In relation to the proposal, and the amendment I have tabled accordingly, to increase the rate of VAT on electricity from 5 per cent to 10 per cent, I note the Minister in his Budget Statement today proposed to raise the VAT rate from 1 March next and that the increase would yield £11 million in 1990 and £18 million in a full year, and I quote from the speech: "In order to ensure that prices charged to domestic consumers do not increase, I am arranging that the additional costs involved will be absorbed by the ESB." What arrangement has been made to have the costs absorbed by the ESB? How are the ESB going to fund that absorption and what does that mean in terms of what the ESB might otherwise be in a position to do about the prices they charge to their customers? The Minister went on to say: "Charges for VAT-registered businesses will remain unchanged as they will be able to reclaim the VAT element of their bills." I may be wrong but that seems to suggest that as far as the charges for electricity made to businesses are concerned it is anticipated that the price will remain the same and instead of reclaiming a VAT element of 5 per cent which is the case now, from 1 March next the VAT registered business will be reclaiming a charge of 10 per cent, so the net position remains the same. That will not be the case for householders who cannot reclaim any VAT. We need to know what is going to happen to ESB prices.
The last financial year for which we have information available pertaining to the ESB is the year ended 31 December 1988. According to the annual report of the ESB for that year, they had a surplus of £3.407 million in relation to their business in the generation and transmission of electricity, and when the other parts of their operation were taken into account, that is appliance sales, external activities and fisheries, the result for all activities was a surplus for that year of £5.413 million. All of that came from a total revenue income for the ESB in that year of £712.710 million. Therefore, the ESB are turning over roughly £700 million per annum. Their costs in that year amounted to £709 million. Of course, the figures would have changed by some margin since then for the most recent year.
It seems that what is being proposed is that the ESB would be asked or obliged or in some way led into absorbing £18 million which would represent an addition of some 2.6 or 2.7 per cent to their total costs and a figure of slightly less than that as an imposition on their total revenue. For the previous year ended 31 December 1987 the ESB had a deficit of £8.5 million on their electricity trading account and a deficit of £5.5. million on their overall operations. The ESB also have a very high level of debt. How a company like that are going to be in a position to absorb £18 million is something of a mystery to me. Deputy Rabbitte referred to this a few moments ago. In previous years we have seen payments being taken from the ESB at an accelerated rate. I think I remember in this House on a previous budget reckoning that something like seven years payments were being taken from the ESB in one year. I do not know what effect an imposition of £18 million is going to have on the financial position of the ESB.
If, on the other hand, the financial position of the ESB is such that they can simply part with £18 million just like that, that raises another question. What would the ESB do with that £18 million if they did not have to hand it over to the Government in response to an increase of this nature in VAT? Again, if we apply that to their electricity generation account we can see there is a potential there for a change of some 2.5 per cent in their price level and clearly the possibility that the change could in some cases or for some customers be bigger than that, depending on whether it was decided to apply that over the prices of all the electricity they sell or if they were to apply it selectively on some categories of customer. I take the view that the ESB are likely to be in a position to make the far more sensible decision about the use of resources of this kind than are the Government and, therefore, the case is by no means demonstrated that we need to have an increase in the VAT rate on electricity. Neither am I at all convinced by the Minister's statement that this is to ensure that arrangements have been made that will ensure that prices charged to domestic consumers do not increase.
Before we go further with this measure the Taoiseach should explain to us what the financial capacity of the ESB is to this and what kind of arrangement has been put in place to ensure that the price of electricity to domestic consumers does not increase. Unless and until we know those things this House is not going to be in a position to make any kind of informed judgment simply on the basis of the assertions the Minister has given here today.
Another proposal is VAT on telecommunications. I am given to understand that the reason this is not in the resolution before us is that it is proposed to come into operation with effect from 1 July next and, therefore, the matter does not need to be dealt with in a resolution here tonight but can be dealt with in the Finance Bill we will be dealing with later on. In relation to VAT on telecommunications, the Minister makes the following point:
"Allowing for the fact that BTE will now be able to reclaim VAT on its inputs, the charge will yield a net £3 million to the Exchequer in 1990 and £11 million in a full year. I am confident that this initiative can be implemented without increased costs to telephone users, both households and VAT-registred businesses, bearing in mind the ability of BTE to recoup VAT on inputs...".
That raises a number of questions. The charge would yield a net £3 million to the Exchequer in 1990 and £11 million in a full year. The Minister is again suggesting that this can be absorbed in some way by Bord Telecom Éireann. He was much less firm about that assertion than he was about the ESB, as he had made an arrangement with them, but in this case he is simply confident that this can happen without affecting the telephone consumers. As my colleague, Deputy Noonan said this afternoon, it seems that the Minister has a much firmer grip on what happens in the ESB than in Bord Telecom Éireann.
One of the features of the case is that the effect on telecommunications charges is not as big as one might think because there is a substantial element of trapped VAT in the operations of Bord Telecom Éireann. Bord Telecom Éireann pay VAT on a lot of their inputs and purchases and, not being a VAT registered business, they can neither charge, nor reclaim VAT. If VAT is applied, this trapped VAT can be reclaimed and BTE will be in a more competitive position. I assume that is what the Minister had in mind when he indicated that the effect on consumers would not be great. I would like the Taoiseach to expand on that, and if that is the case to say how much VAT is trapped and what the effect of this will be on telephone charges.
Of course, the Minister is not able to tell us that the charge will be passed on to consumers because BTE would be adding VAT to every consumer's bill. While this is acceptable for a VAT registered business or person, it means that the ordinary householder has an extra charge imposed on his telephone bill. If we create a situation where BTE can get the VAT trapped out of the system and thus be more competitive, what steps can the Minister take to prevent them from doing the very thing that gets rid of the blockage that traps the VAT, i.e. passing on the VAT to their customers? We have had no information from the Minister on the amounts involved, the methods involved or why he is confident that this will not affect the consumers. I contend that whatever the case of the business consumer and the advantage to Bord Telecom Éireann in terms of freeing the trapped VAT, there is absolutely no doubt but that a VAT charge will find its way into the telephone bills of the ordinary domestic consumer and the many people who are trading in businesses of various kinds but are under the VAT registration threshold and are not registered for VAT, and whose businesses therefore have to carry VAT.
I now come to the third matter dealt with in this Financial Resolution, the rate of VAT refund to unregistered farmers. In our amendment No. 5, I am proposing that we substitute the figure 2.5 per cent for 2.3 per cent. Of course, I should point out that there are two consequential amendments to amendment No. 5, which will be circulated to Members very shortly. The reason I am raising this amendment is simple and the Taoiseach has admitted the case for it. The Taoiseach said — and I think my recollection of what he said a few minutes ago is correct — that in proposing a rate of 2.3 per cent this year the Government are moving back nearer to where the figure should be. My contention, and the Taoiseach appears to agree, is that the figure should be more than 2.3 per cent. In fact, I believe some experts claim that the figure should be around 2.6 per cent or 2.7 per cent — I am not sure if that is correct but it should certainly be more than 2.3 per cent — and I propose a figure of 2.5 per cent.
I have to say to Deputy Rabbitte and to Deputy McCartan, who is not in the House at present, that their proposal to delete that section would amount to putting an extra tax on farmers as we would be deleting the refund of VAT trapped in the cost of their inputs and which they cannot reclaim because they are unregistered for VAT. This Government and their predecessor changed the flat rate refund to unregistered farmers in the first instance because they claimed farmers were not paying their proper share of tax. Ever since that proposal was first made I and my colleagues have argued that whatever may be the truth about whether farmers were paying their proper tax, the way to resolve the issue is not by interfering with the VAT system by looking at the accounting and collection mechanisms so that we can determine what tax individual farmers should be paying and find ways of taking the tax from them legitimately, above board, and in a way that is fair between one farmer and another.
Trying to resolve this problem by messing with the flat rate of VAT refund is unfair because one has no idea of the circumstances of individual farmers or how they are affected by this. It is also inefficient. It gives rise to a great deal of ill informed and misleading comment and belief about the farmers' tax situation. This figure should not have been interfered with in the first place.
Deputy Noonan was quite right this afternoon when he said to Members on the benches opposite who seemed to be happy that the figure was being changed to 2.3 per cent, and I quote "it is like being thankful to the hangman for loosening the noose around one's neck". The interference that this Government and their prodecessor operated in relation to the flat rate of VAT was actually cutting off funds that should have been going to farmers by right to compensate them for VAT that is included in the cost of their inputs. The rate of 2.3 per cent is not enough and I propose that it should be raised to 2.5 per cent. I know for a fact that a good many Deputies on that side of the House agree with me.
