Finance Bill, 1991: Second Stage.

I move: "That the Bill be now read a Second Time."

The objective of this Finance Bill is to provide a legislative basis for the taxation measures which I announced, or foreshadowed, in my Financial Statement on 30 January. Despite the constraints imposed by difficult external conditions, the Government are making further significant steps in taxation reform again in 1991. The provisions of this Bill, taken with those of the 1990 Finance Act, represent major progress towards gearing our tax system to the needs of the economy and to the requirements of the EC single market. In a little more than one year, we will have achieved: a reduction of 3 percentage points in the standard and top rates of income tax; a cut of 4 percentage points in the standard VAT rate; a considerable narrowing of the difference in excises between this country and the UK; a reduction in the standard rate of corporation tax to 40 per cent from 1 April this year; and significant reductions in the top rates of capital taxes.

This progress in reducing rates does not, however, represent the full extent of the Government's commitment to tax reform. It has to be seen in conjunction with: (a) our determination to improve tax collection and enforcement, so that taxes due are paid promptly and fairly. This year's Bill contains important initiatives in relation to the administration of capital acquisitions tax, stamp duty and capital gains tax, which means that all our main taxes are now on a self-assessment basis; (b) our commitment to broadening the tax-base generally, to making the tax system more equitable, and to ensuring that special reliefs and incentives are better targeted. This year's Bill maintains the thrust of earlier years, towards reducing the cost of "tax-expenditures", seeking to maximise their effectiveness and giving a fair deal to everyone; (c) our firm intention to build on the progress already made, especially in relation to personal income tax, which is no important for the attainment of our employment goals; and (d) our commitment to disciplined management of the public finances which, in the final analysis, is crucial to sustainable lower tax rates.

Before turning to the specific provisions of this Bill, I will outline our broad economic and budgetary strategy and comment briefly on the immediate prospects for the economy, and on budgetary developments.

The Government's economic strategy in the last few years has been based on lower public borrowing, improved competitiveness and strict adherence to our obligations in the EMS. This created the conditions for lower inflation and lower interest rates, which benefit everybody, and inspired greater investor and consumer confidence. These, in turn, resulted in a rate of economic growth among the highest in the EC, and, most important of all, in higher employment. By any standards the strategy was an outstanding success, not least because this progress was accompanied by sound economic fundamentals. With these, we are in a much better condition to withstand the present downturn in the international economy. By adhering to this broad strategy, we will be well placed too to benefit from its upturn in due course. The Government will be resolute in this regard despite the difficulties which the international scene may pose for us this year.

The Programme for National Recovery was the cornerstone of much of the economic and social advances of the past three years. The Programme for Economic and Social Progress continues that strategy which underpinned the Programme for National Recovery. Its primary aim is to develop a modern, efficient economy capable of sustained economic and employment growth. Only in this way can we earn the resources necessary to address broader social objectives.

Budgetary discipline must, and will, be maintained under the programme. In my budget speech I reaffirmed our mediumterm objective of progressively reducing the debt-GNP ratio towards 100 per cent by 1993, and our longer term aim of bringing this ratio more into line with the rest of the European Community. The budget target for 1991 — which envisages total borrowing of just under 2 per cent — was set with this goal firmly in mind.

The pay accord in the programme should help to consolidate the competitive gains of recent years. It should also ensure a further improvement in workers' living standards, against a background of good industrial relations. The combination of moderate pay increases, low inflation and income tax concessions in excess of £800 million on a cumulative basis gave substantial increases in real take home pay over the PNR period. The tax concessions in this year's budget combined with the pay increases agreed in the programme and an expected inflation rate of 3 per cent, provide the basis for a further increase in real take home pay this year.

Our policy of improving benefits for those on social welfare is being maintained. An innovative new approach is being adopted towards tackling unemployment black spots. Structural reforms aimed at making us a more competitive efficient economy will be implemented.

The policy strategy which is reflected in the Programme for Economic and Social Progress, in this year's budget measures and in the Government's stance generally is giving the right signals to investors both at home and abroad. The credibility of economic policy is central to maintaining the confidence in Ireland which is crucial to our future. A climate which encourages and sustains investment, the engine of growth, is the only solid basis for employment creation. This credibility was established during the Programme for National Recovery and it is being reinforced by the broad consensus which now obtains, for the continuation of that economic strategy in the new programme.

Turning to the prospects for 1991, I made it plain in presenting my budget that 1991 would undoubtedly be a difficult year. It was inescapable that slower growth abroad would affect us adversely. It was largely on this account that I projected that our growth rate this year would be less than half that of 1990. The prospect is that the international economy may be somewhat weaker, at least in the first half of the year, than expected two months ago. The UK authorities, who had been forecasting a modest rise in output this year, are now talking about a decline of 2 per cent. Moreover, the prospect for growth in our continental EC trading partners — particularly in Germany — is now weaker than forecast at the end of last year.

Though it will be no easy task to attain our Budget Day forecasts for growth, I remain optimistic about the short term prospects for the Irish economy. Better competitiveness and lower inflation should enable us to increase our share even in weaker international markets. The decisive conclusion to the Gulf crisis should see a resumption of strong investment growth, supported here by EC Structural Funds and by businesses continuing to gear up for the EC Single Market. The measures taken in the budget, together with the new Programme for Economic and Social Progress, will help to sustain investor confidence, and they will boost real incomes as the year advances. Most of the domestic economic indicators which have become available since the end of January relate to developments in 1990 but, in so far as they throw some light on prospects for this year, they support the view that 1991 will be a year of more modest progress. Manufacturing output remains subdued, at least in comparison with the very strong expansion of recent years, and consumer and investment spending have shown a weaker trend.

It must be borne in mind, of course, that our information essentially pre-dates the ending of the Gulf War. Not only did the war have adverse direct effects on international trade, but the associated uncertainty also damaged consumer and investor confidence. It is no surprise that expenditure on durables was restrained in the earlier part of the year, and as might be expected, indirect tax receipts felt the impact.

Of course, it must be borne in mind, in interpreting the tax returns, that at this stage what we are looking at is, in effect, the tail-end of the 1990-91 tax year. Consequently, year-on-year comparisons reflect the full impact of the reductions in tax rates introduced in the 1990 budget, both in the area of indirect taxation and in income tax. As we get further into the year, the influence of this factor will become less significant. In any case, we have yet to see the impact on consumer spending of the budget and the new programme measures which, for the most part, take increasing effect as the year progresses. These should give a boost to the revenue trend in the months ahead. As far as expenditure is concerned, outlays on social welfare have been affected by higher than expected unemployment in the first quarter, consequent on the sharp fall in net emigration. This apart, expenditure trends for the year to date show no significant departure from the expected pattern of departmental spending profiles.

Given the particular uncertainties which are a feature of 1991, it was bound to be difficult to evaluate the overall budgetary picture until a good part of the year would have passed. Nevertheless, the Government will monitor the evolving situation very closely, and will not hesitate to do what is necessary.

The recent reduction in domestic interest rates was a welcome development. In that context I would like to pay tribute to those financial institutions which passed on the 0.5 per cent reduction to their borrowers and mortgage holders with the minimum of delay. While we will continue to be constrained by the international interest rate environment I would hope that it will be possible for Irish interest rates to more fully reflect our strong economic fundamentals.

I would now like to address the individual sections of the Bill. Details of these sections are contained in the explanatory memorandum which has been circulated to Deputies with the Bill.

The opening sections of the Bill deal with the substantial package of income tax reliefs I announced in the budget. All in all, nearly 700,000 taxpayers will see their marginal income tax rate reduced as a result of these changes. These reliefs continue the established trend in income tax policy of making special provision for the low paid, especially those with children, extending the standard band, and reducing the top and standard rates of tax.

Increasing the general exemption limits is an effective way of relieving income tax for the low paid. These limits are being increased by £150 for a single person and £300 for a married couple, with the age exemption limits going up by a similar amount. The child addition, which I introduced in 1989 at £200 per child and increased to £300 per child last year, is being raised to £500 per child in respect of the third and subsequent children. This year's measures will exempt some 18,000 taxpayers with 23,000 children from tax altogether. A further 26,500 taxpayers with 36,000 children will be brought into marginal relief. The marginal relief rate itself is being reduced to 52 per cent; two years ago this rate stood at 60 per cent.

This is the third year in a row in which I have substantially increased the exemption limits. In 1988, the exemption limit for a married couple was £5,500 and took no account of children. It is now £6,800, an increase of nearly 25 per cent. For a married couple with three children, the increase is to £7,900, or nearly 44 per cent. For a couple with five children, the new figure is £8,900, which is an increase of over 60 per cent. These substantial increases in the income tax thresholds, in conjunction with family income supplement which I improved further in this year's budget, represent an effective response to the position of low-income families, while ensuring an incentive to take up employment.

Widening the standard-rate band has the desirable effect of pushing up the income levels at which higher tax rates are reached. The standard band is being extended by £200 for a single person and £400 for a married couple. This is the fourth year in succession in which this band has been extended. It was £4,700 for a single person, and £9,400 for a married couple, in 1987; these figures are now £6,700 and £13,400 respectively, an increase of over 40 per cent.

Moreover, the personal allowance is being increased by £50 for a single person and 100 for a married couple, with appropriate consequential changes in the widowed personal allowance and in the widowed parent and single parent allowances.

The third area on which income tax policy has concentrated in recent years is the actual rates of tax themselves. This year I am providing for a reduction of 1 per cent in both the standard top tax rates. This brings them to 29 and 52 per cent respectively: before the 1989 budget, they stood at 35 and 58 per cent.

In other words, the past few years have seen very substantial improvements in the three focal points of income tax policy: the general exemption limits have been increased over the last three budgets by at least 25 per cent, and in some cases by over 60 per cent when the child addition is taken into account; the standard rate has been cut since 1989 by more than one-sixth; and the top rate of tax cut by more than one-tenth and the standard band has been extended by over 40 per cent, so that a significantly lower proportion of taxpayers face the higher rates. This is the way to deal with the tax wedge that is so much talked about: by real and substantial progress on extending the standard band and by reducing our tax rates.

These would be no mean achievements in any economy. Against the backdrop of the severe budgetary constraints imposed by the need to restore order to the public finances, they are clear proof of the Government's determination to reform taxation. Of course, despite these achievements, the Government recognise that more remains to be done as budgetary circumstances allow. I made this clear in my budget speech: the Government's aim, as I said, will be to reduce both the standard and top rates of tax by 2 per cent in each of the next two years.

The Bill also contains additional provisions to respond to the needs of certain taxpayers. A new allowance is being introduced to help widowed parents cope financially in the difficult bereavement period which follows the death of their spouse. This allowance, which will apply for the three years following that in which the spouse dies, will be £1,500 for the first year, £1,000 for the second year and £500 for the third year. This is being implemented in such a way that those people whose spouse died since 6 April last year will qualify. The ceilings on the relief on rent for persons aged 55 years or over who live in private rented accommodation are being increased from £750 to £1,000 for a single person and from £1,500 to £2,000 for a married person. In addition, I have decided to introduce a special ceiling of £1,500 for widowed persons. Finally, as announced in the budget, the PAYE allowance is being made available to persons whose place of employment is outside the State where they are paying tax under a PAYE-type system.

The last section in Chapter I arises from my announcement last December of certain relaxations in exchange controls. I said that individuals would, subject to certain conditions, be permitted to open foreign currency accounts with Irish financial institutions. I pointed out that deposit interest retention tax would apply to interest from such accounts, and that therefore permission to open them would have to await the passage of the Finance Bill. In keeping with this announcement, section 11 provides for the application of deposit interest retention tax to interest from foreign currency accounts held by individuals, with effect from 1 June 1991. Non-resident individuals opening new foreign currency accounts on or after that date will, of course, be able to receive interest gross on presentation of the usual declaration of non-residence. Existing foreign currency accounts of non-residents will not be affected by the provision; nor will accounts of companies.

Chapter II of the Bill deals with the relief for investment in corporate trades, commonly known as the business expansion scheme. It provides for the changes set out in the Financial Resolution passed by this House on budget day, 30 January, and for the transitional arrangements and other measures relating to the scheme which I announced in my statement of 12 March.

Briefly, the changes are as follows. To begin with, the scheme itself is being extended for two years, until 5 April 1993. Secondly, shipping, hotels, guesthouses and self-catering accommodation are being excluded from the scheme. Thirdly, the amount of BES funding an individual company can raise under the scheme is being reduced, from £2.5 million to £500,000. Fourthly, a lifetime cap of £75,000 is being imposed on the amount on which an individual taxpayer can claim relief. Subject to transitional arrangements which I will come to in a moment, these measures relate to shares issued on or after 30 January.

The House will be aware that on 12 March I issued a statement setting out transitional arrangements to apply to companies which, in the period between 1 January 1990 and 30 January 1991, had entered into binding contracts in writing to purchase or lease land or buildings, or plant or machinery, or to construct or refurbish a building, in the case of manufacturing, international services, or tourism companies; or to purchase a ship, in the case of shipping companies. Companies which had entered into such contractual commitments by the date would, subject to meeting certain conditions, be permitted to raise up to £1 million in BES funding — less any BES funding already raised, of course. To qualify under those arrangements, shares must be issued by 31 August 1991. Section 14 of the Bill provides accordingly.

My 12 March statement also dealt with two other matters, multiple companies and loans to subsidiaries, and section 15 includes provision for those. After budget day, evidence began to emerge of the increasing use of multiple company structures. These were clearly intended to get around the new £500,000 limit, and I said that I would be introducing measures to counter this development. The Bill provides that, where a company is party to an arrangement or understanding or agreement with another company or companies which is designed to circumvent the £500,000 per company limit, they will be entitled, not to £500,000 each, but to £500,000 divided equally among all the companies.

The other provision of section 15 ends the facility for a company to on-lend to a qualifying subsidiary funds raised under the BES; such funds can, in future, only be used to acquire shares in, rather than on-lend to, the subsidiary. The ability to on-lend BES funds was being used to give quasi-guarantees to investors under the scheme. Such guarantees meant that the risk which an equity-holder normally accepts was being shifted away, and the BES investor was in effect not a shareholder, but a creditor. This practice was not within the spirit of the scheme's objectives.

These two provisions will apply in respect of eligible shares issued on or after 12 March, except for companies qualifying under the transitional arrangements, or where a company had applied to Revenue for outline BES approval, or issued a BES prospectus, before that date.

Section 46 also provides, as I announced in the budget, that if a self-employed taxpayer's preliminary tax payment under self-assessment is based on 100 per cent of his liability for the previous year, he must exclude for this purpose the effect of any BES relief to which he was entitled for that year. Otherwise, a BES investment would serve to reduce not only tax liability for that year but also the preliminary tax payment in the following year.

While I am dealing with the business expansion scheme, I would like to make some general remarks about the scheme and about the purpose of the changes being made to it. The first point I want to emphasise is that the objective of the changes is to refocus the BES on its proper purpose of generating capital for smaller, riskier companies. Hence, the exclusion of asset-backed sectors and the reduction of the company limit from £2.5 million to £500,000. Without these changes, the cost of renewing the scheme would have been prohibitive. Renewal was, therefore, made possible by them.

The second thing I want to do is to nail the accusation that the BES is dead as far as tourism is concerned. It is not. There is still a large number of non-accommodation tourist facilities which qualify for investment under the scheme; for example marina services, cruiser hire, equestrian centre services and tour coach services. In fact, the exclusion for the asset-backed sectors should operate to improve the chances that such ventures will, in fact, be able to raise funds for investment.

The third point I want to make concerns the transitional arrangements I made in March. They were a recognition that there were cases where binding contracts in writing had been entered into on or before budget day in anticipation of BES funds. The wisdom of entering into binding written contracts in advance of securing the money to fund them is, of course, questionable, but it was to deal with the difficulties that would arise for companies, especially smaller companies, where such contracts existed that I announced these transitional arrangements. They are, however, transitional only; only a limited number of companies will be able to benefit from them, and only to the extent of £1 million per company less any BES funds already raised, and only where the shares are issued by 31 August. This Government are not in the business of putting small businesses out of business and, consequently, I made the transitional changes to which I have just referred.

However, the budget measures remain; a lifetime cap has been imposed on investors, the company limit has been reduced from £2.5 million to £500,000, and shipping, hotels, guesthouses and self-catering accommodation are excluded from the scheme. That is the position and so it will remain.

I also want to deal with the view that the BES has done no good in the economy, and that it should have been abolished. A review of the scheme carried out by my Department, in conjunction with the Departments of Industry and Commerce, Tourism and Transport, and the Marine and the office of the Revenue Commissioners, makes clear that whatever the cause and effect additional jobs were arising in companies which raised BES funds. It also threw light on the question of where the BES was most costeffective which, in the final analysis, is the key question about any incentive scheme.

The review covered 347 companies and identified some 4,250 additional jobs in those companies. It identified State aid in respect to those companies of some £74 million, between tax foregone under the BES and direct State aid in the form of IDA grants. This sectoral breakdown was as follows: 3,138 additional jobs were identified in 275 manufacturing and international services companies, which had received £36.9 million in BES investment at a tax foregone cost of £20 million approximately and £24.9 million in direct State aid. One thousand additional jobs were identified in 63 tourism companies which had received £46.8 million in BES investment at a tax foregone cost of approximately £23.5 million. Seventy-eight additional jobs were identified in four shipping companies which had received £7.7 million in BES investment at a tax foregone cost of £3.9 million, while 28 additional jobs were identified in five special trading houses which had received £3.3 million in BES investment at a tax foregone cost of £1.7 million.

Of course, it is not possible to establish objectively to the exclusion to the element of judgment that State support — including low-cost finance under the BES — was directly the cause of the additional jobs identified. Jobs growth is very likely to have reflected other influences as well, not least the favourable economic climate which has existed in recent years. In addition, account was not taken of possible effects on non-BES companies, in the relevant sectors or otherwise. Nevertheless, it is reasonable to assume that BES funding played some part. It will also be noticed that there were significant variations across sectors in the level of additional jobs identified. These considerations underpinned, although were not the exclusive or deciding factors in, the budget decisions taken on the BES.

The Bill contains three sections relating specifically to income tax on farming.

Section 10 increases the existing £2,000 income tax exemption for lessors of farmland who are aged 55 years or over, or who are unable to carry on farming because of mental or physical infirmity. This measure is aimed at encouraging greater land mobility and enabling younger farmers to have the use of land for a reasonable period in order to plan ahead. The new exemption limit will be £3,000 in the case of leases of at least five years duration and £4,000 where leases are for seven years or more.

Section 23 continues, as an exceptional and temporary measure, the 50 per cent rate of accelerated capital allowances for certain expenditure incurred by farmers on the control of farmyard pollution, where such expenditure is incurred before 1 April 1993, and approved by the Minister for Agriculture and Food either under the scheme of investment aid for the control of farmyard pollution or the farm improvement programme. The accelerated capital allowances will apply on a net-of-grant basis. This special concession is intended to assist these farmers who avail of these schemes which protect the environment. The existing scheme of stock relief, which is unique to the farming sector, is renewed for a further period of two years in section 16.

The International Financial Services Centre has been a tremendous success story for this country. So far, approximately 160 projects have been approved for the centre and companies have entered into definite employment commitments for almost 2,600 new jobs. The Bill contains a number of provisions which will help ensure that the centre will continue to thrive.

In the case of investment companies which have been designated by the Central Bank, section 17 provides for "tax transparency", for example foreign investors will only be liable in their home countries for any tax due in respect of their shares in the income or gains of the company. This brings them into line with similar investment vehicles, such as UCITS (Undertakings for Collective Investment in Transferable Securities) and Unit Trusts.

Section 102 of the Bill exempts from companies' capital duty all investment companies to which the provisions of Part XIII of the Companies Act, 1990, relate. This exemption already applies to UCITS and it is considered appropriate that it should extend to other investment vehicles, to which Part XIII of the Companies Act 1990, relates, in the IFSC.

Although insurance was one of the financial services listed for the IFSC in the Finance Act, 1987, life assurance business has not yet been attracted into the centre. It has been suggested that the IFSC is at a disadvantage vis-á-vis competitor centres because in Ireland the investment income of policyholders is liable to tax as well as the normal trading profits of the company, whereas continental countries do not operate this kind of taxation system. A disadvantage also arises vis-á-vis other forms of savings products, such as UCITS and Unit Trusts, already operating in the IFSC, in respect of which “tax transparency” has already been granted. Accordingly, I have included provisions in section 25 which will, I hope, ease the way for the entry of life assurance business, which has very significant employment potential, to the IFSC. The effect of section 25 is that such companies transacting business with non-residents only will effectively enjoy tax exemption in relation to the income of policyholders, leaving such income to be taxed in the hands of the recipient, as is the norm amongst continental European countries. The section also incorporates some precautions which are designed to ensure that shareholders' profits will be partially “ring-fenced” in order to preserve the tax due on these profits.

The 10 per cent rate of corporation tax is a vital part of the package which has been designed to attract business to the IFSC. Originally, that incentive was due to expire on 31 December 2000. Following agreement with the EC Commission, that date is now being extended under section 29 to 31 December 2005. The period during which new projects may be approved for the IFSC has also been extended, from 31 December 1990 to 31 December 1994.

This is a major boost to the centre and will, I am sure, help to consolidate its future. It is my earnest hope that many companies will take advantage of these extensions and move quickly to establish in the centre. There is no doubt in my mind that the centre has an important part to play in the worldwide financial services industry and it is the Government's intention to ensure that it can continue to do so.

As with the IFSC, the Bill also extends the expiry date for the Shannon 10 per cent tax rate from 31 December 2000 to 31 December 2005. In addition, the provisions of sections 17 and 102, in relation to investment companies, will apply in the Shannon zone.

In section 18, the National Treasury Management Agency, which was established on 3 December 1990, is being given an exemption from corporation tax and capital gains tax. The agency is totally funded from, and carries out certain delegated functions for the Exchequer. Because any tax it would pay would in effect be funded by the Exchequer, the exemption avoids a circular transfer process. A corporation tax exemption is also being given to the pensions board. Section 35 provides for this. The board are self-financing, with their administrative expenses being met by fees levied on pension funds. Any surpluses arising to the board will be once-off or used to provide against unexpected expenditure. It would be inconsistent to tax the board's surpluses, derived from fees levied on pension funds which are themselves exempt from corporation tax.

Section 19 closes a loophole in relation to the availability of double rent allowance to lessees in the urban renewal designated areas. Under existing provisions, it would have been possible to obtain more than the intended ten-year span of relief. This section limits lessees to a maximum of ten years. The section affects rent payable on leases entered into on and from 18 April 1991, the date of publication of this Bill.

Section 21 relaxes the current requirement that, for initial capital allowances on buildings to be available to the purchaser, the buildings be unused when acquired. These allowances will now be given if the buildings are sold within one year of being first used and the allowances have not alreay been claimed by any other person. This change will help property developments, particularly in the designated areas, where the current commercial practice is frequently to sell buildings with tenants in occupation.

Section 22 implements the budget proposal in relation to the use of capital allowances through certain property investment schemes. These schemes were deliberately designed to maximise the short term use of the capital allowances available for the construction of buildings in the designated areas in an unintended and unacceptable way. If appropriate action were not taken, the schemes would have led to a considerable front-loading of tax losses on the Exchequer in 1991 and subsequent years. Obviously I could not have permitted this. Accordingly the section restricts the use of the capital allowances in question in the case of such schemes.

The section has been carefully drafted to ensure that there will be no adverse effect on the normal type of joint investment in property which has taken place in recent years. Thus the restrictions will not apply to schemes which are in accordance with a practice which commonly prevailed in the State in the five years to budget day 1991. To take an example, where four individuals jointly purchase a new building in a designated area in the traditional way, it is intended that the associated capital allowances will continue to be available for set-off against all the income of each of these individuals for tax purposes. The Revenue Commissioners will be prepared to express an opinion on the entitlement to capital allowances where requested to do so in any particular case. Thus, a group of investors contemplating an acquisition or development in a designated area need be in no doubt about their position.

Section 24 makes a number of changes in the legislation governing the availability of domestic-sourced section 84 loans. The changes are in continuation of the general policy of widening the tax base and reducing the cost to the Exchequer of section 84 loans while, at the same time, providing transitional arrangements in the case of certain loans for new industrial projects. The cost to the Exchequer is reduced through the lowering of the ceiling for new loans from 75 per cent to 40 per cent of the loan volume as at 12 April 1989, with effect from 31 December next. This reduction takes account of the fact that about £500 million in loans to Shannon financial services companies will terminate on that date. The new 40 per cent ceiling will apply earlier in the case of any particular lender if any such Shannon loan of this lender terminates before 31 December next.

The cost to the Exchequer of section 84 loans is also being reduced by taxing the interest in the hands of the lender in the case of what are known as high-coupon loans. These are loans in foreign currencies with high interest rates which are much more costly to the Exchequer than the ordinary IR£ loans. The prohibition will operate through the taxation of the interest on section 84 loans in the hands of the lender where the interest rate exceeds 80 per cent of DIBOR. To cater for the fact that the UK is still our major trading partner, sterling loans are excluded from the scope of this restriction.

Transitional arrangements are being introduced in the case of loans for certain new manufacturing projects. Where it is not possible for such loans to come within the new 40 per cent ceiling, the provisions permit the giving of these loans above the ceiling. The 80 per cent of DIBOR rule will not apply to certain new loans for manufacturing companies where commitments had been given before budget day.

Section 25 allows life assurance companies to amalgamate their ordinary and industrial branch funds for corporation tax purposes. The 1989 Insurance Act permitted the amalgamation of these separate funds into a common fund for life assurance policies. This section brings the tax legislation into line with this. In order to minimise the cost to the Exchequer, the past tax losses on industrial business are being ring-fenced so that they can be offset only against the future income from the industrial side of the business.

Section 26 contains taxation provisions aimed at facilitating the securitisation of mortgages. Securitisation is a special type of arrangement under which a bank or a building society effectively sells off a package of its mortgages through an intermediary to investors such as pension funds and life assurance companies. Securitisation will provide a new investment outlet in the State for pension funds and life assurance companies and will also provide the scope for extra mortgage finance for the banks and buildings societies. The borrower's consent will be required for the securitisation of the mortgage to take place and the borrower will continue in practice to have the same business relationship with the bank or building society as existed prior to the securitisation.

Section 27 ensures that the standard rate of corporation tax will continue to apply in the case of the processing of meat which is sold into intervention.

Section 30 extends from 2000 to 2010 the termination date for the special 10 per cent rate of corporation tax in the case of certain activities in line with the similar extension for manufacturing contained in last year's Finance Act.

Section 31 converts into domestic tax law the EC Directive on a common system of taxation for the distribution of profits from a subsidiary company in one EC country to their parent located in another member state. This directive is part of a package of three measures on which agreement was reached during Ireland's EC Presidency after a delay of 21 years. The other two measures are concerned with mergers, divisions, transfers of assets and exchanges of shares involving companies in different member states and with an arbitration procedure where there is disagreement between the Revenue authorities in different EC countries on a particular double taxation question. It is hoped to introduce an amendment on Committee Stage containing the provisions in the mergers directive. The new arbitration convention will be dealt with by way of a Government Order in accordance with the normal practice for double taxation treaties. The aim of section 31 is to ensure that the profits distributed by the subsidiary to its parent are not taxed by both the countries concerned. Although the reliefs provided by section 31 already apply under existing double taxation treaties with the majority of our EC partners, the new provisions will extend the reliefs in the case of the remaining EC countries.

The scope of the tax exemptions for pension funds was extended in the 1988 Finance Act to investment in financial futures and traded options in the State. Section 32 will now allow for similar treatment for such investment in foreign futures and options exchanges. This change is appropriate in the context of 1992.

In last year's Finance Act, a one-year tax relief was given for corporate donations to the Trust for Community Initiatives. The trust was set up by the business community as their response to my call for an initiative from them aimed at alleviating poverty and increasing employment. It promotes a wide range of community development projects throughout the country. I have decided to renew the tax relief on company donations to the trust for one further year and section 33 provides for this.

The main provisions in Chapter VI are to give effect to the introduction of self-assessment for capital gains tax, as announced in the budget. This will bring capital gains tax into line with other taxes such as income tax, corporate tax and capital acquisitions tax, to which self-assessment already applies. Capital gains tax will continue to be due in the year following that in which the disposal of the assets takes place. Preliminary tax will be payable on 1 November in the tax year following the disposal of the assets, and the tax return will be due on the following 31 January. In order to avoid the possibility of an interest charge, preliminary tax must be at least 90 per cent of the full amount of the tax due for the year of assessment. To help taxpayers and their agents adapt to the changeover, the Revenue Commissioners have produced an explanatory booklet on the measures as introduced. This is being posted to taxpayers on their agents and is also available on request from tax offices.

In addition to this major change, the Bill contains in Chapter V three proposals which will provide relief from capital gains tax in certain cases. The first concerns the disposal of an asset, whether a business or a farm, on the retirement of the owner. The threshold for relief on disposal of an asset outside the family is being raised from £50,000 to £200,000. The second proposal concerns the provisions governing the disposal of shares by a retiring director of a family company. The requirement that the individual making the disposal be a full-time working director for the ten years prior to the disposal is being eased. The requirement in future will be that he or she has been a working director in the company for ten years of which five years must have been full-time. Moreover, this time period need no longer be immediately prior to the disposal of the asset. These changes will make it easier for people to retire from a business or farm and thus enable business and farms to pass to younger management. They will also cater for people whose active involvement in a family company is curtailed by, for example, illness or disability.

The third provision is being introduced to encourage private owners of works of art to lend them to galleries for display to the public. When a work of art, worth over £25,000, has been on loan to an approved gallery for six years for display to the public, it will be exempt from capital gains tax on its subsequent disposal.

(Limerick East): That is a nice provision for someone.

Kilmainham — development of a modern art gallery.

(Limerick East): I thought it was Kinsealy.

No, Kilmainham.

(Limerick East): It is a good incentive.

It is a good incentive.

It is a good one.

It is a good measure.

Chapter VII deals with urban renewal measures, and in particular with the special package of incentives for the Temple Bar area. The Government have chosen the renewal and development of Temple Bar as a flagship project in Dublin's specific contribution to mark its status as European City of Culture in 1991. The aim is that the existing buildings in the Temple Bar area should be refurbished and conserved in a manner which maintains their character, that new construction will only be allowed where it complements the architecture of the area, and that the activities to be encouraged in the area will be those which are in sympathy with its ambience. In order to ensure that this happens, a special role is being given to Temple Bar Renewal Limited a company chaired by the Lord Mayor. The approval of this company as to the appropriateness of the work involved will be necessary before refurbishment or new construction work can qualify for the specific tax reliefs, which will exist for a five year period, up until 5 April 1996.

The Temple Bar area is defined in the Second Schedule to the Bill. Section 49 contains the details of the tax reliefs. In summary, these distinguish between expenditure on existing buildings, and that incurred on new buildings. For existing commercial buildings, owner-occupiers can avail of a 100 per cent allowance for capital expenditure on refurbishment. This expenditure will include not only the actual refurbishment expenditure but also the lesser of the cost of acquiring the building or the value of the building at 1 January 1991, provided that the expenditure on actual refurbishment is at least equal to this additional cost or value element. Where a lessor refurbishes a commercial building, a 50 per cent initial and 4 per cent annual allowance will be given. A 100 per cent allowance, as with commercial premises, will also be available to owner-occupiers who refurbish their residential buildings.

For new commercial buildings, construction expenditure will attract a 50 per cent capital allowance for owner-occupiers. In the case of lessors, there will be a 25 per cent initial and 2 per cent annual allowances. Lessees in both existing and newly-built commercial premises can also avail of double rent allowance. Owner-occupiers of new residential buildings can avail of a 50 per cent tax allowance, at 5 per cent per year over ten 10. Finally section 23 reliefs will apply to the construction of new residential premises and to the refurbishment and conversion of existing buildings.

It is intended that a 100 per cent capital allowance will be provided for development of multi-storey car-parks in the Temple Bar area. Where these car-parks are leased, a 50 per cent initial and 4 per cent annual allowance will apply. In recognition of the need to integrate car-parks with the architecture of the area, they need not be free-standing. This integration principle is also catered for in allowing apportionment of expenditure for tax relief purposes within a building which is partly commercial and partly residential.

The remaining sections in this Chapter provide for the general urban renewal measures. Section 50 extends the time-scale for section 23 reliefs on construction and conversion for a final year, up to 31 March 1992, in the non-designated areas. In the designated areas, these reliefs will last until 31 May 1993 and until 24 January 1993 in the Custom House Docks area. As in the case of the special tax reliefs, they will be available until 5 April 1996 in the Temple Bar area. This section also removes the ring-fence on conversion expenditure incurred under the section 23 scheme in the designated areas including the Temple Bar area. This means that such expenditure can in future be offset against all rental income whereas previously it could be offset only against rental income from the property in question.

Section 51 provides a parallel extension for refurbishment expenditure under section 23, and for the removal of the ring-fence which applied to it on the same lines as in the previous section.

Section 52 gives a similar relief where there is a conversion of a building not previously used as a dwelling into a single dwelling.

Chapter VIII contains certain taxation provisions that are needed to complement the changes in the 1990 Companies Act which will allow companies to buy back their own shares. The existing tax rules are designed to address arrangements under which profits are transferred to shareholders without payment of a dividend, thereby avoiding an income tax charge. They treat the redemption of shares by a non-quoted company as a distribution of the company's profits to the shareholder, which renders the shareholder chargeable to income tax.

These rules are now being relaxed, subject to certain anti-avoidance safeguards. Where the various conditions designed to prevent avoidance are met, the shareholder's gains on the buy back of shares of unquoted companies will be subject to capital gains tax, instead of income tax, treatment. In general, this will mean a substantial reduction in the shareholder's tax liability in such situations and accordingly will facilitate shareholders in non-quoted companies who wish to dispose of their shares and terminate their connection with the company. Unlike the case of quoted companies, there has up to now been effectively no market in these unquoted shares. The changes introduced by Chapter VIII will, by facilitating share buybacks by the companies, greatly increase the liquidity of the shares of these companies.

Part II of the Bill — sections 67 to 69 — deals with customs and excise provisions. It implements the measures which I announced in the budget in relation to tobacco taxation, the concessions relating to liquified petroleum gas, including that for the horticultural industry, and the rationalisation and restructuring of road tax charges. Provision is also made for the introduction of special low rates of annual road tax for veteran and vintage vehicles.

Section 114 provides for a reduction in the level of adaptation required from 30 per cent to 20 per cent of the tax exclusive cost of the vehicle for qualification under the disabled passenger provisions of the disabled driver scheme. A general review of the scheme of tax concessions available to disabled drivers and passengers is already in train. On completion of the overall review, I will, of course, be consulting with the Opposition spokespersons in line with the undertaking that I previously gave in this House. However, I consider that this change is desirable and since it requires specific amending legislation it would otherwise have to await the 1992 Bill.

Part III of the Bill gives effect to the VAT changes announced in the budget as well as a number of further measures. The budget measures comprise the reduction of two percentage points in the standard rate to 21 per cent, the increase from 10 to 12.5 per cent on certain low rated goods and services, the extension of the provisions regarding certain categories of accommodation in the interest of creating greater equity in the sector, the taxation of certain non-postal services of An Post, and the application of VAT to the services of veterinary surgeons as required by EC law.

As I pointed out on budget day, the net effect of the VAT rates changes is to return £37 million to consumers. This figure makes a nonsense of the suggestion that householders will be worse off on account of these changes. It should, in any case, be plain that the cost of many everyday purchases will benefit from the further cut in the main VAT rate, given its very wide scope. Though some increases in the reduced-rate areas were needed to partly fund this reduction, the necessity for significant restructuring, if our VAT code is to be brought into line with the requirements of the EC Single Market, has long been apparent. The considerable progress we have made in this regard over the past two budgets has reduced significantly the incentive for tax inspired cross-Border shopping. It also played a key role in making possible the liberalisation of travellers' allowances recently put in place.

The other VAT measures are mainly technical in nature. The group registration facility, which allowed Revenue to treat two or more taxable persons as one accountable person in the interests of efficiency, is being extended to cater for VAT exempt bodies. This change, which is provided for in sections 73, 77 and 78, accords with evolving requirements in the business sector. Section 75 is intended to allow deduction of VAT on services like solicitors' fees incurred where a business is transferred from one taxable person to another. In section 79, subsection (a) (i), I am bringing national law into line with EC VAT law so that the assignment or transfer of debts and receivables is exempt from the tax. Finally, in subsection (a) (ii) of the same section, I am updating the existing VAT law on unit trusts to take account of recent legislation affecting investment undertakings. No substantive amendment to existing practice is being made.

The bank levy is renewed for a further year in section 83. The amount of the levy is unchanged at £36 million.

The law on stamp duty is very much out-of-date and the Bill provides for an extensive modernisation and rationalisation of the code. Up to this, there has been no compulsion on the parties to an instrument to have it stamped and pay the duty due. Enforcement of stamp duty has thus relied primarily on the fact that an instrument has no legal status unless it is stamped. While the great majority of instruments that should be stamped are stamped as required, there is evidently undue opportunity for avoidance. In addition, the penalties for evasion have not been changed for 100 years and are consequently of limited effectiveness as a deterrent.

Sections 87 to 101 of the Bill provide that stamp duty becomes a compulsory tax, thus putting it on the same footing as other taxes. It sets out who is liable to pay the tax. In most cases the buyer will continue to be responsible for payment; in other cases, the parties to the instrument will be liable. The Bill also provides that all relevant information pertaining to an instrument be made available to the Revenue Commissioners and that the Revenue Commissioners may make an assessment of the tax due. Existing penalties are updated, and new penalties are introduced where they are made necessary by the altered legal status of the tax. A new offence of negligence is introduced, a concept imported from the existing CAT code. The Revenue Commissioners are given powers to enforce payment of the tax, in line with their powers in other taxation areas, including making the Revenue sheriffs responsible for collecting debts, where necessary.

It has come to my attention that, under current legislation, it may be worthwhile for parties to large mortgages to have the instrument stamped outside the State. Part of the reason for this is the fact that the stamp duty on mortgages is currently capped at £3,000. In order to help our financial services industry, to ensure that work will be carried out here which up to now could be sent abroad, and to capture revenue for the benefit of Irish taxpayers, I am reducing this cap to £500.

Section 103 provides that the personal representative of a dead person be liable for residential property tax. This is to enable outstanding tax be collected from the estate of a deceased owner.

The Bill puts into effect the changes in capital acquisitions tax announced in the budget. The top tax rate is reduced to 40 per cent. Various reliefs, outlined in the budget, are detailed in the Bill. Agricultural relief goes up to 55 per cent of the market value of the property, while retaining the maximum of £200,000, and the conditions are amended to focus the relief more clearly on the situation where a farm is transferred to a working farmer.

In the case of a person aged 55 or over who inherits a house or part of a house from a brother or sister with whom he or she has been living for the previous five years, the value of the house will be reduced by £50,000 or 50 per cent, whichever is the lesser, for tax purposes. This measure should provide significant relief to a group of taxpayers who can have difficulties meeting their tax bills under current legislation. The Bill also provides for the extension of the Class A threshold to inheritances taken by a parent from a child. Again this measure is to alleviate hardship, and only a small number of cases are expected to benefit. The measure is backdated to 1982, to cover all known cases. This is an issue that arose in discussions on the Final Stages of the Finance Bill last year where a father had passed on his farm to his son who was later tragically killed in an accident. All the tax had been paid and consequently the question arose of the same amount of tax being paid in transferring the farm back to the father. That is what this provision is all about. I said at the time I would introduce such a provision in this year's Finance Bill and backdate it.

Sections 111 and 112 give effect to the tax amnesty for CAT and death duties announced in the budget. The new enforcement measures, which will come into force following the amnesty, are provided for in sections 118 and 119 of the Bill. These include extending the Revenue Commissioners' powers of attachment and giving the Revenue sheriffs power to collect CAT liabilities. These measures will be rigorously enforced.

The Bill as usual contains a number of miscellaneous provisions, some of which I have already mentioned. Section 113 contains the usual provision relating to the capital services redemption account. Section 115 and the Fourth Schedule apply to revenue offences the same procedures for the collection of fines imposed by the courts as for non-revenue offences. Section 116 is a technical amendment required to facilitate the proposed relocation outside Dublin of certain offices of the Revenue Commissioners.

In this opening address I have outlined for Deputies the Government's approach to general economic issues as well as detailing the more significant elements of the Bill. I look forward to the opportunity on Committee Stage to discuss in more detail the individual sections of the Bill. I commend the Bill to the House.

(Limerick East): I do not know if you have ever heard the song called The Fields of Shanagolden, but John Duffy, the great circus proprietor, visited Shanagolden once. At the start of the proceedings he addressed the audience as: “Ladies and Gentlemen and all the empty seats”. I do not think there is any need to address the empty seats here in the House but we should mark the occasion of the first Finance Bill where the Minister has gone right through his speech without a single representative of the press in the Press Gallery. I do not know if they have gone out in sympathy with the ESB or if the NUJ have called a walk-out but——

A better story.

(Limerick East): It is the first in the House and should be noted. The Finance Bill is a monument to failure. The Government are seeking a statutory framework for a budget which has already failed; a budget which is increasing unemployment well beyond 250,000 on the live register; a budget which is failing to meet its own limited targets, which is reducing confidence and guaranteeing high interest rates; a budget which again fails to reform income tax, which ensures that the PAYE worker will continue to carry an overwhelming burden; a budget which clearly illustrates the paralysis of the Government and the growing conflict between the Coalition partners leading to a total inability to take decisions.

This Finance Bill underpins the failures of the Government; where it breaks new ground it merely provides extra means for avoiding tax. I do not believe that a further extension to the tax dodgers' charter is necessarily good for the country. Even though the budget was announced only 11 weeks ago it is now substantially off the rails and the Minister will have great difficulty in achieving his budgetary targets. Even though he has been very confident about achieving them in statements in recents days, the section of his speech today which dealt with that matter is far less sanguine.

The Exchequer returns for the first quarter support this view; Exchequer borrowing for the first three months of the year, at £499 million, was £39 million greater than the estimate for the year as a whole. Receipts under almost all tax headings — especially indirect taxes — are below what was estimated. Those who defend the budget say — and I quote from one of them: "The greater part of the Government borrowing is usually undertaken in the first quarter of any year". While this has been so in recent years there is no written — or unwritten — law which requires this. The distribution of Government borrowing in any year is not predetermined but depends on the type of budget introduced by the Minister for Finance.

When budgets cut public expenditure and increase taxes — we had a number of these in recent years — then it is to be expected that a disproportionate tranche of borrowing takes place in the early part of the year. This is because it takes some time to put the expenditure reductions in place in the line Departments and the extra taxes, with the exception of excise and a month of VAT returns, do not come into effect until the start of the tax year in April. Consequently, in that type of budget, a disproportionate amount of borrowing takes place in the first quarter but that is not the type of budget which was announced on the last day of January this year.

When we have a budget along the lines of this year's budget, when it actually increases public expenditure and when its taxation measures are either neutral or expansionary, then there is no valid reason to expect matters to improve later in the year. We saw this in budgets of the late seventies which were along these lines. We saw that a bad first quarter was followed by a worse second quarter, leading to a realisation in the third quarter that the budget was off the rails. Then we had a lot of wringing of hands and wondering whether there would be supplementary budgets. It was then politically decided to leave well enough alone because, when we were going into the fourth quarter, it was not worth doing anything until the following budget and the next financial year. I am very much afraid this is the kind of budget we now have, where matters will get progressively worse as the year proceeds. If this happens the Government have only themselves to blame. The assumptions on which the budget was based were far too optimistic and the chickens are now coming home to roost.

I do not know of any independent commentator who believes that the economy will grow by 2.25 per cent this year. If this increase in growth is not achieved, then the increase in revenue estimated to arise from this growth cannot be achieved either. We also know that unemployment is — and will continue to be — far higher than estimated by the Minister. Extra social welfare payments will cost approximately £35 million and the estimated increase in income tax and PRSI receipts from higher employment will not be realised as employment goes down.

The Minister in the Finance Bill has taken no step to correct this; as a matter of fact, he has made his budgetary position worse by failing to implement some of the budgetary announcements. I refer in particular to his failure to implement the restrictions he announced on the business expansion scheme, a reversal of policy which, I understand, will cost the Exchequer £17 million approximately.

This week we are involved in a very ironic exercise; we are giving a statutory framework to a budget which has already failed and the Minister does not have a single proposal to rectify the position. There is very little attempt to reform taxation, in particular income tax, in this Finance Bill. Some further progress has been made in reducing the top and standard rates of income tax and the Programme for Economic and Social Programme makes a commitment to further reducing the standard rate in the next two budgets. Any advantage to the taxpayer, however, is cancelled by increasing or eliminating the income ceiling on certain levies, by not indexing certain allowances and bands — or under-indexing them — or by the failure to increase certain bands by the full rate of inflation.

Most PAYE workers find our tax system complex; they are not particularly interested in how their tax is deducted but they are interested in how much is deducted and, in particular, how much take-home pay is left after all deductions are made. Trying to convince people that paying the same amount of income tax — or extra income tax — assessed in a different way is to their benefit is a totally futile exercise. Our tax system has many faults but there are also many misconceptions about it. We are not a particularly highly taxed country despite the conventional belief. The burden of taxation is about average for the EC. We are, however, a very high income taxed country because the tax base is narrow and the PAYE taxpayer, in particular, carries a greater burden than in other Community countries.

The standard rate of income tax is not particularly high in Ireland, at 29 per cent. The problem is that average income is not taxed at the standard rate and about 40 per cent of taxpayers pay tax at either the 48 per cent or the 53 per cent rates, and frequently at both.

That is my script.

(Limerick East): I am sorry. If the Labour Party and Fianna Fáil can hold hands in relation to prospects for the future why should Deputy Rabbitte not say much the same things as I am saying? After all, he has been listening to me for the past two years.

Now that Eoghan Harris is teaching Deputy Noonan how to say it——

(Limerick East): The disincentive to work is not because the standard rate of income tax is 29 per cent instead of 27 per cent or 25 per cent; it is because people on quite modest incomes — particularly single people — pay tax at the higher rates. The overtime, Christmas bonus, pay increase, promotion and the increment are all taxed at 48 per cent or 53 per cent; this is the real disincentive, not whether the standard rate is one penny more or one penny less. The difference between our income tax regime and that of our neighbours is the fact that the higher rates apply on modest incomes, that almost 40 per cent of workers pay tax at the higher rates and that single persons pay tax at the higher rates on what are, in effect, starting salaries. That is worth repeating, single people pay tax at the higher rates on what are, in effect, starting salaries. When they come straight out of school or college, they pay 48 per cent on their first increment. This is the disincentive to work which is destroying the work ethic for many people; this is what causes voluntary emigration which is highly selective and is driving the skilled young to countries where they are not tyrannised by tax. Despite record high unemployment, there are now shortages in some skilled jobs emerging in the economy for this reason.

I have no doubt that the key factor in the sorry state of our income tax code is the low level of income at which all the rates commence rather than the level of the marginal rate applying to the individual taxpayer. The low paid should not be taxed and those on moderate incomes should be taxed at the standard rate on all their taxable income. The higher rate should apply only to a very small minority of highly paid individuals. To be specific, I believe that no more than 10 per cent of taxpayers should pay tax at a rate higher than the standard rate. Some people, especially married men with four or more children, cannot afford to return to work because they make more money on social welfare than they possibly could on a net income after tax deductions and PRSI. One of the reasons for this is that income tax starts at too low an income and the standard rate, together with PRSI, is too sudden a shock to the income of the low paid.

A strong case can be made for a commencement rate of tax which is far less than the standard rate of tax. Some progress will be made by exempting the low paid, but even when those exemptions are put in place, the jump from that level of income to a deduction of 29 per cent plus 7.75 per cent in PRSI is too steep and too sudden at too low a level of income. I would advocate that the Minister, as well as having a higher rate and a standard rate of tax, would seriously consider having a commencement rate of tax which would ease people into the tax net so that they are not faced with this sudden bang when they go through a particular income barrier which is a very low barrier that they have to break through before they are taxed at this high rate.

I suppose it is futile to make these arguments to the Government. Their course is set. It has been agreed with the social partners. The taxpayers' money will be taken from one pocket of the taxpayer to be put into the other pocket of the same taxpayer. Marginal rates will be reduced because that commitment has been made and, I am sure, will be insisted upon by the junior partners in coalition; and PAYE people will continue to be frustrated. There will be no tax reform but there will be attempts by various spokespersons on behalf of the two parties in Government to create the illusion that a total concentration on the reduction of the marginal rate of tax is somehow or other a major tax reform and that it is the trigger which will release dynamism in the economy and lead to growth, wealth creation and the creation of jobs.

That will make Michael McDowell happy again.

(Limerick East): It is not an illusion but a delusion which is propagated day in and day out particularly by the former Deputy who has been mentioned by Deputy Rabbitte. It is a fallacy it is populist rhetoric aimed at high income earners. It has little enough to do with the real economy. I do not think there is a basis to the argument in terms of incentives to work or in terms of leverage in the economy. It is populist rhetoric which does not bear up to any analysis.

The problem is clear to any of us who are practicing politicians. It is as I have outlined. I know there is agreement on that among the Deputies over here and I am sure they will refine the arguments further because I am giving them at the level of principle. The key to the tax problem in this country is that PAYE people are paying too much and that the higher rates are kicking in at too low a level of income so that people on very low incomes who should not be paying tax at all are in the tax net. When they are brought in, the standard rate plus PRSI is too high an introductory level, and the conclusions that follow from that are fairly obvious.

I have referred to the Progressive Democrats and Fianna Fáil on a number of occasions. I refer to them because I know the Progressive Democrats will agree with the Government in Government and then will publicly complain in the most hypocritical fashion that their policies are not being implemented. Almost since their foundation the Progressive Democrats have been advocationg low marginal tax rates as a trigger to a more vital and vigorous economy. They have, however, ignored the kind of arguments I have just presented and have always fudged on exactly how their tax proposals will be paid for. Their chairman, I believe, has a genuine commitment to tax reform and he argues in favour of lower rates, fewer allowances and a broadening of the tax base. I wonder which allowances he is talking about. Could he be more specific? I am sure the Minister can give an estimate of what it would cost to get us down to the 40 per cent suggested in the headline in the morning paper.

PRSI is included.

(Limerick East): It is about £12 million for every one point. and one has to double that for the 48 per cent rate, so I suppose 13 multiplied by 12, and eight multiplied by 12 would give us the figures.

Do not forget that includes PRSI.

(Limerick East): Is that being rolled in as well? I do not have the benefit of the in-house briefings that the Minister has from the Progressive Democrats. I have to reply on the newspapers.

I read that in the newspaper too.

Do the professional classes pay PRSI?

(Limerick East): This Bill does not broaden the tax base. It restricts it by the provision of a whole new raft of allowances in respect of the Temple Bar and the Custom House Docks developments. The type of allowances and reliefs provided are those most inimical to tax reform in that they are available, broadly speaking, only to the wealthy and, in the case of the Custom House Docks site, the super wealthy. I know of nothing more inimical to tax reform, more contrary to the interests of the ordinary PAYE worker and more cynical as a budgetary manoeuvre than the provision of a range of new reliefs and allowances which can be availed of only by the wealthy. It leads to a situation where the poor pay tax and the rich avoid it. We have had an example of that in every Finance Bill since 1987, but the provisions in this Finance Bill reach a new low. How can it be just, honest or honourable to allow tax relief if only 25 or 30 individuals are involved in a project but to rule it out if it is open to the general public? The advancement of certain projects by means of tax relief has frequently been tried. Sometimes it works and sometimes it does not, but there is always a price to be paid. We need to measure this price in terms of the tax foregone far more precisely than we did in the past. The changes which the Minister introduced in the BES two years ago cost the taxpayer about £50 million with little return to show for it in terms of jobs or economic activity.

(Limerick East): I am not so wrong at all. The Minister's speech is fairly close to what I am saying.

I did not introduce anything two years ago. Go back and read it.

(Limerick East): The rafts of further tax breaks introduced in this Finance Bill are also overcooked and will lead to a substantial loss of revenue for a doubtful return.

I would like now to turn to what I consider to be the greatest problem facing our people, the problem of unemployment. The level of unemployment is now an absolute disgrace. On the live register are more than 246,000 persons. From this month those over 58 years of age will not be obliged to sign on so there will be a further massaging of the figures from the end of April. Up to 30,000 persons are involved in courses of one kind or another. The real level of unemployment now is somewhere up against 300,000. Yet there is not a single measure in this Bill which deals specifically with the problem or changes the situation one iota. Employment is a function of growth. Growing economies create jobs; declining economies lose jobs. In the ten months up to budget day the seasonally adjusted live register had risen by 12,700 to a figure of 232,400. That is almost a six per cent increase for the ten months.

Since the budget the pace of unemployment has continued and the live register at the end of March was 246,515. The seasonally adjusted figure was 242,800. The Government, and in particular the Minister for Finance, estimated on budget day an average unemployment figure for the year of 228,000 and the amount of money for the Department of Social Welfare was based on this estimate. This would require a drop of about 6 per cent in unemployment between now and December. Is it likely that unemployment, which has risen by two-thirds of 1 per cent for each month of the last 12 months, will suddenly turn around for no reason and begin to decline at a rate unprecedented in our recent history, especially when there is no evident change in external circumstances? Even today the Minister said that the authorities in the UK are revising their figures downwards from a modest projection of 2 per cent growth to 0 per cent. How can we have a decline in unemployment when external factors are worse than they were on budget day in the United Kingdom and the United States of America and when the newly acquired state of East Germany is putting further pressure on what used to be the engine of growth in Europe, the German economy? Yet there is nothing in the Finance Bill nor was there anything in the budget which changes domestic policy. If policy is not changing abroad or at home how can things get better?

When Deputy FitzGerald spoke on the budget a week after it was introduced he pointed out that the estimate of growth by the Minister was below the level which normally creates jobs. He made a very good point which is worth repeating: with output per worker in this country rising annually at about 3 per cent on average, a 2.25 per cent growth rate implies a reduction in jobs rather than an increase in jobs. People think that jobs can be created at any level of growth because it is extra but one cannot create jobs if the growth is being created by the extra productivity of an intelligent work force. Thank God we have a hard-working and intelligent work force. It is clear that one has to at least exceed a level of 2.25 per cent growth if one is to create jobs. If the growth rate falls significantly short of the Minister's estimate, then there will be a far more serious decline in jobs than I think the Minister believes or yet realises. The live register figures are already bearing this out. I would not be surprised if the seasonally adjusted figures exceeded 250,000 by December.

As I have said, growth creates jobs and anything which impedes growth costs jobs. Therefore, it is worth looking at what creates and impedes growth in this country. Investment creates growth in jobs. The Minister is a successful businessman and he knows that people invest to make money. That is how a market economy works. It is very difficult to make money when real interest rates are at the astronomical level they are at present. The A overdraft rate is 15.75 per cent and the inflation rate is about 2.75 per cent. Therefore, the real rate of interest for the ordinary borrower is 13 per cent. In other words, an investor who invests borrowed money must make 13 per cent for the bank before he can make £1 for himself. That is a tall order. An investor who invests his own money has a choice of putting it into Government paper at whatever the prevailing rate is but he can sit by the fire and be sure that he will make at least 10 per cent, which is 7.25 per cent above the rate of inflation. He is making a real gain and letting his money grow while sitting at the fire. Why would such an investor take a risk in investing in the economy when the real rate of interest for the small man, farmers, shopkeepers and small businessmen, is 15.75 per cent?

Anyone who wonders why we have low growth rates at present or why, as the Minister put it in his speech, investment is weaker than it was in recent years must put the astronomical interest rates at the top of the league table when looking for a culprit. Is it any wonder that business activity is in decline? Yet the Minister for Finance has no policy to reduce interest rates. If we ask the specific question, a Cheann Comhairle, you will rightly advise that it is not the function of the Minister and the question will not be answered in the House: we are told that the Central Bank has the statutory authority to set interest rates. There is a pretence that the Minister can do nothing except, of course, when there is a 0.25 per cent reduction and he, like the cavalry, rides over the nearest hill, charges down and says "I was the man who reduced them".

Was I or was I not? The Deputy should answer the question.

(Limerick East): I will put it this way——

The building societies got away with it and they were all lined up the following day to do the same. I make no apologies for what I did.

If the Minister is being apologetic he should apologise for the 0.25 per cent. It should have been 2.25 per cent.

And have all the money flowing out of the country the following day.

(Limerick East): I have yet to see——

The Deputy is only talking about one half of the picture; he should deal with the other half of it.

(Limerick East):——a Minister riding over the hill when interest rates go up. I am suspicious of Ministers who ride over the hill the day before interest rates come down and then claim credit.

This was a specific instance which needed to be stopped, and the Deputy knows that as well as I do.

(Limerick East): I should like the Ceann Comhairle to take note of the Minister's intervention.

Hear, hear.

(Limerick East): He has now said that he has responsibility for reducing interest rates. The next time I put down a question asking the Minister why interest rates are at a certain level at any point in the spectrum of interest rates I expect the Ceann Comhairle not to rule me out of order because the Minister is on the record as claiming that he can do it, he will do it, he has done it before and why should he not do so again.

I will get the Deputy a job in the Abbey. He is fooling no one.

(Carlow-Kilkenny): The Minister will be there before him.

(Limerick East): The Minister has far more experience of the entertainment business than I will ever have.

The Deputy is not bad.

(Interruptions.)

Dreamland.

(Limerick East): I should like to remind him that this sometimes has the appearance of jetland and roseland. It is certainly not dreamland.

This is great crack.

(Interruptions.)

(Limerick East): The Minister has left me speechless because I thought he was going to continue to insist that he had no power over interest rates. However, he now seems to have power when it is 0.25 per cent but, according to Deputy Quinn's intervention, does not have power when it is around 2.25 per cent.

That was not why I intervened. I intervened because of the abuse by building societies of their position and their decision not to pass on the reduction——

He is changing already.

That is what it was about. It had nothing to do with 0.25 per cent, 0.50 per cent or 2.25 per cent. It was about the principle involved.

(Limerick East): This is getting even more interesting.

You had better ask Maurice Doyle about that.

(Limerick East): If I may continue with my contribution——

I am sorry for interrupting the Deputy.

(Limerick East): I think we all agree that interest rates are astronomically high——

We know the problem. Tell us the solution.

(Limerick East):——for one reason or another. This is inhibiting investment and, consequently, growth. We need high growth rates to deliver on jobs. Therefore, there is an unbreakable link between high interest rates and joblessness and unemployment.

The Minister asked for a solution to the problem. He always pleads that he can do nothing about interest rates and that he is dragged along in the wake of international events. I want to suggest two things the Minister could do. First, he could insist that the margin between deposit rates and lending rates is cut right across the spectrum of interest rates. This margin is the highest in any banking system in the EC. The Minister for Finance and the Minister for Industry and Commerce have direct responsibility in this area. When are we going to get the kind of competition we need in the banking industry so that the gap between what the depositor and the lender get is narrowed down to what prevails in neighbouring countries? That is the first thing the Minister should do. That is not the job of the Central Bank; that is the job of the Government and, in particular, the job of the Minister for Industry an Commerce. It is the job of the Minister for Finance, as he said here previously, to ensure that the Minister for industry and Commerce does his job in relation to competition in the banking industry, which he is not doing at present.

The second thing the Minister could do is create the fiscal background to enable the Central Bank to reduce interest rates. In reply to Deputy Quinn's intervention the Minister suggested that vast amounts of money would run out of the country if he was to reduce interest rates, against the background of the budget 11 weeks ago, against the background of the Book of Estimates and the Finance Bill. However, with a different fiscal background, as the Governor of the Central Bank, Mr. Maurice Doyle reminded him on a number of occasions, it would be possible to bring Irish interest rates down.

The Minister has singularly failed in his fiscal policy this year to set the background for lower interest rates. The Minister set soft budgetary targets. His budget is already off the rails. The discipline which was maintained until the 1989 election has been abandoned; expenditure is rising at an amount greater than inflation in virtually all Departments and the public pay bill is totally out of control. The wage agreement introduced under the PESP is only three months old and already today's ESB strike in pursuit of a 5 per cent wage increase against a complex background looks like knocking the wage agreement clean out of the water.

The Central Bank cannot cut interest rates against this background. They can rise and fall with international interest rates but the bank cannot take a unilateral initiative unless the Minister provides the policy context against which they can operate, so that the money the Minister talks about does not flow out of the country.

Investment creates growth and jobs. Investment will not take place and business confidence will be dissipated when the Minister and his Government manage the national accounts in the manner in which they have been managed since late August 1989.

The Minister's phoney budget and this time serving Finance Bill has undermined confidence and there is a widespread belief that we are returning to the slippery slope of previous Haughey and O'Malley Governments when expenditure went out of control to the extent that it set the agenda for a whole series of problems over a decade. Is there any one so naive as to think that the report in this morning's edition of The Irish Times that the Exchequer borrowing requirement continues to rise well in excess of the Estimate for the full year does not damage confidence, does not keep interest rates up, does not reduce investment and does not cost jobs? It says in page 12 of today's edition of The Irish Times:

The tax and spending figures for the year to mid-April show an Exchequer borrowing requirement of £720 million, some £190 million ahead of the same months in 1990. The borrowing requirement appears to have been artificially inflated due to the Easter break, which postponed some significant tax receipts, but financial analysts say that they confirm that the Exchequer borrowing level for the full year is heading significantly above the £460 million budget target.

The Minister must be putting his hand into the pocket of Greencore.

(Limerick East): There is something peculiar happening when the first quarter's figures show that borrowing has already exceeded what the Minister intends borrowing for the full year.

It happened last year, the year before and every year.

(Limerick East): Now the mid-April figure shows that borrowing is already £260 million over the Exchequer borrowing requirement for the year and we are only three and a half months into the life of the budget. Perhaps the Minister will get a run of tax receipts.

This time last year the Deputy had me £100 million off the target. The record shows it.

(Limerick East): As I pointed out on previous occasions, the record of the Minister's Department on Estimates is not good. In recent years because they underestimated revenue buoyancy and budgetary targets were achieved, it looked as if the Estimate was correct. The job of the Department of Finance was well done but if we examine their estimation of any of the key statistics, we see their record is not good. I would nor rely unduly on the Estimates of the Department of Finance or any of the key figures because their record is not good. The fact that they over-estimate, and that is an advantage, or underestimate and that is a disadvantage, is not the point. Their Estimates are not good when we compare them with the private sector.

On whom does the Deputy rely?

(Limerick East): We rely on a range of Estimates, and every independent commentator at the moment is predicting growth rates well below what the Department are predicting.

This pleasant argy-bargy is grand but, Deputy Noonan, if I were in your shoes I would not respond to interruptions that are not in order.

(Limerick East): I would like to remind the House, now that the microphone is back on, that I am in possession and when I am in possession and am interrupted, the Minister should be called to order not I.

Deputy Noonan——

(Limerick East): This happens every time I am on my feet when you are in the Chair. I am tired of your childish headmasterish interrupting.

Deputy Noonan need not try to make a situation that does not exist. I was suggesting that if Deputy Noonan did not respond to the Minister's interruption, or to any other interruption, I would deal with it. Where the Deputy decides to take it upon himself to deal with the interruption, he precludes me from carrying out the duties of this Chair, which I would like to do. I do not want any tantrums from Deputy Noonan or anybody else.

You should turn the parliamentary cheek.

Let Deputy Noonan put my proposition to the test.

(Limerick East): A Leas-Cheann Comhairle, if you continue to interrupt me when I am being interrupted by the Minister and not refer to the Minister or ask him to cease interrupting, I will sit down and ask you to send for the Ceann Comhairle before I proceed.

The Deputy is free to do anything he wishes. I will not respond to that. The Deputy is in possession and he will proceed in accordance with the rules of the House. If the Deputy is tired or wants to opt out, that is entirely a matter for himself.

(Limerick East): I am in order and have been since the start. The information I quoted from page 12 of today's edition of The Irish Times, I presume, was provided by the Minister's Department to the financial editor of The Irish Times. Because it is put in such categoric terms and in such exactitude of figures, I cannot believe it is not information passed on by the Department for publication in The Irish Times. I quoted that in support of my argument that the figures published for the first quarter show that the borrowing requirement is well in excess of the budgetary target. According to The Irish Times this morning the figure continues to remain in excess of the estimated budgetary target and is actually increasing as the months go by.

If it were not for the availability of the Structural Funds, if it were not for the expenditure of significant amounts of EC money from the Structural Funds, our economy would now be in recession. I am using the term in the manner which the Minister, at Question Time last week, said he understood it; I am using it in the real sense. We would have had negative growth for two successive quarters. The only thing keeping growth above that is the intervention of EC Structural Funds. Left to our own devices we would now be in recession. That costs jobs, and it will continue to cost jobs. I have heard nothing from any of the economic Ministers, who share the burden with the Minister for Finance, which suggests that there is any solution to the problem of unemployment, or that the Government are in any way seriously addressing the issue with a set of coherent policies.

Strong domestic demand can create jobs if that demand is satisfied by home production. Reports from different sectors of the economy, for example from the building industry tell me that apart from schemes which are being completed, house building has virtually stopped in the major cities. The representatives of the motor car industry have told me that the number of cars sold during the first three months of the year is seriously below the figure for the equivalent period last year. Representatives of the general retail sector have also told me that their sales are down. All this would seem to indicate a decline rather than an upsurge and the prospect of a poor tourist season, given the absence of American tourists in the wake of the Gulf War, will accentuate that trend. The Minister confirmed this in his speech. When he pointed out that investment is weakening he also said that consumer expenditure is weakening, which means less demand, more redundancies, more job losses and a further decline.

Real tax reform also creates jobs but neither party in Government have any interest in real tax reform. Therefore we need not expect the energy and dynamism which characterises the Irish abroad to be released by tax reform at home. The Progressive Democrats continue as they did when they were in Opposition — talking tough and voting soft, making populist press releases but carefully avoiding, as they always did, to explain how their populist promises would be funded. Yes, real tax reform would create jobs but we are not going to get it from the Government.

A reduction in the standard rate of VAT and excise duty would also create jobs. Good progress was made in respect of VAT reductions last year and it has been continued this year. It is now clear, however, that the Minister does not intend to do much more. The United Kingdom budget raised excise and VAT levels both there and in Northern Ireland and we will not find it difficult to approximate to their rates. The Minister's sights now seem to be firmly set on the approximation of rates rather than on the harmonisation of taxes. There will be little play left if the Minister intends to move to a point where we are within 2.5 per cent of the United Kingdom rate. This approach will prevent potential job losses but it will not create new jobs. I ask the Minister to raise his sights once more and to look for harmonisation of indirect taxation between ourselves and the United Kingdom rather than move to a position where taxes are approximated to avoid a distortion of trade patterns.

The uncertainty surrounding the GATT talks is also undermining confidence in agriculture and the food industry and the sector looks like losing jobs rather than creating them. In the light of the foregoing, is it not fair to ask what Government policy on jobs is? There is neither a macro-economic nor a sectoral approach to the problem. Nobody in Government seems to be responsible for job creation and the social partners have little interest in the subject. Have the Government in their hearts, adopted the approach of the former Tánaiste, Deputy Lenihan, who in a modest proposal in 1987 advocated the export of our surplus population? This post-Famine strategy worked during the past few years but I am afraid that the Government can no longer rely on it. Recession in the United States and the United Kingdom and the influx of young east Europeans to the Community have spoiled this strategy.

The former Taoiseach, Mr. Jack Lynch, once said that a Government who presided over a live register in excess of 100,000 should not continue in office and should not be re-elected. I wonder what he thinks of the 246,000 persons who are on the live register now, especially that his bete noire, Deputy Haughey, and his protégé, Deputy O'Malley, jointly hold the reins of Government? A leading British politician recently said that a Government who were unable to choose were unable to govern. I think the budget and this Finance Bill shows up a Government who are unable to choose and, consequently, are unable to govern.

I will deal with the specifics of the Finance Bill on Committee Stage but I would like to comment on two sets of provisions, one relating to the Temple Bar project and the other to the Custom House Dock site. I have no objection to the development of specific projects being levered by tax incentives. I believe, however, that the ones in this Finance Bill are excessive. The Minister has not learned his lesson from his misguided extension of the business expansion scheme. These tax driven schemes cost the Exchequer huge amounts of money. Tax foregone is as real a cost to the Exchequer and potentially as great an imposition on the taxpayer as any other element of public expenditure. It is not a free lunch for the taxpayer and should not be undertaken without a careful cost benefit analysis. Those who avail of these schemes argue — at times there is merit in this argument — that the schemes are self-financing as the business activity created yields sufficient revenue to compensate for the tax foregone. This, in one way or another, is the argument always put forward by those seeking extensions to such schemes.

I have no objection to schemes where the tax relief available is tied to the investment in the project or the rental income arising from the development. I do object, however, to schemes where taxable income derived from activities in no way connected with the particular investment can be offset against the cost and/or the rental income from a project in the designated area. I have no objection to investors getting a tax break if a risk is taken and the project in question is in either the local or national interest. I do object however when the tax break is confined to certain people and not available to the general taxpayer. I also object when the projects which are funded one way or another by public money are shrouded in such secrecy that no evaluation of the net benefit is possible and one cannot distinguish between the transfer of business activity from other areas into the designated area and the creation of new business.

The initial urban renewal scheme introduced by the Fine Gael-Labour Coalition was very successful in Cork, Limerick and Galway but less successful in Dublin. It has, because of its success, led to numerous extensions and in many cases to limits which are no longer beneficial. Before any further extensions are made a full cost benefit analysis of what has already occurred should be carried out. The extension which took place in my city of Limerick where a further 40 acres were designated had no beneficial effect. In fact, it brought about a situation where development of the final six acres of the area originally designated did not proceed as the date was extended and new options were given in another part of town. Therefore rather than giving us another tranche of development it marked the end of the initial tranche.

So now you have two uncompleted sites.

(Limerick East): We have one uncompleted site and there is nothing happening in another 40 acre site.

Deputy Quinn is aware that under Standing Orders speakers should not be interrupted.

That was an observation.

It was an interruption.

(Limerick East): One of the difficulties is that if a tax driven scheme is applied everywhere or if it is applied over too many areas it is of no use. Its value is its scarcity value and we must be very careful to ensure that the areas designated are matched with the amount of potential development. There is only a given quantum of development which can take place at any given time. Therefore, to a large extent, one is involved in the transfer of activity from one part of the country to another or from one part of the city to another or in the amalgamation of development so that the sum of the parts gives a new totality and the whole is greater than the sum of the parts if spread right throughout the city. All this is good but it must be measured very carefully.

The ultimate folly, the kind of development levered by tax breaks, is the famous office block in London——

Centre Point.

(Limerick East):——Centre Point which remained idle and empty for many years. Such a development arises when there is no connection between the tax break and the investment. In other words, the Minister's proposals to allow people to write off taxable income arising from activities anywhere in the State or, indeed, elsewhere against the investment in the Temple Bar area could in certain circumstances lead to empty buildings. You will get the development all right but whether you will get the desired activity I do not know. It is also very hard to measure how much tax is foregone by the Exchequer in schemes such as this. There is always a net sum which needs to be worked out. Would the Exchequer or the Government get a better return for their money if they had a carefully directed grant system as against a tax foregone scheme? We are all familiar with the arithmetic of these things. Sometimes they work, sometimes they do not. The initial urban renewal scheme worked very well; the later ones are not working. Certain aspects of the BES reached a state of high farce where nothing happened; balance sheets were changed around, there was no economic activity, no jobs were created, but the Exchequer lost hand over fist.

While we all welcome the Temple Bar development and would like to see the kind of activity people talk about in that general area of the city, the number of tax breaks now being loaded into this Finance Bill is excessive. I presume, because of this we will get a great deal of activity going in the Temple Bar area, but I think we will never be able to calculate the price.

I would like to return to the question of income tax. In times of high interest such as we have could the Minister not see his way to restore full mortgage interest relief to relieve some of the burden on persons with high mortgages, especially young couples who are finding it so hard to make ends meet? I would like the Minister to tell us also if he shares the belief of the Chairman of the Progressive Democrats that mortage interest relief, VHI relief, the PAYE allowance and all other reliefs should be considered appropriate for abolition to get the top rate of tax down to 40 per cent.

I would like to comment briefly on some of the Minister's statements. First, I thank him for dealing in great detail with some of the more technical sections in the Finance Bill. That is of benefit to all of us in the House and certainly to the accountancy and tax profession outside this House who are not sure of the parameters of a particular section and would in the normal course of events quite frequently have to wait until the end of Committee Stage to get a definition of amendments. The Minister has supplied that definition for the more complicated sections today. I welcome that and I congratulate him on taking this approach.

I thank him also for two other proposals in the Finance Bill. Last year at the end of Report Stage the Minister agreed to take on board an amendment on inheritance tax where in tragic circumstances a son or daughter dies and the estate has to be retransferred, this time from the child back to the parents after it had been transferred initially and had been liable for the full rate of gift tax. The Minister promised to look at this. I think the circumstances were that he had agreed to take the amendment but the Attorney General was not prepared to clear it at the very short notice he gave him between Report Stage and Final Stage. This year the Minister has kept his word and not alone has introduced the amendment requested but has backdated it to 1982 which, as far as I know, includes all the cases which were surrounded with tragedy which we had in mind.

I thank the Minister also for accepting this year another amendment we argued first last year, again to do with capital acquisitions tax and inheritance tax between brothers and sisters living together. I think the Minister is confining this relief to transfers to a recipient over 55 years of age. The Minister might look at the age between now and Committee Stage to see if there is any valid reason for pitching the age at 55 or if it could be done at a lower age. In normal circumstances it would not occur anyway until later stages in life as it requires a first and a subsequent transfer before the anomaly is thrown up between brothers and sisters.

I thank the Minister also for the provision he has included to alter the disabled driver's scheme. I understand why he had to act in the Finance Bill rather than wait for the promised discussions between the Finance spokespersons, but I think rather than waiting until the 1992 Finance Bill it was important to include it. It will be of benefit. I welcome also the fact that the Minister has reaffirmed his commitment to have discussions with all spokespersons for the parties on the general disabled driver's scheme. I presume the amendments many of us are seeking can be implemented by alterations to the regulations and we will not have to wait until the 1922 Finance Bill to bring about the amendments we seek.

In his remarks on VAT the Minister said there was a real return of income to the consumer of £37 million in the balance between reducing the standard rate and increasing the lower rate of VAT. Will the Minister in his reply try to identify which consumers are benefiting? The normal basket of goods is not a standard basket across households with different incomes, and it seems that items which would be charged at the standard rate would be over-represented in the shopping baskets of the well off and under-represented in the shopping baskets of the poor, while other items at the lower rate might cut a wider swathe. I would like the Minister to comment on that point. While I agree there may be a net benefit to the VAT payer to the tune of £37 million, can he distinguish between the winners and losers or is there information in his Department which would enable him to do that?

I would like to ask the Minister a question on VAT. I understand it was his intention on budget day to increase the VAT on services provided by hotels and restaurants, and particularly the provision of meals, from 10 per cent to 12.5 per cent. Since the announcement on increasing the lower rate of VAT to 12.5 per cent, I understand the Commissioner, Madame Schrivener who has responsibility for harmonisation, recommended that services in restaurants and hotels be in the lower VAT band, and we have been circulated to this effect by the lobby involved in forwarding the case of the restaurant and hotel business. I would like clarification on this point because it is not my reading of what is happening, yet we are getting submissions which need clarification.

It is not mine either.

(Limerick East): Will the Minister clarify what VAT rate is going to apply to meals in hotels, restaurants, take-aways and everywhere else where food is supplied as a service, if it will remain at 10 per cent and then if it is his intention in future budgets to keep it in the lower band or move it up to the standard rate?

I will be commenting on the BES on Committee Stage. Again, I thank the Minister, although I do not agree with his policy, for his speech which explains in very clear terms many of the more intricate sections of this Finance Bill.

The intervening period between the introduction of the Government's budget and the publication of this year's Finance Bill has, unfortunately, confirmed my own worst fears. Far from dealing with the major economic and social problem of unemployment, the budget which allocated just £500,000 to new measures to tackle unemployment is largely a non-event and a missed opportunity. Since last December the number on the live register increased from just under 233,000 people to 246,500 people in March this year. With the data available to us, employment growth will be shown to have ceased so that realistically, and without any exaggeration, unemployment will top 300,000 by the end of the Programme for Economic and Social Progress in 1993. I am talking about unemployment as it is currently measured, not with the exemptions and the massaging to which Deputy Noonan referred. If things fare worse than I fear, we could be hitting the guts of 300,000 by the end of this year. This is not a forecast which any Member can find easy to contemplate. Already our rate of long term unemployment exceeds the Community average by a factor of 2. Unemployment of 300,000 is we are facing on the basis of current cies, for which this Minister, and the rest of the Government, are responsible. Let there be no misunderstanding, we are entering territory where the viability of Ireland as an economic and social entity is under severe threat. The problems in some parts of our society are a manifestation of how serious that threat is.

I would ask the Minister for Finance to consider seriously the proposition we put to him in our pre-budget submission regarding a package of enhanced employment subsidies and job placement for the long term unemployed. It is modest to suggest expenditure of £50 million this year and £120 million next year on a programme of this kind which ultimately is self-financing, as every person taken off the live register is a saving on Exchequer expenditure. Recently the General Secretary of the Irish Congress of Trade Unions, Peter Cassells, appealed to the Government to establish a forum on unemployment so as to prevent the unemployed being treated as a political football. In relation to the building of a social consensus, which I support, the Labour Party wish to see this process deepened and are willing to take a constructive approach. At a minimum, the Government should establish a national forum on unemployment with the necessary resources and secretariat, so that all the political parties, interest groups, and particularly the organisations which directly represent the unemployed, can agree on a strategy for reducing unemployment over the next decade.

The second major failure in this Bill is in the area of tax reform. I heard the Minister say on radio that if anyone had better ideas than his own taxation proposals he would like to hear them. He might consider the following. Reducing the standard rate without maintaining the real value of personal allowances produces tax savings of only token value for those on low and middle incomes. For example, somebody with a taxable income of £2,000 has his or her tax bill reduced by £120 per annum with the reduction of the standard rate from 35 per cent to 29 per cent. Reducing the top rate without substantially increasing the standard tax band is also regressive. This represents a straight gain for just 20 per cent of all taxpayers. Maintaining the system of allowances instead of tax credits means that the bulk of tax relief given in any budget favours those on top tax rates. Before any further alteration in existing rates is contemplated, the Minister should consider converting all allowances to tax credits at the standard rate of 30 per cent or 29 per cent, using any savings to increase the value of the tax credit, increase the standard rate band to £3,500 for a single person and £7,000 for a married couple, and increase the 48 per cent band by £1,500 for a single person and £3,000 for a married couple. Based on the advice available to me, my estimate is that this would not cost any more than £450 million, the cost of this year's budget changes and those proposed in the PESP. I would challenge the Minister to contrast what I am proposing — a 25 per cent standard rate and a 48 per cent top rate — with the existing bands and allowances indexed, which is what the Government are effectively proposing. The figures show that the majority of taxpayers would be better off under my proposals, particularly the bottom 50 per cent of taxpayers.

The net effect of the changes introduced by the Government and those which they propose to implement is regressive in terms of income distribution. So much for tax reform by the Government. I make these detailed points at the start of this debate because I understand that the tax reform drum is to be beaten loud and hard in the run up to the Progressive Democrats conference in Cork next weekend. The tangible benefit to single workers in the paid employment sector, in many cases starting for the first time after a lengthy period in our education system, is of limited value because effectively they are taxed not at the standard rate but at the higher rates.

In his budget speech on 30 January the Minister predicted a growth rate for the economy this year of 2¼ per cent of GNP. After a preliminary run over the various factors governing the perception of the economy by the Government and the Department of Finance, the Minister concluded as follows:

Taking all factors into account, I am projecting output growth this year of around 2¼ per cent, with real GNP up by around the same. That kind of growth should stimulate more gains on the employment front.

It is significant that in the Minister's introductory speech to the Finance Bill there is no longer any certainty. There is no mention of 2¼ per cent, 2 per cent or 1.75 per cent; instead there is hedging and no definite assessment. The opening remarks do not reveal a clear statement, based on the rigorous analysis available to the Minister from his many specialists within the Department of Finance and other agencies, of the estimated percentage growth in GNP this year.

Is it any wonder there is a public row between the Governor of the Central Bank and the Department of Finance? The Central Bank no longer trust the public utterances of the Department of Finance in this area and for that reason the bank are not prepared to reduce interest rates, as they are statutorily empowered to do. They cannot reduce interest rates against a background of economic fudge. What now is the Government's estimate of the percentage growth in GNP in 1991? Upon that estimate the budgetary arithmetic must rest. If there is no estimate or if the Government are not clear as to what it is, where do we stand?

The Minister said today that he made it plain in presenting his budget that 1991 would undoubtedly be a difficult year. Many students of English doing a précis of the budget speech would not be able to say the conclusion of the analysis was that 1991 would "undoubtedly" be a difficult year.

Compare and contrast.

Exactly. The Minister said in the budget speech that growth would be halved as against last year but last year was a good year, relatively speaking. There is now a shift. The whole basis of confidence on which this fragile economy rests depends to a large extent on the institutions which make it work trusting the people in Government who have the responsibility for running the economy. In the first instance to trust them means sharing an agreed analysis of the situation. We are now drifting back to the glory days or nightmare days of a previous Administration led by Mr. Haughey of which Mr. O'Malley was also a willing participant when what was said was not what was meant and what was meant was not what was actually on the record.

The Deputy knows it is the custom here that we give to all parliamentarians their appropriate title.

I take the correction — a Deputy Haughey-led Administration——

What about Mr. O'Malley?

——in which Deputy O'Malley participated. It was a temporary little arrangement in those days too, a Leas-Cheann Comhairle, because as you, Sir, may recall — indeed I am sure you have not forgotten — Deputy O'Malley ultimately resigned on the very point of lack of credibility of the figures that were produced by that Administration and because of the chaos and lack of trust that existed throughout the economic institutions and in the economy as a result.

I am deliberately starting at the beginning — where the Minister for Finance started — in looking at the economic background against which the budget was framed and against which this Finance Bill has been introduced to give effect to that budget. Nowhere in the introductory remarks of the Minister's speech today is there any clear indication that this economy is still on course for the set of macro-economic figures enunciated on 30 January. All of the provisions to give legal effect to the expenditure and revenue accounts that make up the budget of 1991 and the legal underpinning which we are now being asked to provide are based on the premise that the arithmetic of the budget was correct and that the analysis of the performance of the economy in a deteriorating open world economy will be as predicted at that time. Opposition Members from the three parties on this side of the House disputed the Minister's analysis of a 2.25 per cent growth in GNP at that time. We were not alone. Virtually every reputable independent economic analyst and forecaster, ranging from the Central Bank to various independent and reputable finance houses, disputed the optimism of that figure in and around the time of 30 January and certainly after the budget.

The Minister is not so rigid in his thinking that he is not capable of changing his mind. He is flexible and has attracted the respect and admiration of a wide spectrum of Members in this House. We are not dealing with a dogmatist. Indeed, those people who put up a case in regard to the business expansion scheme were able to convince the Minister on the presentation of a certain analysis of the situation that there were grounds for a change. They convinced him there were legitimate tangible grounds for a change in the position enunciated by him on 30 January and on 12 March he announced changes in the regime and we are being asked now on Second Stage to take note of those changes. I want to underline this point because it is critical to a Second Stage debate. Are the Government still of the view that while conditions in the business expansion scheme may change from 30 January to 12 March, the estimates of economic growth have not? Are we still expecting a growth of 2.25 per cent in GNP or has that figure shifted? If it has shifted, what is the estimate of economic growth now? That is one of the triangular points of reference that underpin the arithmetic of this budget.

I now want to deal with the second leg of the triangle, that is unemployment. Deputy Noonan has already made a substantial contribution on this area which stands on the record of this House for anybody who is reading this debate seriatim. It is quite clear that the average number of 228,000 people on the live register throughout the 12 months of 1991 is an optimistic estimate relating in part to the estimated performance of the economy, to which I have already referred, but also discounting the fact or not taking fully into account that emigration would be reducing because of the dramatic drop in the labour market in the south-east of England where a large number of Irish people had moved over the past four to six years. Since we have a common labour market between the two islands in more ways than one, the movement into their labour market was very high in the past two to three years. Because of the net migration from the Irish labour market in the first instance and now the inward migration of those who can no longer work in the UK because of a downturn in their economy, it appears to me that the basis which led the Department of Finance to calculate that an average of 228,000 people would be on the live register during 1991 is no longer valid.

In trying to stake out the second leg of this triangle on which the foundations of this Finance Bill rest, will the Minister say what is the estimate of the Department of Finance in conjunction with the other bodies open to them, of the level of unemployment, taking account of the normal considerations; in other words, comparing like with like. Is the figure now 248,000 or 260,000? As a consequence of the increasing number on the live register, what knock-on effect will it have in terms of loss of the tax revenue on one side of the equation and the increase in tax expenditure in relation to social welfare and related payments? There are a number of standard mechanisms of measurement that would very quickly enable people in the Department of Finance, who are available to the Minister, to feed the computer with a range of estimates which would then show us the figures. I have not the resources the Minister has available to him but I suggest that the number on the live register will not stand at 228,000 but that it will certainly be closer to 265,000 on average. It could be as bad as that. I am not trying to talk things down but I believe the number is of that order. If that is the case, it would be very easy to do the calculations of the real deficit in the current account between now and the end of this year.

Will the Minister say if this will be the only Finance Bill we will have in 1991? This is the third leg of the triangle. Will this be the only response to the budget of 1991 or are we going to need another Bill? If we are off-course, and some of the reasons are not necessarily the responsibility of this Government and certainly not of this Minister, the first thing any wise navigator or wise captain of a vessel will address and respond to is the realisation is that they are off-course and they will then take corrective action. I fear the refusal to recognise that we are off-course for a variety of reasons, over-optimism, miscalculation or the non-performance of the world economy over which we have little or no control, will prevent the Minister taking corrective action. He may then succumb to the biggest temptation that is looming in front of him, that is, to use the proceeds of the flotation of the Irish Sugar Company to bridge the gap in current account spending towards the last few months of this year and, if short, to top that up with the proceeds from the flotation of Irish Life.

The Taoiseach has a great regard for the jewels in the Celtic crown of this island. He frequently alludes to them and did so with great poetic symbolism——

(Limerick East): What about the jewels in the handles of the Arabian daggers?

It is a long, honourable tradition.

I am talking about assets owned by all of us. The Taoiseach in his Presidential address to the Fianna Fáil Ard Fhéis, made a number of references to such jewels and riches from our past. I would regard the resources and wealth created by the efforts of taxpayers, the public in general, management, workers, farmers, all who have been traders and customers of State companies, such as the Irish Sugar Company and Irish Life as jewels of another value but no less important. Are we now to contemplate the possibility that the cash realisation of those two companies will be put to temporary short term, ill-advised use to bridge the gap between what was thought to be the outturn in relation to the budgetary figures and what economic reality has dictated should be that outcome? The temptation to do precisely that becomes ever deeper and greater bearing in mind the fudge that emerged — and "fudge" is not the best description I could use to explain the response obtained — and Deputies Noonan and Rabbitte were present in the House when I attempted to question the Minister in relation to this. On that occasion his assurance was that the proceeds would be used to reduce borrowing. While I would have an argument to advance about that — to which I will revert later — the Minister for Finance gave a clear, categoric assurance that the proceeds would be used to reduce borrowing. Since part of the overall budgetary arithmetic for this year includes an element of borrowing it would not be unreasonable to assume that capital receipts in 1991 could be offset against enunciated estimates of proposed capital borrowing, when one sets one group of figures against another.

The budgetary figures set out on 30 January last indicated a borrowing requirement of £460 million. If reduced revenue and increased expenditure, due to the factors to which I have referred result in a borrowing requirement of more than £460 million by the end of this year, can the Minister, assure us that the gap will not be bridged by the proceeds of the sale of State resources. I am not sure whether I have posed that question as clearly as is required by the Minister and his advisers but I have stated fairly clearly on the record my concern.

Let me elaborate why I have done so. Earlier I said that the biggest problem facing this economy, that which will haunt this economy according to senior economists in the ESRI and independent economists in a number of institutions here, is that, notwithstanding the substantial improvements in the fiscal aspects of our economic performance over the past three or four years vis-á-vis inflation, the need to have recourse to external borrowing and a number of other factors — things which have been achieved painfully by way of a growing consensus which must be welcomed by any sane, reasonable person and in some instances we have advanced further than many people thought we could within the appropriate timescale — unemployment, structural, heavy, deep, embedded, long term unemployment is now a major problem comfronting this economy on a scale that is perhaps greater than that prevailing in any other EC country. In the past a comparison was drawn with Spain, a country with a comparable figure. In fact the social and economic tradition of the Kingdom of Spain, in comparison with the Republic of Ireland in this area, is quite different. One does not compare like with like if one takes simply the statistics, one set alongside the other. I put it to the House and the Minister that, in absolute terms our long term unemployment rate — overall one of 18 per cent — imposes an enormous economic cost on our Exchequer and great physical damage on the immediate recipients of long term unemployment and their wider circle. I contend that the scale of our unemployment is deeper, more damaging, and is potentially more disruptive to the social fabric of our society than in any other part of the European Community. For that reason it should be as much a priority of any Government to deal with the problem of long term unemployment as that of getting on top of the national-debt, or balancing the books, so to speak, in the management of our economy.

It seems to me that this Government have a policy for money but none for people. This Government and the Department of Finance appear to be obsessed with arithmetic rather than with the reality of those figures and how they impact on the social stage.

Let me return now to my concern about the proceeds of privatisation, or the selling off of the assets of either the Irish Sugar Company or Irish Life. We have a national debt of the order of £25 billion. The total proceeds of the two, if fully realised, would be between £300 million and £600 million. I am deliberately employing a band so as not to fix a price on them which would give any indication to market forces outside. Certainly they would be less than £1,000 million and, by way of reduction of our total national debt, will have little or no impact other than perhaps reduce the interest repayment bill of between £30 million to £60 million per annum in perpetuity. Surely the proceeds of the sale of Irish State companies can be used to create or strengthen employment, to reinforce existing State companies starved of capital but which have the potential for employment creation — companies such as Bord na Móna, which is profitable, now well managed and run efficiently by their workforce who have demonstrated enormous flexibility, but nonetheless a company that is ludicrously structured in terms of its capital base? The Irish Sugar Company — received something like £39 million of State capital equity over the past five or six years, according to some of the stories reported in the Business Post at its launch over the weekend. Surely Bord na Móna, who have shown similar ability to turn round in terms of their operations, profit and loss account, productivity, are entitled to some capital injection from the proceeds of the sale of that company to enable them achieve a balanced balance sheet, to expand and create real jobs, based in Ireland, founded on Irish resources and dependent on Irish expertise?

I raise that point because in his substantial contribution to the debate the Minister referred to the economic climate within which the Bill is being introduced. It is clear in a separate but related context that the Government are expecting substantial proceeds from the sale of two State companies this year. From what the Minister said on radio over the weekend there was no set programme of proposed sales of further State companies but nothing was ruled out in relation to the sale of any one of them should that prove to be a desirable objective and should the price, so to speak, prove to be attractive. The Minister for Finance will have overall responsibility for the disposal of those capital receipts. Against the background it is appropriate for us to ask the Minister on Second Stage, against the set of budgetary arithmetic upon which this Bill rests — what his intentions are and why? If the proceeds are to be used as he indicated in response to a parliamentary question, exclusively to reduce the national debt, why are they not used to deal with the question of unemployment? This brings me back to the first point I made, that in relation to unemployment, particularly long term unemloyment, the Government have no economic policy whatsoever.

Modest growth of the order of 1.5 per cent, or even if we achieve in 1991 — it is sad to relate I do not believe we will — growth of 2.25 per cent it will be achieved by internal productivity measures which will not substantially increase the real workforce by any significant amount. There may be some gains — all gains are welcome — but on the scale of need we have, the type of gain which will come from an economic GNP growth rate of the order of 1.5 per cent or 1.75 per cent will not make any impact whatsoever. Therefore, there must be an additional impetus from the Government.

We are not the only people who dispute these figures. It is not only the Opposition parties who are challenging the Minister for Finance or, indeed, the Government on their overall economic analysis, whether it is economic growth, their estimate of unemployment or other factors. Economic commentators, investors and institutions who operate our market economic system are also distrustful of the public pronouncements and statements of the Government. It would appear that the Central Bank are equally distrustful.

The relationship between the Central Bank and the Government is a very delicate and intimate one and yet by definition and by law it must and should be a very separate one. I would not like to see the UK system operating in Ireland. Under that system the Chancellor of the Exchequer can intervene with the Bank of England. Certainly, the philosophical thinking within the 12 member states of the Community is for an independent Central Bank type of institution as distinct from the Bank of France or the Bank of England who it is argued — an argument with which I would agree — are open to too much political interference. There is a very intimate and delicate political relationship between the Governor of the Central Bank in any economy and the Minister for Finance and the Government on the other hand. Part of that relationship depends for its effective operation on real trust, real sensitivity and a high level of discretion because markets in the nature of things are very nervous beasts. If that relationship begins to appear to outside observers as it currently does then the Minister for Finance, and the Government, are doing no service to the country at large and, in particular, to the economy.

In asking the Minister to clarify the statistical questions I posed at the outset of my contribution not only would he be responding to this debate but he would be availing of an opportunity to re-introduce into the economic analysis of our economy at this difficult time, a degree of certainty and a degree of analysis which, hopefully, we could all share and with which we could all agree. We could then get on to the business of deciding, against an agreed set of figures, the options open to us, how to proceed and what we should do next. Until such time as the Minister avails of the opportunity and the argument I put forward — this is my considered view and if I am wrong I would like to be refuted — Irish interest rates will remain at their present level.

On top of the international macro-economic factors which are depressing the potential for growth in Ireland, we have the real internal domestic situation of effectively very high interest rates. A person has the option of putting money into a fairly secure financial institution on reasonable terms of withdrawal — six months or a year — and receiving a gross rate of 10 per cent which is a 7 per cent return allowing for inflation. A borrower has to borrow money at overdraft rates. If they are risk-takers they are coming in at the edge of the economic system. The banks, who are not risk-takers, are perhaps the one financial institution here who are asset obsessed in terms of the basis on which they give money. For an investor, be it the general manager of Bord na Móna or a private individual taking a possible plunge in one of the designated areas which Deputy Noonan discussed earlier, the return he or she has to earn for the banks before they start to see any return for themselves is enormous. That high rate of domestic interest which is in part a product of the lack of trust that exists between the financial institutions, including the Central Bank, on the one hand and the Department of Finance and the Government on the other, is an imposed economic impediment which is preventing us from realising the potential for domestic-led and generated economic growth upon which we so desperately depend.

I will add an additional dimension to that scenario to which the Minister or his advisers might respond. It is my understanding that because the investment climate it so marginal due to the cost of borrowing money it is making the equation of viability for some projects so problematic that those which had intended availing of EC Structural Funds are not going ahead. Consequently, the Government's estimate of the drawdown into the Irish economy of EC Structural Funds for tourism related products and projects that have a private sector involvement, will not occur at the rate anticipated because of the interest rate penalty to which I have referred.

Debate adjourned.