist areas such as Kerry. Tourism, which has the greatest growth potential for job creation, has not received the attention it deserves in the budget by way of funding which would encourage many hoteliers to carry out worthwhile refurbishing and raise standards. There was a further setback in the last few days by the announcement that the Cork-Kerry region will not have a ferry link this year. That is very unfortunate because it affects the whole economy, not just that of Cork and Kerry. I hope that the Government will try to secure a ferry service next year. Tourism is the only industry which has been penalised in every possible way. There are special concessions for export manufacturing by way of favourable income tax rates. Exports are exempted from VAT yet exporters are subjected to high labour costs and PRSI. I welcome the Minister's decision to reduce VAT on meals as from 1 July.
Due to ever increasing overheads, including taxes, the tourist business was forced to economise and to cut back where possible and one of the areas in which there were cutbacks was in staffing which is one of the reasons for the problems in tourism not being highlighted. There were many closures and those who did not close were forced to reduce their staff. It is obvious that some of these cutbacks have meant a reduced service to visitors which will have a damaging effect on customer satisfaction in the long term and on the public relations element in tourism which is a major factor in encouraging repeat business.
Since the budget, the Minister for Health announced that he intended to close some psychiatric hospitals. He went on to say that this would cause less emphasis on the 24-hour service and that he intends to replace it by day centres and out-patient therapy. The Minister for Education announced the closure of that fine institution, Carysfort College. I welcome the news that it will remain open for the next two years and I hope that the position will be reconsidered at the end of that time. The Government's idea of public spending is not accepted by the public, even by those who support them.
There has been a 2 per cent increase in the standard rate of VAT and this is an indication of an anti-family budget because all household items will be affected. I was disappointed that VAT on hurleys was not reduced as strong representations had been made in this regard over the last few years. Hurling is a traditional Irish game which is played throughout the country and the cost of hurleys is a tremendous strain on clubs, schools and parents. I appeal for a reduction in the VAT rate from 25 per cent to 5 per cent.
The budget has failed to tackle the problems facing the country, especially unemployment. I should like to see an all-party committee set up to carry out an in-depth study and to bring forward positive proposals which would set a programme in train to reduce the massive unemployment figures and, in so doing, guide us to economic recovery.
I am pleased to have an opportunity of making a few observations on the budget. I should like to make a number of suggestions which I hope, with respect, the Minister for Finance will adopt. The budget should be marked down as a serious attempt by the Government, in very difficult economic circumstances, to begin the process of rolling back the burden of personal taxation. We are all in favour of reducing personal taxation but we are not clear as to who should make up the shortfall. In that context, the Government have made a courageous start. I do not have the slightest doubt that the burden of personal taxation is a major inhibiting factor for commercial and personal initiative and I hope we will move quickly towards a simple taxation model. My personal preference is for a system with self assessment built into it but with the rider, which does not operate at present, of extremely severe sanctions for fraud or evasion. The best system should be self-regulatory and should ensure that the community respond naturally and spontaneously to the propriety and integrity of the system because we know that if we fall foul of it that there will be severe consequences. The underlying reality of tax evasion and fraud at present is that it enables people to evade and avoid one's legitimate liabilities. There is an artificiality about that taxation environment because a figure of £600 million to £700 million is floated as that which is owed by the self-employed which is made up of assessments based on largely spurious grounds, 95 per cent of which are under appeal at any given time and the net yield of which is precisely one-three hundredth of the accumulative assessments made. It is not simply a question of logistical inexactitude on a massive scale; it is an inherent structural weakness in our tax collection system. I do not see any reason for it. One inducement for continuing evasion, avoidance and non-compliance with the tax laws is that it is a positive economic advantage so to do. Therefore, it was with mixed feelings that I witnessed the tax amnesty in the budget because obviously it meant that some people had again got away with it.
The sooner we move towards a comprehensive but simple tax system the better, preferably with self-assessment, trusting in the integrity of the Irish people, their ability to respond to a fair system, and insisting that those who fall foul of that system will fall foul of severe punitive sanctions, not just of a monetary nature but of a more serious nature. There are models in existence for such a tax system. Rather than tinkering around with our tax system, as we are prone to do, we should take a look at these models. We have to more than consider the work of the Commission on Income Taxation. The time has come for many of their recommendations to be taken on board.
There was an echo in the debate surrounding the budget which disturbed me a little. Some speakers referred to moving the burden of taxation from the individual to the financial institutions. That is a handy belief and appeals to an instinct in many of us, particularly many of us representing urban working class constituencies, but on examination in detail we will find there is an inherent fallacy underlying that belief. We must feel apprehensive about some of the concerns expressed, particularly when they appear to take some glee from what was alleged to be an attack on the financial institutions.
The financial services industry in Ireland is highly labour intensive employing 45,000 people, a substantial number more than are employed in the microtechnological industry which is often praised. The financial services industry has a potential for further development provided it is encouraged to operate in a climate which is not hostile to the development of that industry. Not only is it a highly labour intensive industry, but it generates high added value and employs high level skills which are important, not just domestically but internationally in terms of trading services and international commerce. In short, it is an internationally traded industry which generates foreign earnings. It is important that nothing in the budget should be open to the interpretation that we are attacking financial institutions, as if there were some ideological advantage to be gained from that. Instead, we should seek to develop internationally traded services as part of the mainstream industrial development strategy of this small island economy.
I would remind the people who heralded this initiative that the 35 per cent withholding tax on deposit interest payments and the 15 per cent tax on the gross investment income of insurance companies essentially represent a tax on individuals. In a sense the financial institutions are, for this purpose at least, somewhat sieve-like and no corporate body blow is being suffered by anybody because the taxes ultimately are a tax on individuals. How could a tax on insurance companies, which are made up of investors large and small, policyholders and so on, be deemed to be a major step forward — although I personally would not take that view? I do not believe either of these taxes could be described as a tax on financial institutions.
The third element of taxation attributed to financial institutions is the continuation of the bank levy. The Central Bank of Ireland, the public authority directly responsible for the regulation of banks, have described the bank levy as "unjustifiably inequitable". The Central Bank of Ireland also stated that bank profits are not excessive. Leaving aside the last point which is open to argument, even the expression "excessive profits", could lead us into a philosophical argument which I do not intend to go into, there seems to be a hint of inequity latent in a tax which is levied annually without regard to the capacity of that sector to handle that levy or perhaps to handle more substantial tax yields. If bank levies are to be maintained as part of the tax gathering framework, I suggest they should be rationalised and pinned to sensible criteria relating to the ability of that banking sector to pay the taxes and relating to criteria based on common sense, logic and economic underpinning rather than a fairly arbitrary approach which appears to be the trend at present.
The budget emphasises the importance of investment in industry, in people and in infrastructure, cost competitiveness in relation to public sector services used by industry and control of Government expenditure. All these things are implicit in the budget to some degree or other but any budget, particularly a fourth budget, has to be seen in that four to five year context. It would be less than rational to expect some form of radical new approach in a budget four years into Government. In that context, significant steps were taken in this budget to deal with these areas — incentives to industry and personal taxation. We are all in favour of a higher level of investment in productive projects and we know this is essential in order to create more jobs and improve living standards, but what we are not clear about is who is going to pay for all this.
Our overriding concern continues to be the difficulty relating to our collective incapacity to roll back public expenditure. The huge appetite of public expenditure continues to grow apace. Despite the concern of everybody in this House and many people outside, I am not sure that there is the necessary capacity to do something about this. This is a huge problem and I echo to some extent what Deputy Foley said when he spoke about some kind of united approach by this House. We should lay aside the spears and arrows not of outrageous fortune but of political party politics and face up honestly to this incredible economic problem. This will take some extremely courageous Government and leadership.
In that context I want to tell the Government that they should not lose their nerve in following through on a job which the country knows intuitively has to be done. I hope they will continue to press forward in this area, changing methods, if necessary, relating to the degree to which people are involved or consulted. Perhaps we should take the people more into our confidence. I would argue that we have not adequately informed or involved the public and presented to them the limited number of options which are available. There is a belief among the public that there are tough options and easy options. There are no easy options and that message has not got home. The belief which goes right to the top of the business community that there are easy options is a major underlying factor in the popular success of the latest political party. There is a belief that there is a crock of gold at the end of the rainbow and that harsh measures are not necessary.
In our democracy I do not believe the problem can be tackled by edict. It will require the collective wisdom, courage, support and co-operation of society. If we want the man in the street to support us in our efforts we must come clean with him, present him with the evidence, show him the available options and ask him to some extent to point out the choice. It cannot be done by a group of people, well intentioned though they may be, operating in isolation from the people, arguing rationally and logically but without involving and informing them sufficiently.
I am struck by the fact that one still gets incredibly naive arguments from people in the professional organisations, people who should know better. In the debates at the moment on education and industrial development the one common feature is that everyone has the hand out for more. That is not unreasonable but I think that approach would be tempered if we engaged in a process of national dialogue. I should like to see the publication of a document called "The National Options" that would have as a basis for discussion, not just in this House but among groupings at every level, the topic of where this country will go in the next ten or 20 years. It is in our hands to make those decisions. The only way we can succeed is to go to the people and to ask them for their active support and co-operation. We must also speak to the commentators; I am talking in particular of the popular commentators who are sometimes somewhat glib about these matters. If we take that action we have a chance.
The budget has to be seen in the context of our national output which continues to be massively managed by the State, where our borrowing requirement is still extraordinarily high, where the room for manoeuvre and discretion is limited and where the public sector wage bill and pension liability absorb an incredible amount of our resources. Yet, this Government found it possible to make some degree of improvement and progress in these areas and that must be commended.
It is in the area of real economy rather than in the area of money illusion that progress has to be made. Jobs and living standards are earned through the high added value output of manufactured goods and services. Living standards for individuals depend on purchasing power for those goods and services. In the final analysis, jobs and living standards depend entirely on the real output of the economy which is achieved by enterprise in the private and public sectors and in the manufacturing and service industries. All the rest of us live off that output. It is the output of the country, the wealth generated, that sustains all of us. If that output is not able to compete with out neighbours and in the international marketplace we will suffer.
Any budget must be judged to some extent on the basis of what it has contributed to the climate for growth of the real economy; in other words, what it has contributed to the creation of jobs and living standards as a result of improving the climate for productive enterprise. This enterprise is latent in every individual. We must encourage it at every opportunity, turning our backs on the automatic response of many people, including young people, to rely more and more on somebody else. Every person has a talent and ability and it is the job of the State to create the environment in which that can flourish.
By dint of happy international circumstances relating to international oil prices, we have an added opportunity to go one better in the area of dealing with public expenditure. One of the most important economic factors from the viewpoint of industry is to keep the rate of inflation as low as possible relative to that in our international competitor countries. It should go on the record that in the past three years this Government has managed to reduce inflation to a level which many of us did not think was possible. The rate of inflation here is at the lowest level for many years but this must be looked at in the context of what is happening in our competitor countries.
At the beginning of 1986 the calculations made in the EC forecast an average inflation rate of 3.9 per cent. In recent weeks that forecast has been revised downwards because of the significant fall in oil prices. The fall in oil prices within the EC, if the price level is to remain at about $18 per barrel for the remainder of this year, will reduce the average inflation level by 1.5 per cent to about 2.5 per cent. The price is now $16 and still falling. If an average inflation of 2.5 per cent or even less is achieved within the EC, this will have extremely serious implications for Irish cost competitiveness in view of the projection of the Minister for Finance in his budget speech that our inflation rate will be about 4.5 per cent for this year.
Circumstances have changed significantly since the Estimates for the Public Service were published last December. These Estimates were based on a 5 per cent increase in current public expenditure during 1986 over 1985. It is reasonable for us to exhort the Government to revise the public expenditure Estimates in the light of the current projection of 2.5 per cent inflation or less on average within the EC. Otherwise there will be a further significant re-allocation of real resources from the productive base of the economy to the Exchequer. What might appear at first to be an economic victory in terms of a record low inflation rate might well turn out to be a Pyrrhic victory simply because the goalposts have been moved within the EC. Therefore, this affords us an opportunity to look again at the public expenditure Estimates. One of our major underlying problems is the extraordinary demand placed on the Exchequer by public expenditure.
In the budget we should welcome a certain number of specific elements aimed directly at stimulating the level of investment in industry. For example, there has been a reduction in the rate for long term capital gains tax from 40 per cent to 35 per cent. This is a positive initiative that will help to create economic activity. There is also the statement by the Minister that the taxation of dividends will be changed so as to allow the benefit of the 10 per cent corporation tax to flow through to the shareholder. Again, this is a sensible move to encourage initiative and investment. There are also the tax incentives for investment in research and development partnerships. In that context I urge that special measures be taken in the area of marketing. Investment in marketing is extraordinarily productive in terms of real jobs. We are quite deficient in marketing our goods and services.
There may be some inequity, and perhaps the Minister would deal with it in the Finance Bill, in relation to the advance corporation tax, specifically relating to a number of small indigenous Irish companies. They invested significantly in the past and will not have a net corporation tax liability for some years because of the accumulation of allowances to cover the bonafide business cost of amortising their capital investment. These companies are subjected to a retrospective tax which they could not possibly have been expected to foresee when preparing the cash flow projections for the investments. There may be a case for introducing a transitional period for advance corporation tax which would effectively mean that the ACT would not operate until all capital allowances outstanding as at the date of introduction of the principle of ACT are fully utilised. This is not an unreasonable request for companies who have embarked on certain financial structuring in the light of what they had reasonably expected to be the climate likely to obtain. I know that some areas of industry are a little unhappy about the changes in the rules of capital allowances and the special 12 per cent duty on section 84 loan interest, about reductions in the funds available to the IDA and CTT and changes in relation to leasing.
If progress is to be made in dealing with the economic problems facing us, it should not be judged on the basis of who shouts loudest. Whenever any of the semi-State organisations are touched directly or by implication, there is an automatic defence mechanism designed to convince all of us, often by very high powered professional public relations methods, that this or that semi-State body or agency is indispensable, although there is unquestionably a substantial degree of waste, overlapping, duplication and unnecessary expenditure of public moneys involved. There is need for rationalisation of dozens of semi-State bodies, many of them doing duplicatory work. I am not sure how that will be dealt with. It is relatively easy to bring a new semi-State body into being but almost impossible to apply even the most humane of humane killers. Somewhere along the line that nettle will have to be grasped. I have never yet met anyone working in any area of the public sector who would admit openly that a programme which was commenced was no longer relevant or necessary or that an agency which had been set up for a specific purpose was no longer relevant. I would urge the Government to apply the kind of rigours which were applied in Britain when a type of internal scrutiny was introduced into agencies and companies which forced people to answer questions about the relevance of the job they were doing. The taxpayer is burdened by an increasing clamour of demands for money for agencies and semi-State bodies, the relevance of which is open to question in some cases and the need for which should be examined. I have not the slightest doubt that there is massive room for rationalisation and that some of them at least should go.
The budget began the process of rolling back personal taxation. That was the main positive feature from the point of view of the ordinary man. The very high rates of personal taxation, particularly the high marginal rates, have always been a disincentive and have given rise to a brain drain of highly skilled internationally mobile personnel and a massive disincentive to the ordinary person to work or to work overtime on occasions. I welcome the reduction in the highest rate of income tax from 60 per cent to 58 per cent and also the removal of the income levy. We should also express our pleasure that the indexation of tax bands is continuing. We all hope that move can be continued but there is no point in simplistically making demands if we are not willing to accept that a shortfall in the area of personal taxation must be made up somewhere else.
Regarding the public capital programme, the Minister might speak of the implications of the budget for this programme. The argument might be that certain viable capital programmes are being postponed. I wonder what the rationale is. For example, the allocation for new road construction which was projected in Building On Reality to amount to £140 million in 1986 has now been reduced to £130 million in the public capital programme. I do not see any social justification for that and I am not clear what the economic justification is. It may simply be that the money is not there. There is a common view that investment in this area would be extremely productive in a number of respects and that there are a significant number of viable road projects which would not only benefit the economy but could also attract low interest loans from the European Investment Bank, grants from the European Regional Development Fund and grants from the EC Transport Infrastructure Fund.
Unemployment in the construction industry is currently about 45,000 persons and many of these have skills of a civil engineering nature which are required for new road construction. All of the materials which would be used for new road construction are available within Ireland and the plant which would be used is already in the ownership of Irish contractors. The fact that there would be little or no import content in relation to new road construction and the fact that there would be money available in many cases from the EC makes it difficult to understand why viable projects which in some cases are already planned must be postponed. It is possible there is some dimension to this discussion with which I am not familiar. I am clear that the Government have committed themselves for the first time in the history of the State to medium term planning in relation to investment in capital projects in the context of Building on Reality.
The second area of capital development which could successfully utilise a higher level of investment is the national gas grid. The Government announced the extension of the national gas grid to Limerick and Waterford and this work should be completed in 1986. Many of us feel that there is potential for expanding the grid to other towns such as Drogheda and Dundalk. I gather that money has already been allocated by the EC for this latter project. The public capital programme is an area which must be looked at carefully in terms of its potential yield for the economy. It is obvious that it will be necessary to invest considerable amounts annually to cater for business expansion in the area of telecommunications. However, the public capital programme has reduced investment in telecommunications from an outturn of £148 million in 1985 to a projection of £128 million in 1986. That reduction may be because of some essential once-off investment which Bord Telecom would have to pursue in their initial work on infrastructure and cabling. I trust that is what is concerned because otherwise it would be difficult to understand such a reduction. Investment in telecommunications should be commercially self-financing.
The degree to which Ireland must catch up on other member states of the EC in the field of telecommunications is obvious from the statistics given in the IPA Yearbook and Diary 1986 which show that Ireland has 235 telephones per 1,000 population in contrast to Greece which has 336, Spain with 345, and the United Kingdom with 524. It is fair to put on record that incredibly large strides have been taken in the past decade and hundreds of millions have been invested, initially by the Department of Posts and Telegraphs and latterly by Bord Telecom. It is an area where investment appears to yield a high return and to be self-financing.
The area of waste disposal is another which deserves a major capital investment programme in order to provide infrastructure essential for some types of industrial development. The public capital programme in 1985 allocated £1.25 million for this purpose but only £335,000 was actually used. The allocation for 1986, therefore, is £205,000, which is not all that startling in the light of the expenditure last year. This area of essential infrastructural development has to a large extent been ignored in the past as is evidenced even from the recent discussions in the Dublin County Council area relating to the disposal of asbestos.
Further areas which merit consideration in terms of public capital are sanitary services and housing. In the case of housing I urge that the Government look far more closely at the contribution which can be made by joint venture and share equity housing and essentially by reexamining the massive public contribution which now goes into housing and seeing whether we can get better productivity and greater yield from it.
Debate adjourned.