I should like to join with other speakers in welcoming Deputy John Bruton to the Department of Finance. He is taking over at a very interesting time, when he will have an opportunity to build on very real achievements by the Government on the public finance and economic fronts. Few people realise that the Government have brought down the borrowing requirement of the State from 20 per cent in 1982 to about 14 per cent now. That was a very real achievement by the Government. Back in 1982 everybody knew that the problem we faced was excessive Government borrowing. That was confronted head on and in the teeth of the most difficult economic circumstances the country has faced. A measure of the achievement is that when we took office Government spending was runaway, was growing at 25 per cent nominally or 9 per cent real. We succeeded in bringing that back down to less than 6 per cent nominally and virtually no growth in real spending year on year. That is the measure of the turnaround that has been brought about by the Government in the face of extraordinarily difficult circumstances.
The major feature that made life so difficult in the last four years has been the turnaround in the cost of borrowing. Anybody who, like myself, is on a mortgage will know that in the last four years mortgage repayments have not budged one inch whereas heretofore people could rely on inflation eroding their mortgage payments and the value of their home going up. The same thing has bitten hard into the Government. Interest accounts for virtually all of the growth in real Government spending over the last four years. In other words, the Government have succeeded in running the State system on a much smaller overhead. They have succeeded in cutting back on the number of people required to run the system. They have succeeded in operating the system more efficiently. In the teeth of this massive drain through interest payments that has confronted them, that is an extraordinary achievement. There is one way to illustrate that, that is to say that if we were facing in 1986 the same real interest rates as we faced when we came into power in 1982 we would now have no current budget deficit whatsoever. That is the measure of the Government's performance. The sole reason we still have a public deficit is that because of turnaround in interest rates it is now extraordinarily difficult to be a borrower and extraordinarily advantageous to be a lender.
The Government must be complimented on their achievements. I have often heard complaints from the Opposition benches that to a large degree the Government have achieved that by cutting back on the Public Capital Programme. We hear Fianna Fáil say that this is undermining our capacity to recover. That is completely beside the point. A little exploration of the figures will reveal that. This Government have doubled the level of spending on roads. It is twice what it was back in the early seventies. The housing programme has been increased by one-third from what it was in the late seventies. The only areas where there has been a trail-off are energy, transport and communications. Anyone who has taken the trouble to investigate those areas knows well that we have, if anything, excess capacity in those areas. We have overinvested in energy. We have too much capacity to produce more electricity. We have come to the end of an investment programme in communications and in transport. It is quite natural that a Government should wind back the Public Capital Programme when the major areas of infrastructural investment have been met and, in some cases, exceeded. Those who have a simplistic view and look at global figures should have the commonsense to investigate the whole scene more throughly.
The real question facing this Government and any other person considering the economic plight of this country is what area of the Public Capital Programme is giving the taxpayer value for money. I am glad to say that this Government have been the first to face up to the issue of implementing a sensible vetting system to ensure that the capital projects that come through the State system are those that will provide real returns to the taxpayer. If nothing else was achieved in the term of office of this Government, to have put in place a system that will ensure that we will have no more Howth Harbours with massive overruns, no more misspent projects or investment in excess capacity, then they will have performed a worthwhile task.
Our achievements are much greater than that. This budget shows ingenuity on the part of the Government. With very little room for manoeuvre they have succeeded in taking some bold strokes to tackle what I regard are the key issues. On the employment front, through VAT concessions to labour-intensive industries, they have given that very important sector of the service industry a breathing space to provide more employment. We have diluted some of the biases in our tax code that have encouraged people to put money into machinery or safe havens of investment and savings where there is virtually no employment generated. We have cut back on those and at the same time put in place selective reliefs for those who have shown themselves capable of creating employment opportunities. We have done so through schemes like the business employment scheme. Therefore, this budget is very constructive on the issue of employment.
The other major issue we face is equity. This budget has made bold strokes in the area of equity. It is well known that by bringing in the withholding tax we have succeeded in getting revenue from areas that heretofore people were not returning for tax purposes. We have extended the PAYE system to deposit interest. Anyone who is bearing the brunt of PAYE cannot but recognise that applying the PAYE system to a broader area of tax revenue is definitely equitable.
Besides that move we have also introduced in this Finance Bill what I believe to be a very important anti-evasion package. As the House will be aware, we have introduced surcharges for late payment, tougher penalties for people who fail to return and have set about improving the enforcement system through the appointment of sheriffs. We have made a number of moves in the area of improving tax enforcement — as I hope to develop later — which is the key area so far as equity is concerned. The belief that over recent years enforcement of taxation has been lacking has been the cause of discontent about equity in our tax code. It is not that the tax code is all that radically wrong — although obviously there are areas warranting improvement — rather is it the conviction among PAYE taxpayers in particular that not everyone is bearing the same burden. That is the real source of inequity, the real source of complaint among the PAYE sector. I commend the Government on the steps they have taken, and in the course of my remarks I hope to suggest areas where there is scope for further improvement.
This Finance Bill is facing up to some very important issues, and its thrust is very sensible. We all know about the income tax concessions that have been achieved. It is also heartening to see that the Government are tackling the biases that have drawn our scarce saving and investment funds away from employment creation, and have put them into areas where people are willing to take real risks, willing to stick out their necks in order to create employment opportunities for others. The Government are right in doing so.
I should like to dwell for a short time on the issue of tax enforcement. This is the key question to tax equity at present. The nicest ideas about reforming the tax code will fail if people do not have the confidence that whatever code is in place will be enforced uniformly against all those who are obliged to pay. The situation with which we have been faced in recent years, which the enforcement system has been incapable of confronting and where non-compliance has extended progressively, has led to the faith of those people who are honest taxpayers, trying to comply to the best of their ability with the tax burdens imposed on them, being undermined if they feel that somebody beside them is not pulling his weight, is dragging his feet and getting away with it. If this question of tax enforcement is not made the key priority we will damage not only the moral resolve of people to pay their just taxes but also damage the revenue that can be generated.
Few people are aware of the extent to which non-compliance has grown. For example, in 1983-84 there were 100,000 cases in which the Revenue were forced to go to enforcement to collect tax from people. That was over double the figure it had been a couple of years previously and greater again than the figure it had been a few years before that. It is now endemic. I examined the figures. For example, if one takes the VAT returns one discovers that, for every two and a half people making VAT returns, one enforcement certificate is being issued; that one in every three employers making PAYE and PRSI returns generates enforcement certificates. In the areas of the self-employed one discovers that in one in every five cases the Revenue have to resort to enforcement to collect tax and, in the case of corporations, in one in every seven the Revenue have to resort to enforcement. Those are shocking figures and, even at that level, represent less than the extent to which the Collector-General would like to be able to go for enforcement. He is constrained by the capacity of the various agencies from going to enforcement. For instance, now one in every five self-employed persons must be brought through a legal procedure to exact payment. That is a bad figure. We must make enforcement a top priority. I welcome the significant measures the Government have taken in the past few months, because the switch to sheriff is a very sensible procedure. There is ample evidence that the use of county registrars to collect tax has failed dismally and that the sheriff system is a better one. It could be made a much better one if we set about giving sheriffs a proper contract whereby they would become accountable. We should give them effective powers to assume their duties and the flexibility to vary their levels of activity and to take on people, if needed, for short periods to get over their levels of activity and to take on people, if needed, for short periods to get over the serious problem in regard to enforcement.
The Bill introduces a welcome change by bringing in a 10 per cent surcharge for people who make late returns. The surcharge comes in after 12 months from the date on which tax should have been paid. What is particularly good about this move is that, unlike some of the penalties there already, it is not divorced from tax liability. In other words, the pursuit of this surcharge will not generate a whole new pursuit and a whole new appeals system which would still leave tax liability untouched. The surcharge will be rolled into the tax liability so that the Revenue Commissioners effectively will not be deflected from pursuit of a penalty because they will be able to pursue surcharge and tax liability together.
In the past, penalties were an ineffective way of bringing in revenue because penalties were under a separate system and the Revenue Commissioners had to deflect themselves from pursuit of the tax in order to pursue the penalties. That was a wrong approach and I am glad to see it is being changed.
The Bill provides for interest on late payments. It is very important that interest be used as the real way to prevent people from making late tax returns. The only effective disincentive to people is if, progressively, they see that the longer they drag their feet the more they will have to pay. The Government are right when they envisage charging interest at rates higher than obtain commercially for people who delay on payment of tax. That is right because the Revenue Commissioners are not in the business of financing companies or providing loan finance through late payment of tax. People who delay payment of tax are far from AA borrowers, or whatever the banks call them. Therefore, it is right that the Government should charge riskloaded interest rates on delayed payments.
I take issue with the suggestion in the Bill that the Revenue Commissioners should pay less to people who have overpaid tax. What is sauce for the goose is sauce for the gander, and the Revenue Commissioners, if they are the ones who have been delaying repayments and depriving companies of cash flows that they need, should be subjected to the same regime in regard to interest as is the taxpayer. I question the advisability of having a different rate of interest applying to people who have overpaid and those who have underpaid. The Government should consider stepping up the rate of interest that would apply after a certain period. In the case of the surcharge, they have decided that after 12 months, if things are going radically wrong and if somebody did not have a return in, he should be subjected to the surcharge.
In the same way, I suggest that if somebody is late in paying an agreed liability and has let it drag on for more than a year, the rate of interest applying should be increased. I cannot understand why the so-called penal interest rate applies only in outright evasion cases and so forth. We are talking about penal interest rates. If we are serious about expecting people to comply with their tax responsibilities we should consider bringing in a rate of interest at a higher level after 12 months from the date on which the payment was agreed and due. The increase in interest will be an effective deterrent, however, only if people are confident that it can and will be enforced. Swift enforcement is the key.
From discussions with the Revenue Commissioners before the Committee on Public Expenditure I know that the system is not up to scratch in regard to enforcement. The percentage of the amount due and collected has been falling progressively from 15 per cent to 5 per cent. We need to seize the opportunity the Government have presented in the Bill to have a new sheriff system so that much clearer accountability on certificates that go for enforcement will be possible. Heretofore, the Revenue Commissioners have been unable to tell the Committee on Public Expenditure what has been happening to the enforcement certificates. They could only tell us that 5 per cent was paid but they could not give us in any detail the outcome of the other 95 per cent because there is no clear accountability from the various enforcement agencies in regard to what has happened. The Minister should set about establishing clear accountability from the sheriff in regard to the enforcement certificates.
The Revenue Commissioners also need stronger powers as outlined by the Commission on Taxation in their fifth report, which Deputy Connolly will know Fianna Fáil support in full. In that report the serious deficiencies in the enforcement powers of the various agencies have been pointed out. The report draws attention to the need to give sheriffs power to take possession of goods and, in extremis, to have a sort of receivership power so that accounts could be freezed. Such powers have been sadly lacking. It is well known that sheriffs and county registrars going out to try to enforce tax certificates find that perhaps the property is leased and cannot be seized or the property is livestock and the sheriff does not have a place in which to corral them. There are various problems and the enforcement agencies cannot touch accounts. Changes must be made to make the enforcement system one that will stick.
Some of these changes are unpalatable and people do not like to see the Revenue Commissioners getting tough. However, the key issue of equity is that, if you do not enforce the system that is there, you will undermine people's confidence in it and you will not have a fair tax system.
I am seriously concerned at the extent of the use of liquidation of companies as a tax avoidance device. I do not know the true extent of it, but hearsay evidence suggests it is occurring on a significant if not widespread scale. From 600 liquidations per year, the Revenue Commissioners are being caught for a vast bulk of revenue, averaging about £125,000 per case. It is serious enough to have liquidations occurring and Revenue losing out, but if many of these are bogus liquidations where a company are closing down in one location and re-opening in another, walking away from their tax liabilities, then this is serious. It raises many points about limited liability that will be tackled in the Companies Bill. The Minister for Finance, in his responsibility for the collection of tax, should look at this aspect in the context of the Finance Bill.
Is there a possibility of having some sort of clearance certificate system which a person who closes down in one location owing significant tax must have before re-opening in another? There are many genuine bankruptcies and legitimate closures where after a period the company should be allowed to start up again. I am not suggesting that we should deny clearance certificates to everyone who has faced bankruptcy and not cleared his tax liability. In the cases of blatant abuse the Revenue Commissioners should have some clearance certificate system under which they could deny maverick companies the right to re-establish unless they show that it was a bona fide liquidation of the original company. I do not know the legal ins and outs, but the Minister should give this matter his attention.
I have made one point every year when speaking on the Finance Bill and I feel somewhat like the Roman Senator who got up every year to say that Carthage must be destroyed. Eventually the Romans did destroy Carthage, so perhaps by my persistence we will eventually see the introduction of self-assessment. This is bound to bring benefits to our collection system. They will not come overnight, but they are definite and tangible benefits. They take the Revenue Commissioners out of the hair of the vast majority of those making honest tax returns, free them from pursuing every single tax case, leaving them free to go after the real defaulters. It also has the resounding advantage that revenue comes in on time from those subject to self-assessment. For far too long we have seen persistent delays because of appeal and counter-appeal, with Revenue all the time out of pocket. Self-assessment over time can nip that problem in the bud. I once again appeal that the introduction of self-assessment for all the direct assessment taxes — namely, income tax, corporation tax and capital gains tax — should be considered urgently.
I turn now to another area where the Finance Bill has made a very important advance, and that is in regard to the whole area of the use of savings and investment available to the community. The thrust of the Bill is entirely correct in moving to favour the risky and the employment creating investment rather than the safe havens which have heretofore been the main beneficiary of private savings. This has been done in a number of ways, one being the new tax introduced for life assurance which was obviously more attractive than productive investment outlets. Many of those attractions of life assurance have been based on special constructs designed to exploit concessions which were in no way intended for this use. This Finance Bill has also restricted relief on capital depreciation to the net amount of investment. In other words, depreciation relief is no longer being given to moneys that companies had recouped through the IDA and grants.
Restrictions have been imposed on section 24 and the business expansion scheme has been extended, with its attraction for savings going into generating new enterprises. New incentives have been given to those holding shares in productive 10 per cent companies, which are the power base for producing goods. I welcome these changes. However, I would make a couple of comments. I am worried about the new scheme being introduced to provide a tax break of up to £25,000 for people who are putting money into research and development. There is no doubt that this country needs research and development, but I am concerned that the result of this concession will be solely in companies hiving off their research and development activities into a separate area in order to exploit this tax concession and that there will be no net new research and development done under this concession.
Under the existing business expansion scheme which is beginning to take off, one of the qualifying expenditures was research and development. The new tax relief system might not generate any new research and development. We must be very concerned not to introduce any tax concession which will not result in new investment activity. The Minister, if introducing this concession, must set targets against which its success or failure will be judged. If it goes ahead we must know the criteria which would indicate if the scheme has failed and should be abolished. Anyone who has examined our tax code will know that far too often concessions have been introduced, with the best will in the world, but have outlived their usefulness and are not being removed. With any new concessions we must make sure that they have criteria against which they will be judged and that we have the courage, if in five years' time the schemes are not producing the goods for the taxpayer, to axe them. I ask the Minister to try to institute such a test of success for that scheme as well as for the business expansion scheme.
The time has come for a fundamental rethink of how the tax code is influencing savings and investment. I am nervous about year by year tinkering with various provisions in the code. If we believe, for instance, that section 84 relief should not be there, we should get rid of it and not impose a tax on it. If we believe that some of the life assurance concessions are being abused, we should close off those loopholes and not tax them. We must look at the question of how scarce savings are used in an overall fashion, rather than by piecemeal responses year by year.
The balance in incentives is wrong at the moment. The capital depreciation allowances included in our corporation tax are far too generous, considering that the same corporations are asked to pay very heavy PRSI on employment. We have tipped the balance too far in the direction of encouraging companies to reequip, to expand machinery and plant and we have imposed on them too heavy a burden if they take on employees. The Government are correct in trying to provide selective reliefs on the employment front. The time is rapidly coming when we will have to set out a programme in which, systematically, we put in place a series of incentives to encourage scarce savings into the areas which will generate employment. We must give companies the right signals that tax relief will be available for people who increase employment rather than for those who increase the amount of machinery.
The introduction of the deposit interest retention tax is a very sensible move. It is applying the PAYE principle to deposit interest. The proposal to extend withholding taxes is warmly espoused by the Commission on Taxation, whose recommendations are regarded as a bible on matters of taxation. It is a very sensible move that more revenue, wherever possible, should succumb to the PAYE system. Essentially that is what the withholding taxes are all about. Two very important aspects of the system are that it reduces the cost of collection and reduces evasion. It is well known that the allowances on bank deposits were being widely exploited for the purpose of tax evasion and many people were not returning to the Revenue details of deposits held. Also the building societies had preferential treatment which resulted in their paying lower tax on deposit interest than applied elsewhere. The Government are quite right to introduce equality of treatment between all deposit-taking institutions. That is the only way to have a fair system.
An obvious matter of concern is in the area of people with small incomes, be they over or under the age of 65 years. The Government concessions to those over 65 years and to the handicapped are welcome. There is no doubt that these are the most serious cases. However, I feel that the possibility of a general small income exemption, regardless of age, should be looked at again. I have seen figures quoted by the Department of Finance which indicate that if that concession were given, 60 per cent of the DIRT revenue would be foregone in 1987. I question that. If this tax is to raise £100 million and 60 per cent is to be sacrificed if concessions are given to small income people, it seems to suggest that the banks are controlled or dominated by the unemployed and by small, relatively poor people. That runs completely counter to everything I feel to be the case about deposits in banks. Those figures should be carefully looked at again to see if the extension of small income exemption throughout the code would cost very much.
Let us take the case of persons on a contributory old age pension. The contributory old age pension entirely absorbs the small income exemption and those people would normally be liable to pay 35 per cent on their deposits. Many of those in the small income group would probably have enough outside income to bring them in £2,650 a year, or £50 a week. People who have an outside income of £50 per week are rightly liable for the 35 per cent deduction from interest. There is something very wrong in the Department of Finance figures which suggest that 60 per cent of the revenue would be lost if we said that persons with an income of under £50 a week should not be allowed a refund of their money. This is an important issue and the figure should be considered again. The issue mars what is otherwise an excellent tax.
I am discouraged by the Fianna Fáil attitude to taxation during the past few months. They have repeatedly rejected in their statements what they call the high taxation policies of Government, but they have not either called for an assault on Government spending or talked about reducing Government borrowing. They have done the opposite, talking about introducing selective new spending and what they call self-financing tax cuts. Would that the world were like that.
Would that we could introduce tax cuts which were self-financing. That means that if a person is given a tax concession of £10 the Revenue will get that £10 back at the end of the day.
Could anything be any more ludicrous than the thought that the £10 would end up in the pocket of the Revenue Commissioners? It is completely false and one does not need statistics to realise that. For those who want statistics, the ESRI estimate in respect of a £10 concession that the Revenue Commissioners will end up with £2.40, while the other £7.60 will go elsewhere, much of it on imports. This idea of selective new spending and self-financing tax cuts is nothing but the old formula of more spending and less taxation, dressed up in new words with nice little adjectives attached. It is the same old message.
Fianna Fáil have ignored the commission's single stern warning that the commission's recommendations should not be used by people who are willing to take the attractive proposals and reject the unpalatable. That is the very thing Fianna Fáil have done in successive statements. They have advocated lower income tax rates but have rejected out of hand any move to touch any existing reliefs and exemptions. They have called them manifestly unfair, in the Fianna Fáil Leader's own words. They cannot have it both ways. They cannot take the attractive proposals and reject the unpalatable. Tax reform is a matter of making changes in one area to finance changes in another.
The only area where Fianna Fáil have supported the Commission on Taxation is in relation to the fifth report. To be honest, that is like supporting motherhood. That report is essentially about management and how to manage resources better in the Revenue Commission. To say that one supports better management is not making anything like a sensible contribution to a debate on taxation. Fianna Fáil must get down to addressing the basic issues such as how to broaden our tax base to bring down tax rates and how to improve collection. These are the real issues in taxation and I hope that Fianna Fáil in the course of this debate will face up to those real issues and not go carping on about old formulas and old resolutions to problems which have manifestly failed.
