Amendments Nos. 3 and 10 essentially propose indexation. It would appear that Deputy Burton's amendment aims to increase the tax bands, exemption limits and tax credits by the projected increase in the consumer price index for 2005 over 2003, that is, by an estimated4.75%. It seems that Deputy Paul McGrath's amendment proposes that certain tax credits should be index-linked to inflation automatically each year before and in addition to any further personal tax changes that might be made in the annual budget.
The estimated full-year cost of the measure proposed by Deputy Burton is €460 million. On Deputy Paul McGrath's amendment, if we take the figure of 2.5%, representing the growth in the consumer price index for September 2004 over September 2003, we will note that the full-year cost of indexing the personal tax credits referred to in his amendment would be approximately €75 million in a full year and approximately €54 million in 2005.
As I indicated on Committee Stage, the Government could not accept an approach that seeks to impose indexation across a range of personal credits or across credits, bands and exemption limits as it could curtail the scope to target available resources at those areas where the greatest priority for attention has been identified. It is a prerogative of Government to focus on these areas. In budget 2005, this was achieved through the removal from the tax net of those earning the national minimum wage.
On Deputy Paul McGrath's amendment specifically, the Government could not accept an approach involving a kind of mandatory ear-marked tax expenditure that could limit the flexibility of any Government, including this one, in determining budgetary priorities, having regard to economic realities in any given year. I do not believe any Minister for Finance would wish to be so constrained.
On Deputy Burton's amendment, the actual percentage increases provided for in the budget's personal tax package were considerably more than indexation would have provided for in many instances. For example, the employee tax credit increased by 22% and the health levy threshold was increased by more than 12% for those on gross incomes of less than €400 per week. The age exemption limits were increased by 6.5%. The incapacitated child tax credit was doubled in value, the blind person's tax credit was increased by one quarter and the widowed person's tax credit was increased by one third.
Available resources in budget 2005 were employed primarily with the lower-paid and the elderly in mind. Accordingly, the basic personal credit and the employee credit, that is, the PAYE credit, were increased to fully exempt the current minimum wage from taxation. The age exemption limits for those aged 65 and over increased for the fourth year in a row. To the extent that money was available for other measures, it was used to widen the standard rate band, thereby exempting certain income earners from paying tax at the top rate.
Rather than adopting a mechanical approach involving index linking, as suggested, it is better to adopt a far more flexible approach characterised by its focus on the less well-off. One could use whatever model one liked and be open to making whatever decisions one wanted to make, but one should note that the approach we took had the necessary focus. While one would always like to do more, one works within certain budgetary parameters. Were we to accept Deputy Burton's proposal, some €460 million would be deducted from the tax package straight away and one would not be able to focus, by way of providing extra reliefs, on the lower-paid to improve their circumstances.
All taxpayers have benefited over the past eight budgets and there have been significant reductions in average tax rates right across the board. For example, the most recent data available from the OECD show that in 2003, for a single person on the average production wage, Ireland had the lowest tax wedge in the European Union and one of the lowest among members of the OECD. For the average production worker who is married with two children with a carer in the home, Ireland now has the lowest tax wedge of all members of the OECD. The OECD data show that the tax wedge for such workers has fallen more sharply in Ireland than in any other OECD country, reflecting the progress made in this area.
The approach in budget 2005 is fully in line with the commitment in the agreed programme for Government to deliver further real improvements to pensioners and people on low incomes and to achieve, over the next five years, a position in which all those on the national minimum wage can be removed from the tax net. As I stated on Committee Stage, the Government is committed to sustaining growth, strengthening and maintaining the competitive position of the economy and maintaining full employment. Responsible and targeted fiscal policies are central to the achievement of these aims. The proposal outlined by the Deputies would be somewhat inconsistent with that approach and therefore I cannot accept the amendments.
On Members' comments on previous budgets, my predecessor was not able to do what people would have liked because of an international economic downturn. He has been criticised for it, yet Ireland emerged from that downturn better than anywhere else. In the 2001 budget, there was a very large increase, to €28,000, in the standard rate band for a single person.
Of course tax reliefs provide benefits to those who avail of them. This is why so many avail of mortgage interest relief, for example. That so many in our society want to own their own homes has led to the provision of this relief. The vast majority of the reliefs are directed towards ordinary people. They include housing, medical and medical insurance reliefs, for example, which we associate with normal tax relief systems and provisions. Some people paid no tax under a Labour Minister for Finance — there is a survey to that effect. This is not a result of new policies introduced by my predecessor, as was suggested. This has been a function of the tax system for some time. I made it clear in my first budget speech that those using this group of reliefs should realise that the concept of unlimited or unrestricted reliefs is no longer viable or acceptable to the tax-paying public in the present economic circumstances. I want to ensure that everyone contributes appropriately to the State.
I am not complacent about that and I want to review it comprehensively. People might take the view that I should consider this or that, and I want to take a holistic view. I have made the point, which others say they acknowledge but sometimes omit from their arguments, that when people avail of tax reliefs it provides for those who have a higher disposable income than others, in many instances. One must find the balance between the benefit such reliefs provide to the individual taxpayer and the benefit to the wider community of the increased economic activity provided by those incentivised reliefs. No one disputes that there are many instances of economic activity in certain parts of the country which would not have that rate of development without those incentives.
It is timely, given the present rate of economic and social development, that we should review all that and see where we can change, apart from property or area-based reliefs. This review must consider that more people are at work than ever before, we have more buoyant revenues, the cost of providing services increases year on year, apart from further service development, we have a major infrastructural modernisation programme and a large public capital programme.
I was at a long ECOFIN meeting this week at which the Stability and Growth Pact was reviewed. Some of the countries represented are in a far tighter financial position than we are. One Minister talked about his country's capital programme growing to 2.25% of GDP. Ours was 4.7% last year and we hope to get it to 5%, which is double the EU average. We remain in one of the best positions regarding the rules of the Stability and Growth Pact.
That is a digression. Even against that positive background we cannot provide everything from public funds. There will always be a role for private capital, and we must ensure we direct that capital to the areas of activity from which we will derive a communal benefit. No one in the House has ever opposed tax reliefs in principle because to do so would put oneself off-side with the majority who avail of these reliefs. Ordinary workers and taxpayers avail of relief on mortgage interest, VHI contributions and so on.
We need an informed and balanced debate. The purpose of the review is to ensure greater equity in the system and to explain the benefits derived from reliefs. It may be good political rhetoric and feed the sense of controversy to say the Government protects its friends. References to the golden circle and that sort of nonsense may be eye-catching and generate a few lines in the newspapers, but I do not know who these people are. I am a public representative who, like every other Member, wants to ensure we reward risk and that all our people get jobs at home commensurate with their abilities, that we can redress our infrastructural deficit, deal with these issues and provide more money for public services.
Deputy Burton suggested we are committed to low taxes as if that is a bad thing. I am in favour of low tax for the simple reason that it brings in more money for the State. I am a pragmatist. The more people at work, the higher the contribution to the State. It was suggested that it was bad to cut capital gains tax to 20%. Deputy Burton should look at the figures: in 1997 it yielded €158 million and last year it was in the region of €1,500 million. If the Deputy is committed to developing public services, as we all are, to develop our health service, roads system and local authority and public housing, why is she so excited when capital gains tax goes up by a factor of ten? Will she say she does not agree and that it should be up to 50% or 70%, to give the impression that if it was brought that high one would have three times more than the €1,500 million? We all know that would not be the case. Let us stop fooling ourselves with this nonsense and deal with the issues.
The Opposition has a point on the penalisation of workers. I do not claim to be the winner on every front, but it is on a sticky wicket on this issue. The best way to measure the impact of the tax and PRSI systems over years is to calculate deductions as a percentage of a constant real income. That is an income which has just kept pace with inflation. One arrives at this by taking what a person earned in 1995, adding inflation to see what that person earns now and seeing what percentage of his or her income was paid on tax and PRSI then and now. That is a good way to indicate whether the burden has become lighter or heavier.
For example, if a single person, taxed under the PAYE system and on the higher rate of PRSI, earning £30,000 in 1995-96, which is equivalent to €38,092, received pay rises in line with inflation, he or she would earn approximately €50,193 in this tax year. The deductions as a percentage of income would have adjusted over time as a result of the budget changes. In 1995, on that salary, the person paid, under PAYE and the higher rate of PRSI, 42.12% in tax before this Administration came into office. In 2005 the same person, on the equivalent salary, increased in line with inflation only, would earn €50,193 and pay 28.49% on PAYE and the higher rate of PRSI. That is a fact.
A person earning £100,000 in 1995 would have paid 47.8% and now pays 39.45% on the equivalent earnings. If a person earned £12,000 in 1995, which is equivalent to €15,237, he or she paid 25.82% in PAYE and higher rate of PRSI. Allowing for inflation, that person would earn €20,077 today, and pay €8.49% on a low wage. Quite rightly, that person pays a low tax but the same person paid a quarter of his or her income ten years ago. Someone earning £20,000 in 1995-96 paid 37.43% in tax. In today's terms that person would earn €33,462 and the percentage of PAYE and higher rate PRSI would be 19.37%.
These examples are for people on less than average incomes, less than the minimum wage, average incomes and above. People will feel confident that there is a genuine attempt to bring equity to the tax system, even though they may argue whether it is sufficiently equitable. The progression is consistent with an equitable sharing of the tax burden. The fact that there are 640,000 more people in the tax system is one of the reasons this is the case. This involves promoting an enterprise system that rewards risk.
We must be careful to maintain a balance. By examining how things operate in isolation from how they interact in the wider economic system, despite our genuine belief to the contrary, we must not end up in a situation where we slow the rate of economic activity which, in turn, will deprive us of the number of people active in the labour force who are generating wealth and making a contribution to the tax system. That is always a balancing act, not a scientific certainty. In the short time Deputy Burton has been finance spokesperson, she has held different views from me on what the correct model should be. I do not mind discussing the various models, but let us not subscribe to the idea that some of us have each taxpayer's interest at heart while others are only interested in 400 or 2,000 income tax earners. I also live in the community and I am proud to represent people of all income levels.
We need to inform ourselves as to the nature of the model, how it is working and how it might be improved. I am not saying that what the Deputy said is wrong. From the point of view of the budgetary parameters within which the Government must work and discharge its responsibility, these are the explanations I am providing. Under any objective analysis, they signify real improvements in terms of lightening the burden on ordinary workers.
Looking at the 2004 Estimates, the top 2% of people account for 28% of taxes paid, the top 4% account for 42%, the top 8% account for 55% and the top 13% account for 66%. In other words, almost 80% of tax is accounted for by the top 22% of people. The Deputy asked about the impact on student grants and so on. One of the problems in this regard is the decision made by the Labour Party in government when, in an attempt to hold the middle class vote it got in the 1992 election, it abolished fees regardless of income. I do not know what the social progression of this was. Once a decision is taken, it is very difficult to reverse it.
