Finance Bill, 2000: Second Stage.

I move:

"That the Bill be now read a Second Time."

I have pleasure in bringing before the House the first Finance Bill of the century. It is in many ways a noteworthy event, particularly as there has been much speculation in some quarters as to what the Bill may contain.

The primary purpose of the Finance Bill is to give effect to the Government's budgetary proposals. The budget delivered the largest tax package in the history of the State conveying substantial direct tax reductions all round. In regard to taxation it gives over £1 billion in personal tax reductions on top of over £1 billion in tax cuts delivered in the Government's first two budgets, it removes over 70,000 from the tax net, including 10,000 over the age of 65, it takes 125,000 taxpayers off the top tax rate by substantially widening the standard rate tax band for single taxpayers and two income married couples, it cuts the standard and top rate of tax by 2% in each case and it increases the basic personal allowances by £500 for a single person and £1,000 for a married couple, so that no PAYE earner enters the tax system until they earn £110 per week or more.

The Bill takes the first step in putting in place a single standard rate tax band so that taxpayers will be taxed on what they earn as individuals rather than on their marital status as is the case now, it doubles a series of personal allowances for the aged, widowed, dependent relatives, blind, incapacitated children and it converts them into tax credits at the standard rate of tax and makes them of equal value to all taxpayers. The Bill reforms mortgage interest relief to make it more simple and of greater value to nearly 300,000 taxpayers, it increases rent relief by 50% for those under the age of 55 and in the case of those aged 55 and over doubles the relief for those 80% of claimants on the standard rate of tax.

On capital acquisitions taxes, I took the major steps of exempting the shared family home from CAT for all those sharing the home, irrespective of the circumstances of the family relationship, cutting the CAT rate to 20% and simplifying it from a three band structure of 20%, 30% and 40%, and increasing the thresholds for payment of CAT by substantial amounts so that no tax will be payable on gifts or inheritances below £300,000 which are taken from a parent. These substantial tax reductions will not be lost sight of by the electorate when the appropriate time comes.

When I announced the publication of the Bill on 10 February I summarised its main themes as follows – the implementation of budget measures, the introduction of new tax reliefs, the enactment of the Committee of Public Accounts DIRT recommendations, a streamlining of tax administration and the setting of the tax agenda for the new millennium. Against that background I wish to elaborate on the contents of the Bill in a number of specific areas. I do not propose to go into particular detail – the time to do that is on Committee Stage. I will be anxious, however, to listen throughout to contributions from all sides of the House.

Sections 2 to 12, inclusive, set out the main personal tax changes announced in the budget. The main provisions are the reduction in tax rates, the increase in the standard rate income tax band in section 3, the increase in the main personal allowances in sections 4 and 5, the doubling and standard rating of various personal allowances in sections 6 to 11 and the introduction of the £3,000 home carer's tax allowance in section 12. The changes being made in these sections complete one major tax reform which the Government introduced last year, that is, the move to tax credits by standard rating basic personal allowances, and introduce a further major reform, the move towards establishing a single standard rate band for each individual taxpayer.

Change and reform often invite controversy. This was the case with the standard rate tax band proposals. Much has been said and written about this proposal, for and against. The Government is convinced that the reform of the tax band is the way we must proceed to meet the changing conditions in society in terms of the new labour market situation and the reality of the position in many households where both spouses are earning income. The social partners have recently endorsed this policy in the Programme for Prosperity and Fairness.

The proposal has opened up a wider debate on family issues, the role of earning and non-earning spouses and the view one has of equitable treatment of different household types. From a technocratic point of view there is no correct or right answer in debating such issues – it is a matter of society choosing the path it wishes to follow. Ultimately, in a democratic society, this boils down to electoral choice. Opinions are divided but the recent opinion polls indicate a far greater support for the proposed changes than one might have deduced from the concerns expressed in the immediate post-budget period. Time will tell, but budget 2000 will be seen as a defining point in the evolution of tax policy in the State.

Section 12 gives effect to the £3,000 carer's allowance announced by the Government on 8 December for spouses caring for children, the incapacitated and the aged. The section spells out how the allowance will apply. To ensure it works as smoothly as possible it is proposed to allow for an income disregard when the caring spouse has a limited amount of income of their own, for example, through part-time work. It is also proposed that the allowance will be available where an aged or incapacitated relative resides in the caring spouse's home or is being cared for close by. The allowance can also be retained for one year after the spouse returns to full-time employment. This, and the tapered withdrawal of the allowance when the spouse's income exceeds the income disregard, is designed to ensure it is not suddenly lost when the family circumstances change. We can deal with the operational aspects of the allowance in more detail on Committee Stage.

Sections 13 and 17 set out the changes to standard rated mortgage interest and rent relief announced in the budget. Discussions will shortly commence between the Revenue Commissioners and mortgage providers on the introduction of mortgage interest relief deducted at source from April 2001. Similar discussions will be held with the providers of medical insurance in relation to the deduction of tax relief at source from insurance premia. Both these changes will deliver benefits to the taxpayer. They will also reduce the need for a considerable volume of individual contacts by taxpayers which takes place with Revenue offices at present. These arise from claiming, reviewing and adjusting relief and the issue of revised tax free allowances as appropriate. The new system will streamline the position for all concerned.

The major changes under way in the personal tax system, the exceptional growth in the numbers of persons in employment and the major initiatives being made by Revenue to upgrade computer systems and improve service to customers have placed a considerable strain on resources. The Programme for Prosperity and Fairness envisages examination of the role which refundable tax credits can play in the tax and welfare systems, including the possibility of the payment of family income supplement through the tax system. All these factors oblige us to seek simpler and more effective ways to deliver tax relief, such as deduction at source. I am confident that such a system can be successfully put in place with the co-operation of the mortgage and medical insurance sectors.

Section 15 deals with benefit in kind on preferential loans and the changes to the reference rate of interest for calculating benefit in kind in respect of home loans.

Section 16 continues the special exemption from taxation of the unemployment benefit paid to certain systematic short-time workers. This relief was first introduced in 1994 and, despite current labour market conditions, there are more than 3,000 workers on short-time arrangements for whom the relief continues to be relevant.

Section 18 enhances the tax relief available for agreed pay restructuring, where such restructuring is necessary to safeguard the future of the firm. The relief, introduced in 1997, is being extended to 2003.

Section 19 restores the application of the tax-relieved seed capital scheme to new traders on the financial futures exchange in the IFSC.

Section 21 extends tax relief at the standard rate for post-graduate fees under certain conditions. The relief can be claimed by the person concerned or by his or her parents, guardians or spouse where they pay the fees. This new relief, which will apply at the standard rate of tax, will be available to full-time and part-time post-graduate students and will include distance education courses offered by publicly funded colleges in other EU member states.

Approved courses must be at least of one year's duration and cannot exceed four years and they must lead to a post-graduate award based on either a thesis or an examination. Persons taking the courses must already have a primary degree or an equivalent qualification. Private colleges in the State and the post-graduate courses offered by them will be approved by the Minster for Education and Science and the level of post-graduate fees qualifying for tax relief will be determined by that Minister with the consent of the Minister for Finance.

Section 23 amends and extends a number of the important pension fund changes which I introduced with widespread support last year. This gave certain pensioners the option of investing in a continuing fund instead of being forced to convert to an annuity in all cases. This year section 23 extends the new pension options to proprietary directors who control more than 5% of the shares in their company – the previous ownership requirement was 20% of share capital; allows certain individuals whose pension date has passed but who have not yet invested in an annuity to use the new pension options instead; extends the new arrangements to those using additional voluntary contributions to build up their pension rights; applies gross roll-up tax provisions to the approved retirement funds and approved minimum retirement funds, whereby tax is paid only on payments from the fund; applies PAYE to payments out of an approved retirement fund or approved minimum retirement fund where an individual opts to draw down all or part of the fund; irons out some anomalies in the tax treatment of children who inherit moneys in an approved retirement fund or approved minimum retirement fund; and ensures that all qualifying pension fund managers will be subject to regulation by an independent regulatory agency in the State or in another EU member state. I am sure that these proposed changes will have the support of both Houses when they come to be discussed in detail.

In this income tax part of the Bill, section 25 ensures that where, under joint assessment, the non-assessed spouse is proceeded against for non-payment of tax in respect of his or her income, this power can be exercised at a delegated level within Revenue or by the Criminal Assets Bureau, where relevant. The section will also make it clear that the power applies to cases where either spouse is the assessable person. The current provision, dating from 1958, refers to the husband only as the assessable spouse.

Sections 26 to 29, which form chapter 3 of Part 1 of the Bill, deal with changes to the system of dividend withholding tax which was introduced with effect from 6 April 1999. Last year's Finance Act applied the withholding tax at the standard rate of income tax on dividends paid by Irish companies to certain shareholders. Provision was made to exempt dividends paid to other Irish resident companies, pension funds, charities, collective investment funds and trustees of approved profit sharing schemes and ESOTs. Dividends were also exempt if they were paid to an individual tax resident in the EU or in a tax treaty country, or to a company controlled by such individuals. The legislation set up a detailed administrative system to ensure deduction of the correct amount of tax and to ensure as far as possible that those exempt from the tax were entitled to exemption, for example, on the basis of non-residence.

The Revenue Commissioners have examined how the system has worked in its first year of operation. They have consulted market operators, Irish company registrars, stockbrokers and custodian banks, both here and overseas. As a result, this year's Finance Bill will modify the system to reduce administrative costs, simplify certification procedures, remove unnecessary requirements and extend the range of exemptions from withholding tax to companies resident in tax treaty countries but which are not controlled by Irish residents. The changes will be welcomed by business.

There have been calls for a repeal of the tax. This is not feasible for two main reasons. First, the application of a withholding tax is an effective collection mechanism – the yield from dividend withholding tax in 1999-2000 is expected to be £50 million. Second, from an international perspective, affording exemption only to those non-Irish residents who are resident in tax treaty countries is consistent with the logic underlying tax treaties and serves to reassure our international colleagues of the integrity of the tax system.

Section 30 provides an exemption from a possible income tax charge on companies resident in another EU treaty country which receive interest from an Irish resident company. This exemption applies where the interest is paid in the course of such companies' trading operations.

Section 31 raises from £16,000 to £16,500 the capital value threshold used to determine the capital allowances and the deduction for running expenses for tax purposes for cars used in the course of a trade, profession or employment.

Section 32 relates to the scheme of capital allowances for expenditure on private convalescent facilities and proposes to treat a convalescent home as if it were a nursing home within the meaning of the Health (Nursing Homes) Act, 1990. This will obviate the need for the special regulation of this area under the tax code.

Sections 33 to 40 deal with changes to the relief for urban renewal, rural renewal, the Custom House docks, multi-storey and other car parks, regional airports and certain offshore islands. Section 33 brings forward the termination date for the signing of leases for double rent relief in the Temple Bar area from 5 April 2001 to 31 December 1999, to comply with EU rulings.

Section 36 extends the capital allowance regime for regional airports to 31 December 2000 where 50% of the expenditure on the project had been incurred by the end of 1999. The section also extends capital allowances for multi-storey car parks outside Dublin to end 2002.

Section 37 provides that a person can qualify for tax relief for construction and development on certain designated islands up to 31 December 1999, where 15% of the total cost of the project was incurred by 30 June 1999, instead of 50% of the cost as currently required.

The House will be aware that the EU Commission decided on 22 December last to close the legal proceedings initiated by it in respect of the availability of the double rent and rates reliefs in the Custom House docks area. This decision means that these two reliefs, which are available for a ten year period, will continue to their original end dates where, either the construction of the building was completed before 1 April 1998 or the construction of the building commenced before 1 April 1998 and the tenant occupation of the completed building commenced before 9 February 1999. In all other cases the two reliefs must terminate on 31 December 2003.

The detailed legal text of the Commission ruling is due shortly and the necessary legislative provisions to implement the EU decision regarding the double rent relief will be put down on Committee Stage. Capital allowances for the buildings in the 27 acre and 12 acre sites in the area were approved by the Commission in January 1999 and these allowances are unaffected by the Commission's decision on double rent and rates relief.

These proceedings bear testimony to the close attention the Commission is paying, under State aids rules, to new and existing schemes of tax reliefs under Irish tax law which are made available to business investors. We are now routinely notifying all such new schemes to the Commission. The Commission has shown itself active in pursuing complaints made to it about such reliefs. This may not be welcome news to us but it is a reality which we cannot ignore.

The Commission has set its face against double rent relief and rates relief which it regards as operating aid to business. The State aid rules do not affect tax relief on residential schemes. However, we ourselves must continue to examine carefully whether all such reliefs are needed on a general basis during an ongoing property boom.

Section 35 makes a number of changes in the general application of capital allowances including their application to the various tax relief schemes described earlier. Section 35 provides a legal basis for the option to set excess allowances arising in charging rental income against non-rental income. This option was operated administratively by Revenue up to now. It allows a person on joint assessment to set excess capital allowances against the income of a spouse where the individuals own income is insufficient. The section ensures that capital allowances for expenditure on fixtures and fittings in rented residential accommodation and for expenditure on registered holiday homes can be set off only against rental income and not against other non-rental income.

Sections 38 and 39 extend the qualifying periods for the urban and rural renewal schemes until 31 December 2002 and increase the capital allowances in respect of qualifying commercial buildings to 100%. The year one allowance of 50% will apply to both owner occupiers and lessors of qualifying industrial and commercial buildings with the remaining 50% written off at 4% per annum. The legislative provisions for the business tax incentives available under both schemes are being amended with effect from 1 July 1999 to comply with the EU Commission's approval of both schemes. Double rent and rates relief will not apply to such schemes as a result of the EU Commission ruling.

Section 41 continues tax relief for film investments for a further five years to 2005. Section 42 requires that to qualify for tax relief on expenditure on significant buildings and gardens in the future, the property must be open to the public on at least ten weekend days out of the 40 opening days required during the high season. Section 125 makes a corresponding change in the rules for CAT relief on a stately house or garden.

Section 43 makes a number of changes relating to relief for gifts to third level institutions. The current legislation allows tax relief at the marginal rate of income tax on donations of at least £1,000 made to certain third level educational institutions in respect of specific projects approved by the Minister for Education and Science in the areas of research, the acquisition of capital equipment, infrastructural development and the provision of facilities in certain areas of skills shortages.

Section 43 allows instead for each third level institution to set up an approved development fund to which the donations can be made in respect of the areas specified above. The objectives and operation of the fund will have to be approved in accordance with guidelines to be laid down by the Minister for Education and Science with the approval of the Minister for Finance. In addition, the range of projects covered by the section may be widened with the approval of both Ministers. Section 43 provides for a reduction in the minimum level of contribution from £1,000 to £250 per annum and the carry-forward of unused tax relief by donors in any one year for a period of three years in total.

There is also a requirement for the value of tax relief to be recouped from the third level body if any money in the approved fund has not been used for designated investments. The section provides further for delegation by the Minister for Education and Science of his functions under the section to the Higher Education Authority. Private donations will play a much greater role in the funding of education in the future and I responded positively to the proposals put forward by the universities which are reflected in this section.

Section 44 makes a number of limited changes to the tax relieved save as you earn share options schemes I introduced last year. On Committee Stage I will bring forward a number of proposed changes to ESOT legislation and to certain aspects of the taxation of share options. Section 45 applies the tax rate of 20% announced in the budget to profits from the sale of residential land.

Sections 46 to 49 as well as sections 51 and 59 give effect to the new arrangements announced in the budget regarding the taxation of life assurance and collective investment funds. The purpose of this is to align the domestic market and IFSC tax treatment of these products and to enable the industry to retain its competitive advantage in the provision of such products within the EU. Effectively, this is a break from the traditional UK method of taxing these funds and a move to the system prevalent in the other member states.

The changes, which were discussed with the industry, mean the proceeds of these investment media will no longer be taxed on an annual basis but will be subject to an exit tax on encashment or maturity. The exit tax will be the standard rate of income tax plus 3%. This method of taxation is referred to as "gross roll-up" as the investment returns are allowed roll up gross each year and are taxed on withdrawal, except in the case of non-residents. This is the tax regime which currently applies in the IFSC.

The new gross roll-up arrangements will come into effect from 1 April 2000 for new domestic funds and from 1 January 2001 for new domestic life assurance business. The current taxation arrangements of taxation in the fund on an annual basis will continue for existing business at the request of the industry. Existing business will eventually run-off, leaving in time only the new system applying to life assurance and collective funds.

Section 50 of the Bill increases the tax relief on capital allowances for farm pollution control. This relief will be amended on Committee Stage aris ing from the farm taxation undertakings in the Programme for Prosperity and Fairness concluded earlier this month.

Section 52 provides for accelerated capital allowances for expenditures on the construction, refurbishment or extension of child care premises that meet the required standards as set out in the Child Care Act. This accelerated allowance is available to both owners of the child care facilities and to investors who wish to invest by way of leasing arrangements. I am convinced that the availability of these allowances is an attractive incentive. It will assist in increasing the supply of child care places to help ease the current shortage.

The remaining sections in chapter 4 of Part I are largely technical. Section 56, however, implements a number of substantive changes to the DIRT audit regime. This provides for Revenue to be able to appoint, at its discretion, specially qualified persons to conduct or assist with DIRT audits, to report to the Public Accounts Committee on the results of the DIRT "look-back" audit currently under way and to publish the results of this audit.

The section also augments the powers of the Revenue to obtain information in the course of a DIRT audit and applies the audit powers to returns made by life assurers and collective funds under the new gross roll-up tax regime just described. Certain features of this gross roll-up regime involve distinguishing between the tax treatment of investors on the basis of residence or non-residence in the State. Hence the need for these powers in such cases.

Section 60 to 67 in chapter 5 of Part I cover corporation tax changes. These deal largely with the application of the 12.5% rate of tax to trading income which does not exceed £50,000 and technical changes to consortium loss relief and to IRNR provisions. Section 66, together with section 30, is designed to facilitate the growth in securitisation of assets business both within the IFSC and in the Irish financial sector in general. Section 67 makes a number of changes to the grant and revocation of taxation certificates to IFSC or Shannon companies and the repeal of provisions allowing the application of special tax rates to particular IFSC or Shannon trading operations.

Sections 68 and 71 deal with capital gains tax, enhancing certain aspects of CGT retirement relief for over 55s; applying 20% CGT rate to gains on the disposal of non-resident development land; providing for a more efficient and streamlined tax clearance procedure on sales of newly constructed houses and removing certain tax obstacles impacting on the disposition of property following a foreign divorce or legal separation which is recognised in the State.

Section 72, which forms a chapter in the Finance Bill, sets out the provisions in relation to the income and corporation tax reliefs for the renewal and improvement of certain towns whose population is between 500 and 6,000.

As the House will know, the relevant selection process to designate these towns in each county is still under way. This process involves county councils recommending areas where tax incentives are to be applied to an expert advisory panel which, in turn, will make recommendations to the Minister for the Environment and Local Government. I will then designate those areas for tax relief which are recommended to me by the Minister for the Environment and Local Government.

This town renewal scheme involves a similar range of reliefs being available as in the case of the current urban renewal scheme. The scheme will operate from 1 April 2000 to 31 March 2003 subject to EU approval of the business elements of the reliefs. The residential reliefs will, however, apply from 1 April next.

The scheme is intended to assist in restoring or improving the built fabric of towns, promoting sensitive local development and revitalising the centres of small towns. I remember last year on the Finance Bill we had a very good debate and analysis by the Opposition spokesperson on the plight of rural areas and the implications of changing lifestyles and technology for the future of small towns and villages. I share these concerns and look forward to some thoughtful interchanges on this issue in the course of the debates.

Parts II and III deal with indirect taxation. Sections 75 and 87 relate to excise duties and sections 88 and 105 to value added tax. The excise duty changes: confirm the budget day increase in tobacco excise duty, the reduction in excise duty on kerosene and the abolition of the travel tax on overseas travel by air or sea; provide that the excise duty rebate for diesel fuel used in buses and trains will be confined to the use of low sulphur diesel; clarify the application of excise duty exemptions and reduced rates for fuel used in private flying, buses and off-road vehicles; legislate for updated collection procedures in the case of certain court issued licences and apply excise duty and tax clearance requirements to liquor licences issued to the national cultural institutions; provide for the delegation to authorised staff in Revenue of certain decisions in relation to the operation of vehicle registration tax and for the issue of a combined vehicle registration document covering both registration and subsequent licensing and, finally, close a number of loopholes in relation to the use of mineral oils for automotive purposes.

The VAT changes are largely technical, apart from sections 92 and 94 which confirm the increase in the farmer's flat rate of VAT from 4% to 4.2%, as announced in the budget. The various other VAT provisions close a loophole in reclaiming VAT on rented holiday accommodation; ensure that VAT estimates and assessments can be raised where annual VAT returns are not made or an under payment is revealed by a VAT audit; implement certain requirements of the EU directive on VAT on investment gold; confirm in substantive form the new duty free VAT rules consequent on the elimination of duty free on intra-Community travel from 1 July last and clarify the application of certain VAT definitions, exemptions and zero-rating in the case of particular goods and services.

Part IV sets out a number of stamp duty changes. These are mainly technical except for the changes in section 107 which continues the relief from stamp duty on transfers of assets to young trained farmers for a further three years. The relief, which is a two thirds abatement of the relevant duty will be increased to a full relief on Committee Stage arising from the recent national programme discussions.

Part V refers to residential property tax. While RPT was abolished from 5 April 1997, arrears of tax continue to be collected, some £1.5 million or more each year. Section 113 provides for an increase in the market value exemption limit to £300,000 from £200,000 in respect of properties which must be tax cleared when they are sold if they exceed this limit. Section 114 absolves from tax clearance any property which the vendor purchased after 5 April 1996, the last valuation date on which RPT was payable. These changes will reduce the administrative burden of tax clearance while still collecting significant arrears of tax from those who should have paid when RPT was in force.

Sections 115 to 131 give effect to a number of major changes in the CAT code as announced by me in the budget. In addition, there are some further changes I am making to the operation of business and agricultural relief. The result of these changes overall will be to reduce the severe impact of CAT on family inheritances, in particular, make business and agricultural relief more available and move the basis of gift and inheritance tax from domicile to residence, which is the more general basis of liability in the tax system both here and abroad. These are among the most radical and extensive changes to CAT since its introduction.

Sections 116, 117 and 118 propose to change the basis on which gift tax and inheritance tax is charged on assets situated outside the State from domicile to residence. Under existing tax rules a liability to gift or inheritance tax can arise where either the disponer is domiciled in the State or the property comprised in a gift or inheritance is situated in the State, regardless of the domicile or residence of the disponer. There is no change in this latter property rule.

However, the Bill changes the general domicile rule to a residence basis so that a liability to gift or inheritance tax can arise on foreign property where either the disponer or beneficiary is resident or ordinarily resident in the State. A person will not be treated as resident or ordinarily resident in the State for this purpose unless he has been resident in the State for the five consecutive tax years before the gift or inheritance. This five year period starts to run from 1 December 1999 so that a foreign domiciled person in the State will not be affected by this change until 2004.

The changes apply to gifts or inheritances taken on or after 1 December 1999, except in the case of a gift or inheritance taken under a trust or settlement existing on that date where the present rules will continue to apply. Gifts or inheritances taken prior to 1 December 1999 are unaffected by these changes.

Section 119 closes off a loophole in the qualification rules for agricultural relief while section 127 allows a person to qualify for CAT business relief in respect of a farming business which does not qualify for agricultural relief in the case of inheritances taken on or after 10 February 2000, the date the Bill was published. The effect will be to allow a beneficiary who fails to qualify, under the 80% assets test for farming – for example, because they own a domestic property the value of which has increased considerably in recent years – to seek business relief where he comes within the terms of that relief. The farming groups sought changes along these lines before the budget.

Section 124 provides for the increases in CAT thresholds in the budget and the introduction of the uniform 20% rate of tax for both gifts and inheritances. It also provides for the aggregation of prior gifts and inheritances only within classes of relationship instead of across classes as at the moment. The current aggregation rules, apart from being very difficult to understand, can lead to unforeseen tax consequences depending on the sequence in which gifts or inheritances occur.

Section 126 increases the threshold for exemption from probate tax to £40,000, as announced in the budget. Sections 127 and 129 remove certain obstacles to the recognition of foreign divorce orders in the CAT and probate tax code. This mirrors the changes made in the Bill in respect of CGT and stamp duty in such cases.

Section 130 provides for the new relief of CAT on the family home, as promised in the budget. This relief will be supported by the House and responds to a growing concern on the part of many home sharers over the tax consequences of the death of a partner or family member. I have received a large volume of representation on this issue in the past year alone as, I am sure, have the Deputies opposite.

The final Part of the Bill contains a number of miscellaneous, but nonetheless important, tax measures. Section 135 provides for further payments in 2000 of moneys from the Exchequer into the temporary holding fund for superannuation liabilities. Deputies will be aware of the Government's decision to partially pre-fund social welfare and public service pension liabilities with annual provisions of 1% of GNP and an allocation from the Telecom sale proceeds. Interim legislation was passed before Christmas setting up a temporary holding fund for pension allocations and a sum of £3,015 million was paid into the fund before the year end.

Section 135 will enable me to make further payments of up to £1,850 million into the fund this year. This is slightly above the estimate included in the recent budget due, in part, to higher than expected additional receipts from the Telecom sale. The payments into the temporary fund, which is being managed by the National Treasury Management Agency, are being made pending the introduction of an appropriate statutory framework for the financing, management and investment of State pension funds on a long-term basis. My Department is currently working on the detailed legislation for this and I hope to be able to introduce it within the next few months. The legislation will also provide for the transfer of the moneys in the temporary fund to the new pension funds once these are established.

Section 137 deals with donations of heritage items. This provision was introduced in 1995 and allows for the value of certain donations of heritage items to a national heritage institution to be written off against certain tax liabilities of the donor. Each donation must be worth at least £75,000 and be approved by a special selection committee. There is a limit since 1996 of £750,000 on the total amount of gifts which can be tax relieved each year in this way. In response to requests from the Minister for Arts, Culture, Heritage and the Islands, the Bill increases this limit to £3 million. This relief has been used quite actively since it was brought in and has served a useful purpose.

Section 138 provides for certain changes to the legal requirements for the publication of certain details of tax defaulters. Since 1983, the Revenue Commissioners have been required to compile and publish a list of persons on whom either a fine or other penalty has been imposed by the courts or in whose case the Commissioners have accepted a settlement offer in lieu of initiating legal proceedings. Publication is prohibited in certain cases – where the settlement is the result of a voluntary disclosure, where the 1993 tax amnesty applies, or where the settlement amount does not exceed £10,000.

The list of names of tax defaulters is published on a quarterly basis and gives details of the name, address and occupation of the person concerned and the fine or penalty imposed by the courts or the amount of the tax settlement involved. Section 138 contains a number of changes to tighten up these requirements to ensure that details of settlements are published by Revenue, irrespective of whether a fine or penalty has been imposed by a court and irrespective of whether any such fine has already been published by the Revenue Commissioners. The existing law has been interpreted as allowing publication of either the outcome of the court action or the settlement, but not both.

The section also makes it clear that in future settlements, details will be published even if the relevant tax penalties have been paid in full. This closes a gap in the existing law under which settlements are not published if the full penalty is paid. Furthermore, the published list will now give a brief description of the circumstances relating to the default or evasion, for example, where a case may have arisen out of a specific inquiry or investigation. All these changes take effect for settlements agreed or court fines imposed after the passing of the Act.

Section 140 incorporates a number of provisions to facilitate the introduction of consolidated billing by Revenue – the issue of a statement showing a taxpayer's payment or repayment position across a number of tax heads. The section provides that claims for repayment can be set off against outstanding tax liabilities. The Revenue Commissioners are empowered to make regulations specifying the order or sequence in which repayments may be set against tax liabilities. A similar enabling provision will allow for appropriation of a tax payment in a particular order where no specific instructions have been given to Revenue.

The Programme for Prosperity and Fairness highlights the fact that the taxpayer must have confidence in the fairness of the tax system and that this must be maintained by determined action to combat tax evasion and fraud. I acted swiftly last year to arm the Revenue with a wide range of modern powers to combat tax evasion. I also made it clear that in the case of the DIRT issue, the Revenue would pursue the tax, interest and penalties due to the State under the law. I made the point when publishing the Bill that the amounts of money involved in this could be very substantial. I also pointed out that there were constitutional limits on what could be done in respect of a number of the Public Accounts Committee tax recommendations.

There is no lack of will on this side of the House to see that tax liabilities are properly pursued and to build on the efficiency gains in tax collection which the Revenue Commissioners have achieved over the past 15 years. I have complimented the Revenue on more than one occasion on its achievements in transforming the tax collection system and in upgrading its standard of service all round. I know that it is the Revenue Commissioners' firm intention to continue the process of improvement.

I hope the House has benefited from the extensive outline I gave of the provisions in the Bill. The Bill is a substantial Bill in terms of content and size. I look forward to the debate on its passage and I commend the Bill to the House.

I wish to share my time with Deputy Deenihan.

I move amendment No. 1:

To delete all words after "That" and substitute the following:

"in view of:

–the absence of a clear economic policy underpinning the Finance Bill,

–he continual changing of expenditure targets by the Government,

–the threat to competitiveness caused by inflation,

–the inadequacy of income tax relief for the lower paid,

–the contradictions in labour force policy in the tax proposals which apply to spouses,

–the absence of fair and practicable proposals on child care, and

–the refusal by the Minister for Finance to introduce a fair and equitable tax regime for credit unions,

Dáil Éireann declines to give a second reading to the Bill.".

The budget and the Finance Act which implements it are the main instruments of economic policy at present in the hands of the Minister for Finance. Now that interest rate policy and exchange rate policy are matters for the European Central Bank, fiscal policy in its widest sense is the only real instrument of policy available to an Irish Government seeking to influence the course of the economy.

The Minister for Finance is the Government's pilot. He steers the ship of State through straits and narrows, avoids reefs and rocks to bring the ship safely to port. In all this his primary navigation instrument is the budget and the Finance Bill which flows from it. Any Minister for Finance must ask himself or herself a number of very simple questions? Should he or she spend more or less money? Should he or she increase or decrease taxes? Should he or she reduce some taxes and raise others? What will be the effect on the country if he or she uses the budget to influence employers and unions in negotiating a wage agreement? By how much should he or she increase social welfare expenditure and all the payments, allowances, benefits and pensions that are part of the social welfare code? These are the questions which must be in the Minister's head as he drafts the budget, and the economic consequences of his decisions must take precedence over all other considerations.

There is another approach to budget making, where the Minister of the day sees himself as a Santa Clause figure, a dispenser of gifts, a popular fellow who arrives once a year and who in jovial mood distributes largesse. When this approach is taken, as it has been taken in the past, the purpose of the budget is political rather than economic, and the questions which decide the Minister's actions are different from those stated above. These question include, how can he or she be popular? Which interest group will he or she favour so that his or her party will be better posi tioned to win the next election? How can he or she further advance his or her career?

Ministers in the past who have afforded primacy to political considerations have brought in bad budgets. Ministers who afford primacy to economic considerations sometimes get it wrong, but at least they get it wrong while doing the right thing. This budget and Finance Bill have been based on mixed objectives, some political, some economic and some downright eccentric. The recipe has a variety of ingredients, but the outcome is more dog's dinner thathaute cuisine.

That is a great pity. No Minister for Finance has ever had the opportunity which this Minister has had, but unfortunately he has not availed of it. Rather than making further progress in our advance as a country, this budget leaves the ship of State becalmed. There is no clear course plotted and doubts are beginning to fill the public mind as to whether our prosperity is being put at risk, will the wage agreement hold, is our economy overheating, and does the Minister know what he is doing?

The Minister's ineptitude on budget day, his numerous U-turns since then, the contradictions between the policy statement on budget day and the commitments in the Programme for Prosperity and Fairness have caused widespread unease and for the first time in five years I sense the commencement of a dangerous trend. Confidence is beginning to seep out of the economy.

Everybody knows the budget was a political fiasco. I have no intention of labouring that point further. The Minister's failure has become the raw material for every comedian in the country. I will, however, discuss a more serious issue – the growing realisation that the budget is also an economic fiasco.

A Government, before introducing a budget, must take a view on how much public expenditure may be prudently increased or decreased. There is always a presumption in the House that this has been done and that this decision is the foundation stone on which budgets are built. What can we say about a Government which, one week after announcing its projected expenditure targets for the year, makes further announcements which commit it to over £0.5 billion pounds of further expenditure, and which, in the Finance Bill and Social Welfare Bill, published some weeks after the budget, seeks to legislate increases in expenditure in excess of £300 million?

There is a view that the Minister has so much money at his disposal that it really does not matter whether or not he changes his expenditure plans. There is truth in this if he is disposed to spend a little extra, but when the variation between the Government's stated policy and the actual outcome in the Finance Bill and Social Welfare Bill is so dramatic that we are talking about several hundred million pounds, is it any wonder that the public are confused about where the Government stands on fundamental economic issues?

This Minister built a reputation on his supposed ability to control public expenditure. His 4% formula has, like a conjurer's trick, disguised what has actually happened. The outturns for 1998 and 1999, have shown that current public expenditure has increased by over 20%, not 8% which, on the face of it, was the import of the Government's commitment to controlling expenditure when it took office. In the past two months, however, farce has been turned into a high art form by the manner in which announcements made on a weekly basis dramatically alter the fundamental arithmetic of the budget.

A Government that does not have a strong policy on public expenditure cannot manage the economy. This Minister, whose constant and only mantra from the Opposition benches was that the rainbow Government was spending too much and that he would batten down the hatches, should now consider his position.

Expansionary budgets are inflationary. Inflation makes people poorer. Inflation, in particular wage inflation, also undermines a country's competitiveness and if present trends continue the competitive edge which gave us the Celtic tiger and the economic advantages we enjoy, will erode very quickly. There is no doubt but that the rate of inflation influences the level of wages that workers and their representatives are prepared to accept. The Minister' s ineptitude in not giving adequate tax relief to low-paid workers and in increasing the consumer price index by almost 1% by increasing the excise on 20 cigarettes by 50p has resulted in a higher nominal wage increase than one would have expected. It has also resulted in the Tánaiste abandoning the £4.40 per hour rate for the minimum wage before it has even been introduced.

The Minister will wrap the mantle of the health services around him in defending the excise increase on cigarettes. I agree with the increase and I said so in my reply to the Budget Statement. I agree with the thinking on health care which gave rise to it. However, the Minister should have made compensating reductions in excise to ensure that the adverse effect on the consumer price index was cancelled. If the Minister had reduced the price of petrol and diesel by an amount which would cancel the CPI increase caused by the increase in excise on cigarettes, he would have got a double bang for his buck, his inflation figure would be almost 1% lower, and he would have reduced the cost of transport at a time when the actions of OPEC are beginning to bite.

I see no reason that the Minister could not have taken this course of action. He did not put 50p on cigarettes because he needed the revenue to fund a particular spending programme. He put it on as a health measure, to reduce the incidence of smoking. He has pledged that the proceeds will be used in the fight against cardio vascular disease and cancer. We agree with that. However, in positioning the Government to negotiate a national wage agreement, he should have reduced excise elsewhere, on petrol, on fossil fuels, so that the CPI would not have gone to double the European average where it now stands at a point when a new wage agreement is being put to workers for acceptance.

We no longer have a closed economy, and the traditional causes of inflation, for example too much money chasing too few goods and services, no longer apply. Consumer demands can now be satisfied by the productive capacity of our 11 colleagues in the European Union and of the wider world, who are only too anxious to sell us their goods. An analysis of the consumer price index based on the fact that there is no rise in the prices of many imported goods because we are an open economy is to avoid the real issue. That is not where the problem lies and is not where the problem will arise in the future. As yet there is no sign of difficulty with the balance of payments arising from the sucking in of imports to satisfy consumer demand. However, there is inflation in the economy, even though it is not measured in the consumer price index. We see inflation in the continuing rise in house prices, in the increased cost of services. Inflation in indigenous service industries is now in excess of 6%, and it is this inflation, the price of servicing a car, the cost of an electrician or a plumber to do a small job in the house, the price of a haircut, the increasing costs in pubs and restaurants, which will drive wages forward. It is not a defence in arguing about inflation to say that a whole variety of consumer goods can be imported into Ireland to satisfy demands. That is not the issue. The issue is the housing market and inflation in indigenous services. This inflation is already impacting on wage demands.

When people on middle incomes can no longer afford to buy a house in the capital city, national wage agreements are in crisis. When the middle grade civil servant, married to another middle grade civil servant, cannot buy a house in this city, when applications to move down the country when Government Departments move continue to rise, when the nurse married to the garda cannot buy a house in Dublin, when the two teachers married to each other cannot afford a house in Dublin, when we cannot get nurses to serve in Dublin hospitals because they cannot afford to live in Dublin, we have an inflation problem. That point has been arrived at and the evidence is all around us. When the Minister chooses to ignore the evidence in the interview he gave on Sunday on inflation, he is not thinking straight on this issue.

Before the ink is dry on the Programme for Prosperity and Fairness, before the issues have been put to the workers of this country, the NBU and SIPTU were on strike, before negotiations on their pay claim had commenced. A strike was avoided last night when CIE put £15 per week on the table. That is a 7% increase on what has been quoted as the basic wage for bus drivers. Does anybody think this 7% increase will be withdrawn in four weeks? Is it not reasonable to assume that the 7% will simply be the negotiating base from which a higher settlement figure is reached on top of the 5.5% already committed in the PPF?

I am not saying the bus drivers do not deserve it. I am not saying that there is not a rate for the job that might be necessary to fill the vacancies in Dublin Bus for additional drivers. What I am saying, however, is that a bad budget has led to a wage agreement whose merits are more cosmetic than real. Even before the wage agreement is put to the workers, there is evidence to suggest that it will not survive the 33 months, even though there is no local bargaining element contained within it.

The House will be aware of the position taken up by the Association of Secondary Teachers of Ireland. Historically, that has been the most militant teaching union. It has rejected the pay agreement even though teachers, who would be regarded as early settlers under the PCW, are entitled to an overall increase of between 18% and 19% over 33 months. The ASTI has rejected this wage agreement out of hand. It has stated that it proposed to take industrial action in pursuit of an immediate claim of 30%.

It is remiss of the Minister to make little of the inflationary threats facing the country, in circumstances where before the new wage agreement has even been put to the workers, two such significant wage demands – coming from the employees of Dublin Bus and the secondary school teachers – are put in place.

Against this background, even though I believe the new wage agreement will be ratified, I believe it will not hold and that there is now a real possibility of wage inflation eroding the competitiveness of the economy. The issue is not price rises per se, because the cost of goods and services are going up. The issue is that the asset inflation in the price of houses and the inflation in the cost of services which are delivered domestically, but not internationally, will cause an explosion in wage demands. Over a period of time this will erode our competitiveness. The Government seems to be unaware of this and is standing back from the problem and doing nothing about it.

The public perception now is that the Government is a soft touch. Since the day the Fianna Fáil backbenchers took to the plinth and undermined the Minister's budget, every lobby group in the country knows that the banner of the Government is now the white flag. The Minister will face it hot and heavy every month of this year because he is now reputed to be a soft touch. Every group in the country will take advantage of this, especially when they know that the Minister has a lot of money in very deep pockets. They also know that he can be pressured into doling it out in large amounts when his own backbenchers dance the jig on the plinth of Leinster House.

The Minister for Finance must take a large proportion of the blame for this state of affairs. The primary policy plank on which the budget should have been built was to exchange tax relief for low nominal wage increases. By ignoring the legitimate demands for tax relief by the low paid, by fobbing them off with a paltry £10 per week of extra tax credit and by concentrating the bulk of resources available on further relief for the well off, the Minister made the negotiation of a wage agreement very difficult indeed. The possibility of the wage agreement now negotiated surviving intact for three years will be extremely difficult.

The big failure of the budget was, as everybody now knows, the failure of a Minister with almost unlimited resources to reform the taxation system in a manner which ensured further growth in the economy, in a manner which was fair and equitable and which laid the foundations for a satisfactory wage agreement.

It is interesting to see how the Minister has moved his position in the course of the negotiations with the social partners. In this tax year, people with income in excess of £100 enter the tax net. Next year they will enter it at £110, an increase in allowances or credits of £10 per week. The Programme for Prosperity and Fairness, however, commits the Minister to exempting from income tax all income up to the level of the minimum wage, that is £200 for a 40 hour week.

When Fine Gael proposed that the minimum wage should be exempt from income tax in our tax document published early last October, the Taoiseach described the proposal as rubbish. It is interesting to note that after the fiasco of a failed budget, the exempting of the minimum wage from income tax is now the central plank of the Government's commitments on tax relief.

The Minister's Waterloo on budget day arose from his proposal to individualise the tax bands. Fine Gael has always believed that the income tax code should reflect the additional costs which arise when two spouses are working rather than one. We believe that the PAYE allowance goes a small way in this direction, and in our tax document we proposed that the PAYE allowance should be increased from £1,000 at the standard rate, where it now stands, to £3,600 at the standard rate. We also proposed that it should be extended to cover self-employed people, especially the very large numbers of people who traditionally would have been PAYE workers but who are now employed on a contract basis. That is particularly true in Dublin, both in the financial services industry and the information technology sector.

The Minister chose to go in a different direction. His proposal penalises families where only one spouse works, and the sad thing about his proposal was that he could have achieved the same policy objectives in terms of increased participation in the labour force if he had approached the problem in the manner that Fine Gael had proposed. He proposed, however, that next year a family where one spouse works will be taxed at the higher rate when their income exceeds £28,000, but a family where two spouses work will not be liable for the higher rate until their income exceeds £34,000.

The Minister has maintained this differential in the Finance Bill. It is not this that has upset people so much, but the fact that he intends to increase the differential over the next two budgets so that the two income family does not go on the higher rate until their income exceeds £56,000, but the one income family pays at the top rate after £28,000. That is the nub of the controversy. This proposal is extremely unfair and is designed to increase female participation in the labour force by forcing stay at home wives out to work rather than allowing them a free choice of whether to work.

The proposal is also unnecessary as the type of tax incentives which result from the Minister's proposal could also be achieved in a fair and equitable way which would not discriminate against single income families. If the Minister had taken on board the other proposals in Fine Gael's tax document, including the proposal to introduce a middle rate of tax at 35%, he would have achieved an even stronger labour force effect and avoided the political fiasco which he faced on budget day.

I am glad the Government has now seen the light and I am glad also that in the PPF its commitment to the individualisation of tax bands has been moderated. As I understand the text of the agreement, it is now proposed that the individualisation as announced in the budget will be introduced in the Finance Bill, but the commitment for the future is that the individual tax bands introduced now would be increased in line with wage increases over the next three budgets rather than by the extraordinary increases proposed on budget day.

It is as well to recall what the Minister's stated intention was on budget day. In this tax year a single person enters the higher rate once he or she earns more than £14,000. The Minister proposed that this would rise to £17,000 in the next tax year, £23,500 in the tax year after that and £28,000 in the following tax year. Because each individual taxpayer would have an individual band, if there were two spouses working in the family, the figure would be £56,000.

The increase committed by the Minister in the budget was from £14,000 to £28,000 or £28,000 to £56,000, an increase of at least 100% in simple arithmetic. The commitment arising from the Programme for Prosperity and Fairness is that the Minister would increase the individual band in line with wages and the commitment on wages is an increase of 15.5% over 33 months.

This is a major change of policy between the budget position and that announced in the published programme from the social partnership. Under pressure from the general public, the Opposition and Deputies supporting the Government, the Minister was forced into his first U-turn and announced a £3,000 tax allowance for stay at home spouses who are caring for dependent children, elderly parents or an incapacitated adult. This proposal has been further modified in the Finance Bill and the Minister has finally realised, as I pointed out to him during Question Time before Christmas, that stay at home spouses must be allowed some earnings before the working spouse is disqualified from this allowance. This allowance was announced by a Minister under extreme pressure and was announced for considerations of political expediency rather than for any economic policy reason. The problem, however, is that when Ministers do things which they make up as they go along, they frequently contradict other policy positions they have already taken up. Whatever the merits of the £3,000 stay at home allowance, it will clearly act as a disincentive to women who wish to return to full-time work. If they return to full-time work their spouses will lose the £3,000 allowance and the first £660 of their earnings will be cancelled out by the loss of this allowance. In that it runs counter to the Minister's stated objective on the day of the budget, that there should be an increase in female participation in the workforce and that he was under-individualising the tax bands to achieve this policy objective, he has now introduced a balancing measure that runs in the opposite direction and it is now difficult to believe there will be an increase in participation in the workplace by women.

The allowance as proposed is anomalous. The spouse of a person who cannot work through illness will not qualify for this allowance, neither will a taxpayer whose spouse is in a nursing home, a person whose spouse is on disability benefit or single persons acting as carers. We all know of cases where a son or daughter – more typically a daughter – leaves work to care for a parent who is ill and because it is a daughter rather than a spouse who is in the caring role the working parent cannot avail of this allowance. The Minister has introduced two concepts and given almost equal weight to them. He wants the £3,000 allowance to compensate a woman for staying at home but he has introduced the caring condition also. However, there are carers other than spouses. There are carers in families who have made great sacrifices, who are sons or daughters, though more typically daughters. In circumstances where a father, mother and daughter are involved and a daughter gives up work to care for the mother while the father is still working, why should the father not get the £3,000 allowance? He will not get it because this proposal was made up on the hoof and is riddled with anomalies, despite the work done by the Revenue Commissioners and the Department of Finance since the initial announcement. We have all heard the old adage, marry in haste, regret at leisure. The Minister's position is a parody of this – legislate in haste, regret at leisure.

There are two serious and significant omissions from this Finance Bill. The Minister has failed once more to bring forward a fair and practicable child care package. When he was under pressure on his tax individualisation proposals his defenders claimed that these proposals were designed so that working women would have additional money through tax relief to pay for child care. This horse, however, fell at the first fence when it was pointed out that the individualisation proposal does not focus on families with children and that the biggest beneficiaries are couples, both on high salaries, whose children are reared.

There is a further serious omission in the failure to deal with the taxation of credit unions in a fair and equitable way. I will return to this and other issues on Committee Stage and I look forward to a full debate then. There are many issues I would like to deal with which arise from individual sections of the Bill.

In my budget contribution I said we live in a time of extraordinary social and economic potential. Standards of living have been rising for most people in employment and income per head will reach average EU levels very soon. However, while rejoicing in the good news stories, we must not forget those who are not doing so well or who are not benefiting from the present buoyant economy.

Successive UN human development reports have highlighted the reality of poverty in Ireland. The 1999 report has again highlighted the fact that among industrialised countries, only the USA has a higher proportion of its population in poverty. There are substantial numbers of people living in poverty in Ireland in both urban and rural areas. The number of long-term unemployed is still problematic and access to appropriate accommodation is becoming harder for larger numbers of people. Adult illiteracy levels remain very high while the drop out rate from second level education is a cause of major concern and is storing up problems for the future. Rural exclusion continues to be a major forgotten issue in Irish society and many communities are excluded from our current prosperity. These issues and those of equality, health care and disability must be addressed.

Everyone, including the Government, signed up to the recent NESC strategy document, which made a strong case for budgets to give increased priority to social inclusion within public spending and a three-pronged approach of social welfare, mainstream public policy programmes and a special investment package.

The Minister referred to the fine debate we had on last year's Finance Bill. Many rural areas are, however, falling further behind. I welcome the huge investment in the national primary road structure, but that leaves the areas not served by such roads, which are sometimes served by totally underfunded national secondary roads, peripheral and non-competitive. This is a very serious problem, and I speak from first hand experience as I reside in north Kerry. We have a national secondary road that has received £200,000 this year from the NRA, but the area is becoming marginalised because of the lack of infrastructure. Our train service was taken away and our road infrastructure is disintegrating. Every day it is becoming increasingly difficult to attract industries to Listowel, despite the efforts of all State agencies and the efforts I have made at my own expense.

This is a major problem and I do not know how the Minister can address it through financial packages, but it must be seriously examined. That is obvious when one leaves Dublin on a Thursday evening for one's rural constituency. The differences in activity between the two places are becoming more glaringly obvious and pronounced.

The budget ignored the strategies outlined by the NESC. The budget and this Bill simply reward the rich and better off at the expense of the lower paid and poor. Although I acknowledge that the Minister made an extra allocation in the region of £125 million to stay-at-home spouses, I want to outline some basic figures which demonstrate this assertion. The Minister introduced a package of more than £1 billion in taxation measures compared to the £390 million allocated in the social inclusion package. Two and a half times more has been allocated to tax measures than to social inclusion measures. One and a half times more will be spent reducing the top tax rate than will be spent on our children.

Both the Combat Poverty Agency and the ESRI have analysed the distributional impact of this budget. The analyses revealed that the richest 10% of households will benefit six times more than the poorest 10% of households. The poorest 10% of households will benefit from a 0.7% increase in incomes whereas the richest 10% will benefit from a 4.2% increase. The middle 20% of households will benefit by an average 2% increase. Those figures may have changed slightly because of the Minister's adjustment in respect of stay-at-home spouses but they show that the budget and the Finance Bill are very much directed at the top echelons of society. That is very unjust.

I am aware at first hand of a number of companies in peripheral rural areas which cannot afford to pay their employees a decent wage without risking going out of business. People are working for very low wages because they want to work and they want companies to remain in rural towns and villages. The only way in which extra money can be provided to these employees is through the taxation system. The Minister should have addressed the issue of low pay in the budget. I could outline instances in which people are working for very low wages merely to earn the respect which derives from employment. However, in many cases it is not worth their while.

The Minister appeared to be gaining some understanding of the difficulties of lower paid workers in the previous budget by raising the level of tax-free income from £70 to £100. However, he seems to have slipped back to his old philosophy in this budget, raising the level of tax-free income by a mere £10 to £110 per week. Fine Gael's proposal that no tax should be paid on incomes up to £170 per week, the equivalent of the pay received for a 39 hour week at the minimum wage rate of £4.40 per hour, is very reasonable. The Minister could have taken money away from the top level of society and targeted it at this very vulnerable sector. The ESRI report estimated that in the region of 163,000 people would substantially gain from the minimum wage provision outlined by Fine Gael.

It seems ludicrous that the Government proposes to tax all income over £110 per week when the minimum wage, due to be introduced in April, will equate to £170. It is clear that the Government does not have any real understanding of the need to redress social exclusion, a belief which is also evidenced by small social welfare increases and the Government's failure to increase personal social welfare payments to £100 per week. Low paid workers were not catered for in the budget and that will affect many industries in rural Ireland which are barely surviving. It will also affect the tourism industry and others in which workers traditionally receive lower pay.

I want to refer to the credit union proposals. The credit union people are becoming increasingly frustrated. It is ironic that the Taoiseach has agreed to meet them next week when the Minister has not met them. The Minister understands tactics very well on the football field. I have often discussed with him tactics and their failure, particularly in regard to his own county in the last all-Ireland final. The Minister did not learn from my good friend Mick O'Dwyer's mistake in that instance. The Minister should have met the representatives of the credit unions and diffused the situation. I believe the Minister probably regrets that he did not meet them although I doubt he would admit that publicly. The Minister's position is somewhat undermined by the fact that the Taoiseach has agreed to meet credit union representatives next week. I would not be at all surprised if the Taoiseach were to accede to their requests, namely, that credit unions would retain their corporation tax exemption; that DIRT on deposits would be applied at a rate of 20%; that the first £375 dividend would be tax free and that the next £375 would be taxed at 20%; and that dividends over £750 would lose any tax free exemption. Those are reasonable requests.

The Minister referred to the Commission and DG IV. He stated the existing taxation regime in respect of credit unions has triggered a complaint to the Commission and that any legislative initiative taken at this stage could potentially aggravate the position. The complaint to which the Minister referred was made by the Irish Mortgage and Savings Association, IMSA, which followed a similar complaint from the Irish Bankers Federation which the directorate found to be unwarranted. The Minister may not be aware that DG IV met with the IMSA in December and asked it to submit information which has not yet been submitted in spite of repeated requests. I may be wrong but I believe that the IMSA will not submit the information and that DG IV will dismiss its complaint in the near future. When the Minister receives that clearance from DG IV, I hope he will not make any more spurious excuses to prevent implementation of the recommendations of the working group which he established. The Minister made a promising start last year as regards profit and gain sharing. However, he does not seem to have continued that in this budget. I have often emphasised the importance of encouraging positive employee involvement by new and imaginative means. I remind the House that Deputy John Bruton, when he was Minister for Finance in 1996, introduced incentives for employees to become involved in profit sharing and shareholding. This was a creative measure for its time and should have led to further development in the area. The Minister for Finance responded positively last year by introducing provisions for save-as-you-earn share ownership schemes. While the practical application of these provisions took some time, they have made extra options available to companies. However, these do not meet the needs of many unquoted companies in the private and public sectors. It was expected that the range of options would be expanded in this Bill.

A special tax regime for profit sharing, employee shared ownership, gain sharing and related schemes is based on the belief that it is beneficial to encourage the development of pay systems to better reflect performance. These schemes assist the identification of employees with the place where they work. They provide an opportunity for remuneration in relation to performance, thus reducing the impact of overheads and fixed costs on competitiveness. The new Programme for Prosperity and Fairness contains a proposal to investigate this area and a commitment to explore ways of encouraging more profit and gain sharing in companies. The Minister should establish a task force to do this. This area will be important.

Another area about which I am concerned is the film industry. When the Minister for Arts, Heritage, Gaeltacht and the Islands, Deputy de Valera, launched a strategy for the film industry on 15 December, she committed the Government to fully implementing the recommendations of the Kilkenny report. She stated that film will be a central plank in the Government's industrial policy. One of the principal recommendations of the Kilkenny report was that section 481 should be extended for another seven years, with 100% tax relief for films with budgets under £4 million. However, the Finance Bill extends it for five years and maintains the relief at 80%. The uncertainty while the Government dithered for more than 12 months about whether it would renew the incentive and for how long had a negative impact on the industry. Although definite figures are not available yet, it is estimated that there was a 50% reduction in the value of productions last year. I know this from the Kerry Screen Commission which found it difficult to attract productions to Kerry.

I will put down an amendment to this Bill on Committee Stage. Perhaps the Minister will consider increasing tax relief under section 481 to 100% for films with budgets under £4 million. If this is not possible, the industry should be compensated in part by raising tax relief from 85% to 87% to allow for the fall in the top rate of tax and the post-production levy.

On 1 December last the Minister made his Budget Statement and today he presented the Finance Bill to the House. Given all that has happened since 1 December and what we now know of what happened before that, it is astonishing that the Minister is still in office. The past few months have been an abject lesson in the use and abuse of power. The Minister has shamelessly used power in the interests of one class and abused it by brazenly ignoring the few safeguards the State has to prevent Ministers from doing what he did. The Minister has occasionally been hopelessly incompetent and laughably irrelevant. However, the Minister will have the last laugh because this Bill contains all the elements which made the budget so objectionable. Despite all the bleating from Fianna Fáil backbenchers, the Minister will be able to take off to Cheltenham in March with his head held high, safe and sure in the knowledge that he has done the business for the people who matter to him most.

The budget was unfair, divisive and reckless. Never before has any Minister for Finance sought to redistribute wealth so decisively in favour of the better off. Never before has any Minister for Finance sought to appropriate to one class the benefits which should have accrued to all. I will return to the row about individualisation later but far more important was the deliberate decision of the Minister to dole out the benefits of economic growth to those who need it least.

The Minister was in a unique position – there were no hard choices to be made. He could easily have introduced a reasonably fair budget which would have kept everyone happy, as well as laying the foundations for a successor agreement to Partnership 2000. However, the Minister deliberately decided not to do that. He deliberately decided to do the business for the better off. The punters in Cheltenham will have hundreds of pounds extra to spend while social welfare recipients will get little more than the price of a pint – less when the local authority claws it back in increased rent. One or two examples hammer this point home. A married couple with a combined household income of £50,000 will be better off by £2,444 per annum as a result of the budget. A clerical officer in the Civil Service will be £424 better off regardless of whether he or she is married. Two clerical officers with a joint income of £28,000 will be better off by £684. It is easy to condemn the budget in terms of extremes, which would probably be a mistake. It is not only the poor who have done badly out of the budget. The vast majority of people, taxpayers and non-taxpayers, have done badly as a result of the choices made by the Minister.

In the 1999 budget, the Minister introduced a system of tax credits. This might easily have been forgotten as all the arguments since have been about tax reductions. The advantage of tax credits is that they make it possible to reduce tax in a manifestly fair manner by giving the same cash benefit to all taxpayers. The total cost of the Minister's tax package is about £1,200 million. Last autumn I asked the Department of Finance to cost a reduction in tax across the board of £750 per annum. They told me this would cost £1,163 million. I rejected the figures as too high and in our pre-budget presentation we opted for a lower credit. For the sake of comparison, it is useful to look at what the Minister might have done for roughly the same cost as the package he is now introducing. The package we proposed in November would have taken 251,200 people out of the tax net altogether. It would have taken the great majority of people earning less than the national minimum wage out of the tax net. It would have put an additional £15 per week into the pockets of virtually all taxpayers. Instead the Minister did something totally different. His package will take just 70,000 out of the tax net. Some 200,000 people earning less than £4.40 an hour are still paying income tax. Only a small minority of people are better off than they would have been had the Minister done the right thing. The important point is that some of these people are significantly better off than they might otherwise have been.

We are constantly told these days that there is no difference between the political parties, that we are all the same. I wish the people who say these things would look at the facts. The difference between these two sets of proposals is clear and stark. Let me repeat the central fact. Some 200,000 people who will pay income tax next year would not do so if we had our way. This is a stark difference by any standards. It is the difference between doing the right thing by the Irish people as a whole and doing the right thing for a small minority, many of whom would happily forego the Minister's largesse. I said earlier that the Minister's package is too expensive, that he gave away too much. I am on record in this House and elsewhere as saying so and I repeat that I believe there is not unlimited scope for reductions in income tax, indeed for reductions in tax generally.

For years we have tolerated poor public services. Indeed, given the level of resources available we had very little choice. Teachers have taught and children have been taught in classes which were often too big and without the equipment and resources which were routinely available in other countries. Our local authority services are under-funded, our health service is in crisis and our infrastructure is paid for by other people. Now, for the first time, we can change all that because we have the money. The only ques tion is, do we have the political will to use the money in that way? We have a straightforward choice. We can channel our new-found wealth into more foreign holidays, more meals out and more private consumption or we can use it to improve the services which we all use.

Two main issues arose out of the tax changes announced on budget day and since modified by the Minister. The first was low pay and the second was individualisation and all that goes with that. Perhaps I should start by saying what I mean by low pay. I mean everyone earning less than the average industrial wage of approximately £17,500. This amounts to approximately 60% of all income earners. I suppose the term "low pay" is inaccurate and gives a wrong impression in that it suggests we are talking about a minority of people. We are not, we are talking about a majority of people. The budget ignored the needs of average workers. The facts are incontrovertible. One need only flick through the example sheets appended to the Minister's speech to see the effect of the budget day changes. Since then the Minister has engaged in a bit of what he euphemistically refers to as rebalancing. It is worth having a look at what he has done.

One of the first effects of the budget day changes was to bring about the near collapse of the partnership talks. SIPTU pulled out of the talks and refused to go back until it got a commitment to a better deal for those on low pay. As we now know, the Minister has, in effect, refused to change his tax package. Instead he obliged his colleague, the Minister for Social, Community and Family Affairs, to take some of the hit. The PRSI exemption will be extended to £200 per week provided the individual concerned is earning less than £200 per week. There are two major problems with this. First, it creates a further poverty trap within the system. It has been common cause in this House and elsewhere that we should try to reduce the poverty traps within the system. In fairness, there has been a good deal of progress on the part of all Governments in recent years in this regard. The Minister's proposal deliberately creates a further trap for reasons of pure expediency. Once one exceeds £200 per week, one pays PRSI on all but the first £100 of income. The result is that someone earning just over £200 per week is worse off than someone earning just less than that. Needless to say, I appreciate the motivation behind the proposal, but we should be very slow to create this sort of anomaly. The same argument applies with even greater persuasive force to the levy exemption threshold. In this instance the rap is deeper and the resulting disincentive is greater. The more we increase the threshold, the greater the trap when it becomes payable.

Of greater importance is the principle involved in exempting people from PRSI as a means of reducing the cumulative burden of income tax and PRSI. For years PRSI was effectively just another tax and seen as such by many workers. For many years there was no fund simply because the take from PRSI did not cover the social welfare benefits which were paid out of the fund. However, all that has now changed and I believe we must radically reassess our attitude to the PRSI fund. Two years ago the fund was in surplus for the first time. The Estimates published prior to the budget projected a likely surplus of almost £600 million this year. The importance of this development appears to have been lost on many commentators. This means in effect that we can afford to greatly increase the level of benefit or the range of cover without increasing taxes or reducing expenditure elsewhere. For the first time we have an insurance fund worthy of the title. For the first time we have choices in how we plan for the future or how we use resources in the present. However, the Minister is not doing this. He is, in effect, raiding the fund in order to get himself out of a political mess. It would be perfectly fair to reduce the take in PRSI if we were satisfied we have the resources to do what we want to do, but this is not what the Minister has done, it is not the judgment he has made. The Minister, Deputy McCreevy, has acted out of political expediency in order to save face and bail himself out of a hole which he created for himself.

The issue of individualisation is important and deserves a good deal of debate and study, perhaps more considered debate and study than it got during December. In a moment I want to look at what the Minister claims he was trying to do, but first I want to say a few words about what he actually did. The end result is that there are now at least four different types of married couples for income tax purposes. There are married couples with two incomes earning more than £28,000 between them. For them individualisation is quite a useful little bonus, particularly if they are earning more than £34,000 in which case they can get the full benefit of the change. Second, there are married couples with two incomes earning less than £28,000 between them. For them the argument is largely academic in that they are not earning enough to benefit from the Minister's proposals. Third, there are married couples with one income, earning less than £28,000 where one partner stays at home to care for children or other relatives. Finally, most of the rest gain from neither proposal. These are mostly married couples with one income and no children. It requires no imagination to see that the changes have introduced a level of complication into the system which is difficult to understand and impossible to justify.

I want to deal with the £3,000 stay at home allowance. This measure is badly thought out. It was hastily introduced to assuage the Fianna Fáil backbenchers. It makes no sense. It will be difficult to police. I will wager any money with the Minister that it will not be on the Statute Book in five years' time. The Minister's own comments are the best possible commentary on the allowance. In a radio interview a few days after the budget he was asked why he came up with this idea. He said it was intended to rebalance the effect of individualisation. When he was asked why he wanted to rebalance the effect of individualisation he said that he personally did not want to rebalance it but that others did. For good measure, he went on to explain that the £3,000 allowance did not actually rebalance the individualisation anyway. In other words, it was and is a meaningless sop which will never meet its stated aim, not least because the Minister who introduced it did not, and still does not, want it to.

Needless to say, there is nothing wrong with providing additional support for those who are obliged not to work in order to look after elderly relatives or children, but the Minister has gone the wrong way about it. He should have abolished the means test for the carer's allowance and made additional direct payments towards child care. The stay at home allowance is an absurd hybrid, not least because it acts as a significant disincentive to work for some of the women that individualisation is meant to help.

Debate adjourned.