Deputy Mary Flaherty has given me notice of her intention to raise the following matter: whether the Minister for Energy proposes to absorb the cost of the increased ESB charges. Deputy Flaherty knows the procedure, she has five minutes to present her case and the Minister has five minutes to reply.
Adjournment Debate. - Increase in ESB Charges.
Fine Gael believes the Government should absorb the increases in ESB charges. They are a direct result of changes in VAT imposed by the Government. The Irish taxpayers, workers and pensioners are already struggling to meet the increased costs of home heating fuel as a result of the Gulf crisis and its impact on prices. In Dublin the imposition of the ban on smoky fuels has led to a very great increase in costs which has not been covered by the additional funds made available by the Government; those who are not in that category have had to bear the full burden. At this time it is difficult for many and impossible for some to absorb the additional energy costs imposed as a result of the VAT changes which are to be passed on to the consumer.
I anticipate that the Minister will indicate that the amounts involved are relatively small. I refer to the pensioner to whom I referred in my budget speech who talked about the £4 per month he would receive as a result of the budget. A sum of £1 will be taken back by virtue of this change, another £1 by the anticipated increases in his gas bill and another £1 as a result of extra telephone charges. Out of that £4 he has £1 left to cope with all the other increases. While the amounts involved may be small, as a result of the other cumulative changes they are substantial. I make a particular case for the social welfare recipient. I would also like to ask the Minister to reassure us on the points raised earlier in the day by Deputy Michael Noonan, our spokesman on Finance. Is this the end?
In his budget contribution the Taoiseach said he anticipated that all items in the 12.5 per cent range would gradually move up into the higher band and only those which were at the 10 per cent rate would move into the lower group. Is this the Government's policy? Is this what we can look forward to? The EC recommended that the appropriate range for home heating fuels would be in the order of 4 per cent to 9 per cent. The Government and the ESB promised there would be no increases until the end of 1992. The consumer should not have to pay for the Government's slowness to reform VAT leaving us to pay higher energy prices than our EC partners. It also underlines the need — this point was made this morning by Deputy Bruton — for a Competition Bill to ensure that we are getting value for money from the ESB which has a monopoly in relation to the supply of electricity in this country. I hope the Minister will give a positive reply and additional information as to the Government's intent in relation to these points.
On 30 January 1991, my colleague, the Minister for Finance, announced that, with effect from 1 March 1991, the low rate of 10 per cent VAT will be increased to 12.5 per cent on a wide range of items and fuels, including electricity. At the time of the budget the ESB announced that on 19 February 1991 its board would consider what to do about the VAT increase.
The ESB, which had itself adopted a policy of price freeze for three years, absorbed two previous VAT increases imposed. In the 1988 budget, when VAT of 5 per cent was imposed on electricity bills for the first time, the board absorbed this in a general concurrent price reduction, so it was not passed on to customers. The 1990 budget increased the VAT rate on electricity bills to 10 per cent. Because of the good financial outcome for the 1989 year the board applied a discount on domestic electricity bills during 1990 to offset the VAT increase. The absorption of these two VAT increases represents an annual benefit to the consumer of £31 million.
Yesterday, the ESB board considered the present position. It decided that the tax could not be carried and it approved a rise of 2.5 per cent from 1 April 1991 in its charges arising from the budgetary decision. It will mean a £1.50 increase on a typical ESB bill of £60 for a two month period or less than 17p per week. Most consumers would only use half of the average, therefore, the VAT increase represents less than 9p for them, not the £1 claimed by Deputy Flaherty. It is the first rise in domestic bills since 1985. As is the case with all VAT charges, the amounts which the ESB collect will be transferred to the Exchequer and will not benefit the ESB.
The ESB have expressed their regret that because of their changed financial situation a further discount of 2.5 per cent is not possible and, accordingly, the VAT increase must be passed on in bills from 1 April next.
VAT on electricity was first introduced in 1988 as part of the moves towards harmonisation of our rates with our European colleagues in 1992 and this has to continue. This increase has to be seen in the context of the positive movement in ESB prices in the past few years. Since January 1985 electricity prices have been reduced in real terms by 35 per cent for industry, 27 per cent for commercial and 20 per cent for household. ESB electricity prices are now below the European average for domestic and industrial. It is still a major objective of the board to supply electricity at a price which helps to keep Irish industry competitive abroad.
To put this into greater context, it is interesting to read in today's Financial Times that there is a suggestion that UK electricity prices will rise by a further 10 per cent on top of increases of about 26 per cent since 1988. That is a total of over 36 per cent compared with the forthcoming ESB increase of 2.5 per cent.
When in 1989 the ESB announced that they would not increase the price of electricity to their customers for the following three years, that was dependent on no unforeseen or significant cost increases arising over which they had no control. The cost of the VAT already absorbed has been heavy. While astute oil purchases at low cost about 12 months ago have sheltered the ESB from price increases so far, the ESB have to have regard to further pressures on their financial performance. The ESB also have a large accumulated deficit of £54 million and a heavy debt repayment burden. They will be faced with a major capital expenditure programme to meet increasing demand later in this decade. In the face of rising costs and projected accelerated capital expenditure for the future, the ESB decided that this VAT imposition cannot be absorbed.
The increase in VAT rates in the budget was decided by the Government as part of the overall budget package, which included provisions for the less well-off. The budget provided for a 4 per cent increase in welfare payments generally, and with inflation in 1991 projected at 3 per cent, the budget went beyond the commitment in the Programme for Economic and Social Progress in matching inflation. In addition, a reduction in the standard VAT rate from 23 per cent to 21 per cent will apply to most consumer and household goods. The estimated net effect of the overall VAT changes is that consumers will be better off to the tune of £37 million in 1991.
While the ESB are unable to absorb the costs of this particular imposition, I wish to reiterate that the ESB have assured me that they will continue doing everything possible to hold down costs which are within their own control and to manage the potential risks in a sudden uncertain environment outside.
In reply to Deputy Flaherty, I would finally say that we will apply the VAT rates after 1992 in line with whatever the EC proposals are then.