Before the Adjournment I was dealing with the whole issue of individualisation and the claims which the Minister made for the measures he proposed on budget day and which he is implementing in the Finance Bill today and I dealt with the £3,000 tax free allowance.
One of the primary reasons the Minister gave for the proposals he made was that it allowed him to take 83% of taxpayers out of the top rate of tax. The Minister knows this policy is not as relevant as it would have been a couple of years ago, for reasons which, on the face of it, sound technical but which are nonetheless important. In the first case the introduction of tax credits means, of necessity, that a higher percentage of taxpayers will pay tax at the higher rate of tax, since much of the tax which those people pay at the standard rate is actually refunded. For obvious reasons this point is lost on the general public who cannot be expected to follow such points of detail but the Minister understands it only too well. It is now the stated objective of Government and the social partners to take nearly 300,000 additional people out of the income tax net. There are already hundreds of thousands of income earners who do not pay tax at all and these people should be factored in when calculating the percentage of income earners who pay tax at the higher rate. Because they are factored out of the equation the overall picture given by the simple presentation of statistics which the Minister gives is misleading. My party and I believe that the higher rate of income tax kicks in at a level of income which is too low but structural changes in the tax system mean we have to have a fresh look at how we go about this. More importantly, we should be very wary of the distorted presentation of statistics which is intended to sell an unpopular measure which primarily benefits better off DINKIES. In his statement the Minister concludes with the interesting comment and observation that ultimately in a democratic society this boils down to electoral choice. This is a mantra which we have heard frequently from the Minister. He claims, with some justification, that he has a democratic mandate to reduce tax in the way he has done, namely, by reducing tax rates. How can he possibly claim he has a mandate for this measure and that it is a matter of democratic or electoral choice that he wants to individualise the standard rate band?
For goodness sake, there has not been any debate on this issue. The tax strategy group set up by the Fianna Fáil-Labour Government in 1993 hardly debated it. So far as we can tell from the minutes of the meetings, it debated it at one meeting and it was dismissed as improbable and as something that was unlikely to get a significant basis of public support and the meeting moved on to the next issue. All the indications are that this was a big idea which the Minister arrived at all by himself without going through even the normal process of Government. So far as we know, he bounced it off his ministerial colleagues on either budget day or the previous day. To suggest there is anything resembling an electoral mandate for it, if that is what the Minister intended to suggest yesterday, is clearly wrong. If he is suggesting he can get a mandate in retrospect for that sort of move his understanding of democracy is different from mine.
I was interested to hear the comments of Commissioner Solbes in relation to the inflationary risks. This is pertinent in light of the new inflation figures published in the past week. I have been slow to push this button although I have been urged to do so on a number of occasions. The normal practice of the Opposition is to push that button whenever it is there to be pushed. I have been slow to do it largely because I accept much of the analysis which the Minister offers. I accept that much of our inflation is imported and is as a result of factors beyond our control. I have to agree with the Minister when I read in the Irish Independent this morning his scepticism in relation to the advice he gets from international organisations. From contacts which I have had with individuals in the IMF or in the OECD I sometimes think there are economists on the top floors of some of these buildings who are only waiting to be proved right. To that extent I have some sympathy with where the Minister is coming from. There is no doubt but that the open nature of the Irish economy means that, to use the Minister's words, the normal rules of economics do not apply with the same force here. Having said that, there are distinct danger signals and we would be foolish not to pay some attention to them. It is unquestionably the case that asset price inflation is beyond control, at this stage. It is unquestionably the case that the price of services is spiralling to a worrying extent. We are now talking about 5% or 5.5% year on year increases in the price of services. That is worrying.
There is no doubt but that domestic demand, the one part we can hope to control, is also increasing. This is clear from the credit figures and a whole range of indicators. The danger signs are there. Equally, and this may be most important from a political point of view, there is no doubt that in reducing tax by the measure and in the way he did, the Minister has sent a signal which is unhelpful and has injected into the economy money which unquestionably will stoke up domestic demand further and which can only lead to further inflation. Specifically by putting £500 million too much as spare cash, largely into the pockets of people who are better off, the Minister has stoked domestic demand unnecessarily and recklessly. That is something we may rue as the next year unfolds. I share some of the Minister's basic analysis but he is playing this game far too hard. He has done things recently which are reck less and he needs to keep a close watch on this part of the game.
I do not wish to say a great deal at this stage about the Programme for Prosperity and Fairness since there will be statements on that issue tomorrow but I shall refer to two issues which leap off the pages in terms of the macro-economic argument. On taxation, it is now the stated objective of the social partners and of Government to take people on the minimum wage out of the income tax net. I do not know what this means. Are we being told explicitly that this will be done in the next two and three quarter years? Are we being told this is the sole tax policy of the Government over the next two and three quarter years or, as I suspect, that on the one hand some progress will be made, probably by way of tax credits on taking those on the minimum wage out of the tax net? The Minister will at the same time and at enormous expense look to pursue his own agenda which is to reduce the tax rates further. If the Minister seeks to reduce the tax rates, to take people on the minimum wage out of the income tax net, and at the same time seeks to pursue his individualisation project further, possibly to the end he outlined in the budget, he will be faced with an enormous reduction in income tax. He is certainly facing a reduction of far more than £1.5 billion over the next three budgets, assuming he is in office to introduce three more budgets. The Minister is facing a tax reduction of at least £2.5 billion. This is too much. Apart from the equity considerations of the way used to reduce tax, the economy cannot afford that sort of stimulus.
How will the minimum wage relate to the wage increases which are part of the programme? This will have an impact on employment over the next few years. Will the national minimum wage become effective first, to be followed immediately by an increase of 5.5%, or can employers increase salaries up to the minimum wage level and claim that this also comprises the 5.5% increase? For low paid workers this is a significant question which could involve a large difference in the salary they take home. My party leader will take part tomorrow in the statements on the programme.
The Bill confirms the reductions in capital acquisitions tax which the Minister announced on budget day. The question of family homes presents a real problem with regard to CAT, whether they are owned by married couples, elderly siblings, gay couples or people who have been living in the same house for quite some time. Some time ago I indicated to the Minister that we would support his efforts to deal with that problem. By and large, the measures he proposes are worthy of support. However, I enter two caveats. First, there will be difficulty in policing this measure. I will be interested, on Committee Stage, to tease out the mechanisms for ensuring that people have been living in a house before the death of the person who makes the bequest and that they continue to live there for a period of time thereafter. Second, I do not support the taking of family homes out of the tax net altogether. I would not have given a complete exemption. My party might have reduced the value of the house, for tax purposes, by 60% or 70%. I support the general thrust of this measure although I feel it is a little too generous.
I do not support the remainder of the measures the Minister has taken. During the PAYE workers' marches and the great debates about tax reform in the late 1970s and early 1980s, tax reform was synonymous with broadening the tax base. We spoke of increasing capital taxes, property taxes, taxes on corporations and so on. Twenty years later the process has gone into reverse. I do not blame the Minister for this; previous Governments also played their part in the process. Nevertheless, the tax base has contracted dramatically in the past four or five years. Corporation tax is to be reduced to the basic minimum of 12.5%, the Minister has reduced the level of capital gains tax to 20% and he proposes to minimise the effectiveness of capital acquisitions tax. We have abolished service charges and residential property tax. We have no other property tax and no political prospect of introducing one. The only direct tax remaining is income tax. This causes us little difficulty at the moment because income tax and indirect taxes are giving high yields, but in future years we may regret that we have so precipitously reduced the tax base.
The Minister will argue that by reducing the rate of capital gains tax he has increased the take. I do not accept that argument, but I will be fair and say that the jury is out on the matter. Because economic activity is at an unprecedented height, because people are transferring income into capital gains and because of one-off gains such as the privatisation of Telecom Éireann, one could claim that the take from CGT has increased. It is not clear that the reduction in the rate of CGT has stimulated activity or simply brought people into the net who were previously avoiding tax. One cannot argue that CAT – and certainly not inheritance tax – is demand led. By reducing the tax one does not encourage people to die or to leave bequests in a particular way. A son or daughter may inherit even a modest family home in Dublin which may be worth up to £350,000 and a further £300,000 without paying tax. Such a person may inherit unearned income of £600,000 without paying a penny in tax whereas someone who is earning £8,000 or £9,000 must pay 22p in the pound on every extra pound he or she earns. I cannot see the equity in that. Equity dictates that earned and unearned income should be taxed at the same rate and that is not happening.
A number of issues were avoided in the budget and are not being dealt with now. The Minister has suggested that a measure will be introduced next week to address the issue of ESOPs and ESOTs. My party will support share option schemes provided they are intended as a means of encouraging participation and are widely available to all employees in a particular place of employment. We will not support measures which are intended to allow employers to select favourite employees – perhaps high fliers in the IT sector – and give them share options as a means of retaining them. If employers wish to give favoured employees particularly favourable terms of employment, that is their entitlement and most have sufficiently deep pockets to do so. If employers wish to effect a broad structural change within their companies and encourage all or most employees to participate financially and to have a stake in the company, we will support measures to facilitate that. In the past, in this jurisdiction and in the UK, share option schemes have been abused as a means of tax avoidance. That is something against which we must guard. However, in our current economic circumstances we can afford to take some risks in this area and we would broadly support the Minister in doing that.
If we have learned nothing else from the political events of last December, we must surely have learned that we must look again at our way of introducing budgets. The Estimates process, in particular, is nonsensical. It is absurd that Ministers and accounting officers are accountable to the House only when all the money, or most of it, has been spent. We should move to the system used by almost every other parliament in Europe where the projects and plans of each Department are accounted for in advance. Departments should come to committees of Dáil Éireann to ask for money to spend on various projects so that when ministerial or governmental decisions are made they can be read in that light. Our tradition of secrecy is one we have borrowed from the British. It may have served us well 20, 30 or 40 years ago but it no longer does so. The only justification for budgetary secrecy relates to excise duty or major tax changes. Ironically, the only change in excise duty in this year's budget – the 50p increase on cigarettes – was signalled well in advance so that people who wished to hoard cigarettes could have done so. I am not aware of evidence of much hoarding. In so far as one could have justified secrecy, that was the one issue on which it could have been justified but the Minister chose to fly the kite in advance. Clearly a major proposal such as individualisation should not have been sprung on the Cabinet, the Dáil, the Fianna Fáil parliamentary party or an unsuspecting public. There should have been genuine debate in advance. The Minister had nothing to fear from such a debate. It would have been good for the House and the Government to be able to argue the merits of the Minister's case in advance of its introduction.
On the budgetary process I put down a marker in relation to multi-annual budgeting which has become a perennial issue raised at the end of budget speeches, but there is no doubt that it has run into the sand at this stage. Two years ago the Government undertook to introduce disaggregated Estimates for particular Departments, but this was postponed in light of the talks on a successor to Partnership 2000. I wager that we will not witness it as long as the Government is in power. Is the Minister still committed to multi-annual budgeting and, if so, when will it commence? It is an important part of the reform of Civil Service management and, if used properly, will add to the transparency and accountability of the budgetary process which is badly needed.
I started my contribution yesterday evening by making some personal comments about the Minister. In a sense they were justified principally because it was very much his budget. Many of the central tenets, particularly those which got him into trouble, were his. He holds responsibility. I look forward to debating these matters in greater detail on Committee Stage next week.