Vol. 628 No. 1
53 Mr. Bruton asked the Minister for Finance if the tax targets set out in the Programme for Government 2002 continue to shape Government policy; and if he has satisfied himself that current tax policy is fair to ordinary families. [39575/06]
The answer to the Deputy's questions is yes. The Government's approach to tax policy is set out in An Agreed Programme for Government and in recent budgets and Finance Bills. In addition, the partnership agreement, Towards 2016, states the Government is committed to a taxation policy designed to maintain and strengthen the competitive position of the economy, foster improvements in productive capacity, economic and social development, and equity, while maintaining a sound fiscal stance.
With regard to the fairness of current tax policy, improvements in the tax system since 1997 have meant more than 776,000 income earners are out of the tax net compared with approximately 380,000 ten years ago. Those on the minimum wage are exempt from tax. In addition, the tax burden for the married one-earner on average earnings has fallen from 20% to 8% under our watch. The married one-earner on average earnings has seen his or her annual tax bill fall by almost €1,500 even though his or her annual gross income has risen by over €12,000 in that time. Even for those whose tax is calculated at 42%, the effect of the new fairer tax credit system brought in by the Government parties in 1999, combined with the other income tax changes to rates and bands, means that four fifths of earners pay no more than one fifth of their earnings in income tax.
Rates under most tax heads have reduced since 1997. At the same time, the tax yield to the State has continued to rise due to the extra economic activity accompanying this policy. In some cases, such as capital gains tax and corporation tax, the tax yield increased substantially after rates were cut. This extra tax revenue has been used, among other things, to reduce tax on the ordinary PAYE worker, remove lower income earners from the tax net altogether and fund the provision of increased public services. The Government's tax policies have been designed to promote the competitiveness of the economy, support enterprise and reward work. The practically full employment which the economy enjoys is tangible evidence of the success of these policies in delivering fairness and dignity to ordinary families.
I refer to the Government's tax targets. Over the past four years, total tax as a proportion of national income has increased. Far from being a low tax Government, this has been a high tax Government. It is even worse for families. The proportion of their personal income taken in tax has increased by seven percentage points to 38.5%. The Minister has the unusual distinction of being the first Minister for Finance to have more people paying tax at the 42% rate than at the 20% rate, which is extraordinary. The reason is that a single person on 80% of average earnings is taxed at 42%, the same rate that applies to a millionaire. Where stands the commitment in the programme for Government to ensure 80% of all earners pay tax at the standard rate? Has it been abandoned or will the Government progress the reforms to deliver it, instead of regressing, which has been the case for the past four years?
The tax strategy group and the Revenue Commissioners independently conducted an exercise, which found that even for those whose tax is calculated at 42%, the effect of the new fairer tax credit system brought in by the Government in 1999, combined with the other income tax changes to rates and bands, means that four fifths of earners pay no more than one fifth of their earnings in income tax. The tax credit is deducted from the gross liability to compute the effective rate of tax and, therefore, four fifths of income earners pay an effective rate of tax of 20% or less. It was different under the old allowance system. The tax free allowance was subtracted from the top rate of tax to prevent people from entering the top rate more easily. Under the fairer tax credit system, which creates the net liability once the gross liability is computed, four fifths of people pay an effective rate of tax of 20% or less. The effective position if that if a worker is earning €50,000 per year, he or she pays €10,000 in tax or at a tax rate of 20% or less.
That is a new interpretation. It is a good try on the Minister's part. He should read his own Department's Budget Statement last year.
That is Clara economics.
Let us deal with the facts. The Deputies can play around all they like. Revenue has confirmed that of the 32% of earners who pay tax at the 42% rate, the tax liability of 11% of them is more than offset by the tax credit. Their effective tax rate, therefore, is 20%.
That does not make sense. Talk about the devil reciting scripture.
Is it a fact? The tax strategy group——
It is very clear——
Excuse me.
The Minister is asking the question and I was going to volunteer an answer.
I am answering, not asking, the question.
The Minister is not answering the question.
Four fifths of income earners have effective tax rates of 20% or less. This has been confirmed by the Revenue Commissioners and the tax strategy group. It is annoying the Opposition that this is the fact.
Does the Minister agree that the commitment in the programme for Government made no reference to effective rates of tax, which have been produced like a rabbit out of a hat to pretend that something promised was not promised? That is the reality. The programme stated the Minister will ensure 80% of all earners pay only at the standard rate, without a mention of effective rates of tax. I am reminded of Animal Farm. The pigs who took control had a slogan, “Four legs good, two legs bad,” but when they decided that did not suit them, they changed it to, “Four legs good, two legs better,” because they were moving on two legs themselves. The Minister has adopted the same strategy and his advisers are changing the citation, like the sheep in Animal Farm, to effective tax rates. That is not the Minister’s commitment. He has not delivered on his promise and he stands indicted for failing to even attempt to deliver.
That is not true. The Deputy has suggested that everyone with a gross liability at the market rate pays all taxes at that rate, which he knows is untrue. The Revenue Commissioners——
I did not suggest that. I read the Minister's promise from the text.
Order.
I did not interrupt the Deputy. Through the tax strategy group mechanism, the Revenue Commissioners have independently brought forward information that, despite the Deputy's blather, confirms that 80% of income earners pay tax at rates of effectively 20% or less. The bottom line——
The Minister is introducing a new concept. It is not the concept in his promise.
I am not introducing a concept.
He is spinning.
When one speaks about tax, one discusses credits, bands and rates. If one asks an ordinary person on the street earning €50,000 per year with a tax liability of €10,000 about the rate of tax, he or she will say that it is 20%.
What if they do overtime?
It is 20% of that person's gross income. The logic of Deputy Bruton's position——
I am asking the Minister to honour the commitment he made in the programme for Government, not to create a new concept and target that he has not mentioned until today. The only reason it suits him to create the concept is because he has failed to honour his commitment to the people just as the Government failed to put children in classes of 20 pupils and to end to waiting lists. These bogus promises have been exposed.
More than 750,000 low income earners pay no income tax compared to less than 400,000 when we entered office. Ireland has the lowest tax burden on single persons on the average wage in the European Union and one of the lowest in the OECD. For a married couple with one earner, two children and average earnings, we have the lowest tax rate in the OECD. After inflation has been taken into account, a person on the average industrial wage——
We must proceed to the next question.
The Minister made false promises that have been exposed.
——has seen his or her take-home pay increase by more than 40%, approximately half of which is due to tax reductions.
We must proceed to Question No. 54.
Some 80% of income earners are paying at rates that are effectively 20% or less. These facts have been validated by the Revenue Commissioners.
The Minister's false promises have been exposed.
54 Ms Burton asked the Minister for Finance his views on the widespread use of avoidance mechanisms in respect of development land and stamp duty, particularly the use of licensing arrangements and the transfer of property via the sale or transfer of shares in a company; if his Department or the Revenue Commissioners have carried out an examination of the actual and potential loss of stamp duty revenue to the Government and the impact of stamp duty avoidance mechanisms on house purchasers and others acquiring property; the estimated cost of avoidance mechanisms; the number of deals in which avoidance mechanisms are involved; and if he will make a statement on the matter. [39326/06]
The Revenue Commissioners have been examining the operations of stamp duty and developers and have undertaken a survey of a number of developers to gather more precise information. I will decide what to do when I receive the observations of the Revenue Commissioners. Stamp duty applies when a title to property is legally conveyed. A legal instrument must convey the title, but such an instrument is not created when a licence is given.
Regarding the conveyance of shares in a company, it has long been the position that conveyances are charged at 1% of the value of the shares irrespective of the assets of the company. There is no provision in law for examining the underlying assets of the company. Legally, a company is a separate legal person to its shareowners. I would be reluctant to overturn that distinction lightly and to make the operation of stamp duty law uncertain or complex in terms of the exchange of shares and company transfers generally because they are a normal part of commercial life.
According to the pre-budget outlook, first-time buyers will pay €70 million in stamp duty. Does the Minister know how difficult it is for them to understand how he can endorse in the House a situation in which, one month ago, a deal on land transfers to the amount of approximately €400 million in respect of the Irish Glass Bottle site was made? It involved a share transfer and attracted a 1% stamp duty rate. Had the Minister closed that avoidance mechanism, €30 million would have been paid in stamp duty in a similar fashion as the stamp duty paid by first-time buyers of secondhand houses worth more than €317,000.
In the event of the Irish Glass Bottle site being developed as housing and apartments, which has been indicated, first-time buyers of new homes at that location will pay stamp duty if their homes cost more than €317,000. However, Fianna Fáil's friends in the building and development industry have two mechanisms for avoiding paying their fair share, namely, the licences to build and the transfer of shares.
I have raised this question with the Minister seven times since he entered office. Where is the review, why is it taking so long and what is the Minister afraid of in reforming these avoidance mechanisms? For first-time buyers, it is difficult to understand why they are caught for stamp duty when the big boys are not.
This year, Revenue is conducting a broad review of the construction industry. When it reports before the Finance Bill, we will see what it has to say about the situation.
Under the stamp duty code, a developer can obtain a licence from a landowner to build on that land without incurring a stamp duty charge at that stage of the venture. There is no duty on the licence, as the licence only confers on the developer a right to build on the land. Once the buildings, whether commercial or residential, are completed, the conveyances or transfers of such properties to purchasers are chargeable to stamp duty in the normal manner unless specific exemptions are available.
Due to the nature of stamp duty being primarily a tax on legal instruments under which the interest in the property passes, no stamp duty is payable on the legal instrument until the title passes. However, if the property is paid for by a developer in the normal way instead of via taking a licence to build on it, the situation would be reflected in the purchase price because there would be an up front cost to the developer.
In the other situation, which has been a feature for some time, developers get licences to build on land and sell the building to purchasers. In effect, the purchaser buys from the developer and the original landowner. I have asked the Revenue Commissioners to report to me to allow the full consideration of any issue that arises in respect of this matter prior to the Finance Bill 2007.
Does the Minister have figures on the amount of stamp duty avoided by these mechanisms, the number of such transactions and the amount involved? Does the Minister agree the situation is a scandal and that it is open to him to close these loopholes to ensure a sense of justice and equity between ordinary people buying family homes and big developers and builders, the type of people who go to all of Fianna Fáil's social functions? I cannot understand why the Minister could not take action to close the loopholes available to his friends in the building industry and introduce a level playing pitch.
The continual reference to personal friends is a joke. From the point of view of the person who grants a licence to a developer rather than making an outright sale of the lands concerned, the same amount of capital gains tax would arise as if there were such a sale.
We are discussing stamp duty.
Sub-sale relief has always existed in the stamp duty code and licensing arrangements with landowners have been a traditional way in which developers develop land. The arrangements involving powers of attorney are more recent, but in recent years and owing to prosperity, the proliferation of developments structured in this way has come to the notice of the Revenue Commissioners and such arrangements are being reviewed by them. I have asked them to let me know the outcome of their review and I will decide what action, if any, is required, bearing in mind the effect on the housing market and the cost to the Exchequer.
Does the Minister know the cost and the number of transactions?
I do not have a figure for the cost. The Revenue Commissioners are investigating the matter.
Question No. 55 withdrawn.
56 Mr. P. McGrath asked the Minister for Finance if he will direct the Revenue Commissioners to prepare, in co-operation with the Central Statistics Office, an accurate assessment of underclaimed tax reliefs by ordinary families in order that an informed policy can be framed to refund tax rightly due. [39576/06]
I refer the Deputy to the statements made by the chairman of the Revenue Commissioners, Mr. Frank Daly, to the Committee of Public Accounts when he appeared before it on 9 November 2006. In response to questions from the Chairman of the Committee of Public Accounts on the amount of money that may be owed to taxpayers and a suggestion that, in the case of PAYE taxpayers, large amounts are not owed in individual cases, Mr. Daly said Revenue had made a total of 485,000 repayments up to the end of October 2006, involving an amount of €353 million. He said this was the factual situation in respect of what was claimed and repaid and that it was difficult to speculate about what more might be reclaimable. Mr. Daly said he was reluctant to put a figure on what had not been claimed but repeated the figure of €353 million claimed to the end of October 2006 and gave the comparable figures for 2004 and 2003, which were €325 million and €295 million respectively. Mr. Daly suggested that to say almost the same amount remained unclaimed as had been repaid would be an overstatement but perhaps there is a further €100 million unclaimed.
The figures quoted by the chairman of the Revenue Commissioners clearly show that taxpayers are becoming more aware of their entitlements and, as a consequence, the number of repayment claims and the amounts being repaid are increasing year on year. During August, September and October this year Revenue ran an intense high-profile campaign to encourage taxpayers to claim the reliefs to which they are entitled. This campaign involved advertisements on radio, bus shelters, the DART and the Luas. There is also a continuing campaign involving the placement of leaflets and claim forms in clinics, doctors' surgeries and pharmacies to encourage take-up of the relief available for medical expenses. There has been a positive outcome to this campaign which is shown in a significant increase in the number of people contacting Revenue and claiming entitlements particularly relating to trade union subscriptions, bin charges and age, rent, home carers and dependent relative credits.
There are preliminary indications that claims for some of these reliefs have more than doubled following the Revenue campaign. It is expected that the campaign will also lead to an increase in the number of claims relating to health expenses at the end of this year and early in the new year when the majority of such claims are normally made.
The Revenue Commissioners can only allow tax credits or reliefs on the basis of information that is known to them and, consequently, there is no way for Revenue, with or without the involvement of the CSO, to accurately assess underclaimed entitlements where changes in individual circumstances have not been notified by the people concerned. Revenue's attempts to bring the existence of various reliefs to the attention of those that might benefit from them is a far better use of resources than a statistical exercise, which of its nature could not achieve that result.
I am satisfied that Revenue takes a very proactive approach to ensuring that individuals are made aware of and are granted their entitlements and that further initiatives in this regard will be forthcoming in the future.
I thank the Minister for his response. Does he not find it significant that in approximately 75% of cases where balancing statements were sought a refund was made? The average refund in such cases was €800 per person, which is very significant. Does he not think that, based on that fact and the chairman's report to the effect that there may be a further €100 million to be repaid, efforts must be redoubled to make the repayments to the taxpayers concerned?
How many of the 2.1 million or 2.2 million people who work make annual tax returns? I suspect the number is quite low. The process of making repayments might be easier with a better system for making tax returns.
Does the Minister not find the moratorium restricting backdated claims to three or four years, introduced by his Government, grossly unfair? Is it not very restrictive? If I were a taxpayer who owed the Revenue money for five, six or seven years but had a credit from four years ago I could not put that credit against moneys owing from the earlier period. The Minister's predecessor brought in the restriction but it is grossly unfair that I cannot set my credits against other liabilities. The Revenue may go back as many years as it deems necessary but I, as a taxpayer, cannot do so to claim credits.
Are health-related expenses, such as those on nursing homes, prescriptions and doctor's expenses, the largest area in which tax reliefs are not claimed? Can the Minister launch a campaign to make people more aware of their rights in regard to those? Does the Minister not agree that the minimum qualifying expenditure of €125 per annum constitutes a disincentive to claiming and clogs up the system? For what it is worth to the Government surely it would be better to wipe out that threshold altogether.
I will consider some of the suggestions the Deputy has made. I indicated in my reply that, as a result of much discussion in this House and committees of the Houses, in consultation with the chairman of the Revenue Commissioners, efforts have been made to improve the ability to claim back ordinary credits to which taxpayers are entitled. The chairman has said in recent years that increasing amounts have been claimed. As a guesstimate, a further 20% or 25% may remain to be claimed. If that is the case and, according to the chairman, whose judgment and knowledge is better than most, the Revenue Commissioners are doing all they can by taking practical initiatives, particularly in medical relief which involves placing forms where people access medical services, then that is as good as they can do. In addition they run many publicity campaigns, provide information on their website and produce information leaflets etc.
The new computer system will not change the fact that the ultimate responsibility is on PAYE taxpayers to ensure their tax credit certificate is correct or to request an end of year review if they feel they have overpaid. However, the system allows PAYE taxpayers to access their records in a way that was not possible before, and to view their allowances, credits and details of pay and tax at any time. They can amend their tax credit certificate on the web, either to claim an allowance or credit not on a certificate or to change the amount involved. Taxpayers can request an on-line review or balancing statement based on Revenue records and confirmation that details are correct and complete. They can also receive an automatic repayment in certain cases where Revenue is fully satisfied from their records or recent contacts that a repayment is due.
The new computer system will also provide for details of taxable payments from the Department of Social and Family Affairs to be provided to Revenue on an updated and regular basis. Part of the new PAYE computer system will involve details of pay and tax from employers' P35 returns being made available much more quickly than before.
The combination of on-line access and amendment, together with the availability of quicker and more reliable information about pay and tax and payments from the Department of Social and Family Affairs, should help to increase the reliability and accuracy of the PAYE system and reduce the number of PAYE overpayments that remain unclaimed, which is one of the issues often discussed in this House.
The vast majority of taxpayers are conscious of the reliefs to which they are entitled. When claims are necessary they take the required action. That said, in reality some taxpayers do not claim all the reliefs to which they are entitled each year and may not have kept a record of expenditure on doctors' bills and prescription drugs so it requires an ongoing effort.
As I have said, introducing tax relief at source is another solution for some, though not all, credits.
Can the Minister say how many of the total number of workers make returns? If he does not have the figure can he come back with an answer?
The Minister said people could download details of their credits from a computer but that only applies to a limited number of people. The people at the margins who pay tax but cannot afford to pay accountants are losing out. Those who employ accountants will do very well and receive all their tax credits. Some become so expert in tax credits they pay no tax at all, even if they have income of more than €1 million per annum. The Minister must reach the ordinary middle class people so that they can receive their just entitlements and not overpay tax.
The Minister forgot to deal with the question on the look-back in respect of claims for tax credits.
Over the past few years many of the more significant reliefs have been made virtually automatic either through the introduction of tax relief at source, TRS, or through the automatic carry forward of the reliefs. Mortgage interest and medical insurance reliefs, for example, are provided at source through the taxpayer obtaining a reduction in repayments or premia equivalent to the tax relief. Recurring reliefs, such as those for trade union subscriptions, once claimed are allowed on an ongoing basis and reappear each year in the taxpayer's certificate of tax credits. With refuse charges, the Revenue Commissioners use whatever information is available from local authorities via tape exchange to ensure as many people as possible get their relief automatically without claiming it.
The other main reliefs relate to medical expenses, certain dental expenses, age credits for people over 65 years, third level tuition fees and rent relief. In the case of these reliefs and the first claims for trade union subscriptions, it is generally up to the individual taxpayer to claim his or her entitlements as the Revenue Commissioners have no other way of ascertaining what these involve. In so far as they can and do ascertain what people are entitled to, they allow it to remain on the certificates in future years. They also have increased the number who can get tax relief at source.
There are improvements. A proactive effort is being made at every level in terms of information for the taxpayer and improving the computer systems to ensure that taxpayers get as fair a deal as possible. However, the primary responsibility is on the taxpayer to ensure their tax credits are in order.
We will proceed to Question No. 57.
Will the Minister comment on the look-back? Will he change it in the budget?
I heard the Deputy's comments about it. I will have to examine the situation.
57 Ms Burton asked the Minister for Finance his views on the recent financial stability report from the Central Bank and its warning that Ireland is more indebted than in 2005, more exposed to interest rates and that house prices have reached unreal levels with a high risk of investors destabilising the market as they exit the market at short notice; the measures he is taking to address these risks; and if he will make a statement on the matter. [39327/06]
I welcome the publication by the Central Bank of its Financial Stability Report 2006 which reflects the bank's mandate to contribute to the stability of the financial system in Ireland. I note the report's main conclusion that Ireland's financial system continues to be in a good state of health. This is based on a detailed assessment of the risks facing borrowers, the financial position of the banking sector as well as recent stress testing of the system.
The bank's central expectation, based on an assessment of the risks facing borrowers, the financial position of the banking sector as well as the results of recent stress testing of the system, is that the current shock absorption capacity of the banking system leaves it well placed to withstand possible pressures. The report also highlights that the strength of the economy continues to support the stability of the financial sector.
The bank's report identifies vulnerabilities facing the financial system, including those arising from credit growth and house price inflation. Within the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, a matter for the Central Bank and Financial Services Authority of Ireland. While the strong increase in borrowing is a sign of a healthy economy and a positive economic outlook on the part of borrowers, I fully support the vigilance of the Central Bank and the financial regulator on the issue of personal credit and mortgage debt and in reminding both borrowers and lenders of the need for responsible behaviour. The Government, for its part, will continue to contribute to economic and financial stability by pursuing a prudent fiscal policy.
Recent indicators point to continued moderation in house price inflation in line with increased housing supply and higher ECB interest rates. The consensus among commentators is for this trend to continue, resulting in a gradual cooling and soft landing for property prices in Ireland. The Central Bank's report shares the view that this is the most likely outcome.
In terms of the general economic implications of the rise in house prices and the associated increase in indebtedness in recent years, both borrowers and lenders need to be aware that interest rates are currently still low by historical standards. The Central Bank has highlighted the need for borrowers and lenders to factor into their financial decision making the prospective impact of potential changes in the future economic and financial environment. This also confirms the need for responsible budgetary policy to provide room for manoeuvre in the event of any unexpected sharp slowdown in economic growth.
The major element of household outstanding indebtedness is accounted for by residential mortgages. Demand for residential mortgages is underpinned by a number of factors, including strong new housing output, the growth in the economy, the accompanying pickup in employment creation and wages, the increases in household formation, significant net immigration and lower public sector indebtedness which facilitates the maintenance of low levels of taxation.
With regard to the Deputy's point regarding investors, the financial stability report states clearly that property remains a popular asset for investors as it continues to outperform other asset classes in the short to medium term. My overall view is that the report, with its main conclusion and its assessment of risks, makes a valuable contribution to the assessment and maintenance of financial stability in our economy.
Has the Minister seen a report in the October 2006 issue of the Irish Property Buyer which includes an analysis of the impact of interest rate increases on average mortgage repayments? Between July 2005 and December 2006 the average monthly mortgage repayment, due to interest rate increases, will have risen by over 50%. The figures show average repayments increasing from €1,057 to €1,573 for all buyers nationally, from €926 to €1,390 for all first-time buyers and from €1,453 to €2,167 for all Dublin buyers, who comprise approximately 49% of the total mortgage market. In view of the outlook from the European Central Bank and given that people also have financial commitments regarding child care and high commuting costs, does the Minister believe such figures are sustainable? Is the Minister concerned about the type of monthly bills sustained by people trying to provide a home for their families?
The Central Bank referred to investors in its report. It said that investors, unlike owner occupiers, pose a risk to the stability of the market in so far as they might attempt to exit the market at short notice. The CSO and property economists have suggested that between 8% and 15% of Irish houses are unoccupied. Is that not a worrying trend?
Our total indebtedness has reached €300 billion. That is equivalent to 205% of GNP. It is extremely high in comparison to other countries and it is growing all the time. Do any of these issues concern the Minister as he frames the budget?
Of course one keeps a close eye on these matters, as one must and should. Interest rate policy, as a result of our euro membership, is a matter for the ECB in the first instance. Ireland is represented on the ECB by the Governor of the Central Bank. Mr. Trichet, President of the European Central Bank, when addressing the European Parliament's economic and monetary affairs committee — his comments were not confined to Ireland but related to a number of European countries — said that the housing market in a number of European countries has been considerably buoyant but monetary policy decisions are taken with regard to the euro area as a whole and cannot be taken with regard to individual conditions in specific countries.
The Central Bank has been consistently pointing to the requirement for prudence on the part of both borrowers and lenders in the housing market here. The prime emphasis in its comments is that people should focus on affordability both in the present and in situations that might not be as benign as in the recent past. This has been done through its economic bulletins and its financial stability reports. In addition, it continues to have ongoing dialogue with the banks and conducts stress testing exercises. The financial regulator also recently increased the risk weighting on all new mortgages with a loan to value ratio of more than 80% and its consumer division has been active in informing consumers of the various options and factors they must consider when borrowing.
Prudent and responsible fiscal policy clearly also has an important role in contributing to financial stability and balanced economic performance overall. One of the issues when preparing the Estimates was ensuring that an increase in spending would not add to inflationary pressures already in the system, due to the fact that we are reaching our potential growth in tight labour market conditions.
With the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, matters for the Central Bank and the Financial Services Authority of Ireland. That follows from the Central Bank's role as part of the European system of central banks and its functions as a financial regulator with regard to the prudential supervision of financial institutions and the protection of consumers of those firms.
The recent growth in credit requires us to recognise that while we have reduced public sector credit, there has been a growth in credit in the private sector. People need to be mindful of that issue. The financial stability report to which Question No. 57 refers indicates that while estimated mortgage repayments as a percentage of disposable income have varied over the past 16 years, the current mortgage repayment level on a national basis is less than the 35% level which obtained during the early 1990s. Irish house buyers benefit from a range of supporting factors, including healthy income growth, low income tax rates and relatively low interest rates by historic standards.
Affordability is also supported by the strength of the economy, record employment levels and relatively high savings rates. Recent indications of an increase in the private sector debt to income ratio require us to recognise that borrowing has to be taken into account on the basis of all the relevant criteria and we are now entering a slightly higher interest rate regime than was the case 18 months ago.
The Minister spoke about his desire for a soft landing but, with a 50% increase in the average mortgage repayment over the past 18 months, how soft will that landing be? The softest arrangements for people in the property market are geared towards investors rather than owner occupiers. The Minister did not address the issue of empty houses, which in a number of economies are taken as a signal of stress in the market when their numbers rise above a certain threshold. What is being done to ensure a soft landing?
A soft landing is being encouraged by the continuing supply of houses to a market which continues to have strong fundamentals. Anecdotal evidence suggests the market is softening but we will not be able to ascertain until spring of next year whether interest rate increases are contributing to that situation. The important point is that we should not be predicting a hard landing when the Central Bank and all the evidence of continuing high income growth and low unemployment rates indicate otherwise. When people saw problems in the housing market across the water, it was against a background of rising unemployment and much higher interest rates. Taking nominal inflation into account, real interest rates are significantly lower at present.
However, 5.5% is a significant increase compared to the rate that obtained when people took out their mortgages.
We are no longer facing the difficulties of the early and mid-1990s, when the real interest rate was as high as 7% above nominal inflation.
People have borrowed based on low interest rates.
I recognise that affordability is now an issue for people. Clearly, the repayment of the mortgage is the first charge on disposable income and the resulting impact in terms of less spending power for other activities can ultimately affect economic growth and revenues. However, we should remind ourselves that interest rates remain at historically low levels. The Central Bank has made it clear that price stability will be the determining factor in how it applies interest rate policies not only at next month's meeting, but throughout 2007. That needs to be taken into account, as the Financial Regulator insists, by borrowers and lenders alike.
