I move: "That the Bill be read a Second Time".
As I said in this House last Tuesday evening, we are now fighting for the economic future of our country. The global financial crisis, the worst in 70 years, is having a profound effect on our banking and financial sector. As a small trading nation, we are exceptionally vulnerable to the serious worldwide recession with a contraction in economic activity on a scale not seen for many decades. Three successive years of economic contraction are in prospect, something we have never had to face before in our history.
The effect on the public finances is most serious. The Government must borrow €18 billion this year at far steeper interest rates to finance capital spending and also to meet the current budget deficit. In other words, we will have to borrow €4,500 for every man, woman and child in this State. Over a quarter of our current bills, including pay, will have to be paid for by borrowed money. The national debt is likely to rise to over 45% of GNP and spending on interest costs will come to €4.5 billion, or 12% of total tax revenue in 2009. This is dead money that should be going to pay for the public services we need. In short, this country faces exceptional circumstances and we must take exceptional measures in response. The Government cannot afford to delay.
The Government did achieve agreement with the social partners during our discussions on the scale of the problems we face and on the need for urgent and radical action to restore stability to our public finances. As the House knows, it was not possible for the unions to agree to our proposals for addressing our fiscal difficulties. In the circumstances we face, we have no option but to take clear and decisive action in the public interest to deal with these major problems. We are determined to remove the threats to the stability of the Irish economy and the long-term interest of the Irish people. The nature and scale of what confronts us are such that painful decisions must be implemented as a matter of urgency. Failure on our part to act now would lead to an unsustainable level of public debt.
It is difficult to understate the seriousness of the position. The budgetary difficulties are a severe challenge to us as a country and as a people. However, I can assure Deputies that the Government is determined that this challenge will be met. Without stability in our public finances, there is little or no prospect that Ireland will be in a position to take advantage of any future recovery in the world economy.
The framework we agreed with the social partners last month set out a shared perspective on the priority to be given to the stabilisation of the public finances through an equitable approach reflecting agreed principles in respect of both public expenditure and taxation. These include achieving an adjustment of €2 billion in 2009, measures to secure in the short term the stabilisation of the economy, maximising economic activity and employment, stabilising the financial and banking sector and helping those who lose their jobs. We will work together to implement a reform agenda involving building Ireland's smart economy, upskilling those in the labour market, delivering public service reform and finalising a comprehensive framework for future pension policy. The need to eliminate the current budget deficit by 2013 at the latest has been set out in the fiscal plan submitted to the European Commission.
As a first step in the process of adjustment agreed in the document, the spending reduction of €2 billion is required immediately. It was not possible to reach agreement on the details of the required measures and the unions were not in a position to agree to the pension-related deduction for public service workers. The Government, therefore, needed to take action in the national interest. For this reason, I am introducing the Bill.
The Bill provides for four of the measures to reduce or control public expenditure that were decided by the Government on 3 February and announced by the Taoiseach. These are the pension-related deduction of 7.5% on average on the total earnings of all public servants to realise savings of €1.16 billion in 2009 and €1.35 billion in a full year, the reduction in fees for certain professional services to realise savings of €67 million in 2009 and €80 million in a full year, the changes in the early child care supplement to reduce the payment from €1,104 to €996 per annum and to set a new age limit for payment of five years to realise savings of €51 million in 2009 and €77 million in a full year and the deferral of certain payments under the farm waste management scheme.
It is clear that the Bill calls on a number of sectors within the economy to make a contribution to the adjustment measures that are so urgently required. It is not just the public service that is being asked to contribute, as the burden is being spread more widely. Given its relative size, the public service pay and pensions bill must be part of the measures taken and the Government expects that the public service will be willing and able to play its part in the overall economic recovery.
Public service pensions are secure, particularly when compared to the recent severe loss in value suffered by many private sector pension plans. In light of this fact and the overall budgetary position, the Bill proposes that all public servants serving on or appointed after 1 March 2009 will have an additional pension-related deduction of their annual pay with effect from 1 March 2009. This change is estimated to raise €1.16 billion in 2009 and €1.35 billion in a full year.
Pension reform, both in the public service and among the wider working population, is one of the central policy challenges facing governments internationally and will remain so for the coming decades. Improved longevity has placed us in the welcome situation whereby Irish people now expect to enjoy longer, healthier retirements. However, those social benefits bring with them costs to the individual, employers and the Exchequer. These demographic effects are already placing a strain on our public finances. Over the next ten years, the number of people over the age of 65 years is expected to increase by approximately 50% and it is estimated that the ratio of workers to pensioners will fall from approximately 6:1 today to 2:1 by 2060. A smaller proportion of our population will be working and will need to bear a greater burden.
The issues surrounding long-term pension policy and the pressing problems of private sector pension schemes in the here and now are complex. The Government has published its Green Paper on pensions and has engaged in an extensive public consultation process that has served to underline the difficulties we face. The Government is at an advanced stage in its development of a new and comprehensive long-term pensions framework, which we aim to bring forward shortly and that will give greater clarity to future policy. Those broader pension issues are for discussion another day, but they serve to underline the importance for the Government of taking decisive action early to ensure that when Ireland emerges from the current difficulties, pension policy is on a sound and sustainable footing.
The Government values public servants and is committed to providing them with good pension arrangements. Such arrangements will continue to be a defining feature of employment in the public service. While there has been significant reform of public service pensions following the work of the Commission on Public Service Pensions, the process of modernising and restructuring the system must continue in light of demographic and budgetary realities that pose a future risk to the public finances. In 1997, expenditure on public service pensions was 1.6% of GNP. By 2027, it is expected to account for 2.6% of GNP and 3% by 2050. Of course, long-term projections are notoriously difficult to make, but the core point remains valid in that the costs of public service pensions, relative to national output, will double in the medium term and will continue to rise. It is both important and fair that public servants make a significant contribution now towards this cost.
The pension-related deduction is a reasonable and reasoned response to a critical and deteriorating situation. The measures we are taking hurt, but they hurt far less than other measures, including across-the-board pay cuts, large tax increases and redundancies. My Government colleagues and I are aware of the important role played by the public service and are conscious of the natural concerns of public servants regarding this measure. However, we must all be prepared to contribute.
The claim has been widely made that the pension deduction is unfair and falls too heavily on the lower paid. This is not the case, as the deduction is progressive. Those on higher incomes will continue to pay proportionately more than those on lower incomes. For example, taking account of all taxes and other mandatory stoppages — income tax, PRSI, standard pension contribution, the health and income levies and the new pension-related deduction — an unmarried civil servant earning €20,000 per year will pay 11% of his or her gross income in total deductions when the new deduction is introduced. This compares with 43% of gross income for an equivalent civil servant earning €100,000 per year.
It is claimed that the deduction should not apply to non-pensionable pay. However, we have taken the decision that it must do so to achieve the public expenditure savings that this country needs. I want to stress that no additional pension benefits arise from the deduction, but this decision does not alter the pensionability of these elements of pay.
There have been suggestions that due to the integration with the State pension, some public servants on lower pay will not qualify for any occupational pension in addition to the State pension. This is not correct. Following a recommendation of the Commission on Public Service Pensions, a new system of integration was introduced with effect from 1 January 2004 for public service pension schemes. The revised system improved the position for those on lower rates of pay and ensured that every person who meets the requirements of the pension scheme gets an occupational pension, regardless of income.
I wish to outline the detailed provisions contained in the measure. The Bill includes recitals that follow the Long Title and link its provisions to the current economic and financial challenges facing the State. Section 1 defines "public service body" as including the Civil Service, the Garda Síochána, the Permanent Defence Force, local authorities, the Health Service Executive, the Central Bank, the Financial Services Authority of Ireland and vocational educational committees. The definition also includes primary and secondary schools, third level institutions and non-commercial semi-State bodies where a public service pension scheme exists or may be made.
"Public servants" are defined as officeholders or employees of public service bodies. Members of either House of the Oireachtas, Members of the European Parliament and qualifying officeholders, such as Ministers, the Attorney General, the Ceann Comhairle, the Leas-Cheann Comhairle and Ministers of State are also covered by the provisions of the Bill. Under the Constitution, the President and members of the Judiciary cannot be included in this measure.
"Remuneration" is defined as total earnings, including allowances, over-time or any other like payment payable by or on behalf of a public service body to a public servant for his or her services as a public servant. This definition draws on the definitions in the Taxes Consolidation Act 1997.
Under these definitions, the deduction shall be made from the remuneration accruing from 1 March 2009 at the rates decided, those being, a 3% deduction on the first €15,000, 6% on the next €5,000 and 10% on the remainder. The deduction will not be paid by those with no entitlement to a public service pension. In this context, three conditions broadly apply, namely, a person must be a public servant, be working in a public service body and be a member of a public service pension scheme or analogous arrangement.
Section 4 provides that regulations are to be made in respect of deduction and collection arrangements and the deductions are to be paid into the Exchequer in accordance with the directions of the Minister.
Section 5 provides that, with the exception of members of the Permanent Defence Force who have particular terms and conditions, public servants who have fewer than two years service on 1 March 2009 may, before 1 April 2009, terminate their employment without giving notice if they do not wish to make the deduction. Deductions are to be repaid to those who leave the public service with no preserved pension benefit, namely, those with fewer than two years service.
The Bill provides that no additional pension benefit is conferred by the deduction. The Minister for Finance has power under section 8 to exempt certain groups from the deduction or modify the extent of the deduction if he is satisfied that they are materially distinguished by some particular aspect of their employment terms from others subject to the deduction.
The Taxes Consolidation Act 1997 and the Income Tax (Employments) (Consolidated) Regulations 2001 will be amended by section 15 to ensure the tax deductibility of the payment. Public servants who are making additional voluntary contributions or other pension contributions will not be brought above the relevant limits as a result of the deduction.
The Government decided that the new pension-related deduction would apply to local authority staff. It was also agreed that to realise savings for the benefit of the Exchequer, it is necessary to amend the legislation pertaining to the Local Government Fund. At present, section 4 of the Local Government Act 1998 requires that the Exchequer contribution to the fund be increased annually in line with inflation. Accordingly, section 16 of the Bill repeals section 4 of the Local Government Act 1998 and introduces a new provision under which the annual allocation is agreed between the Minister for the Environment, Heritage and Local Government and the Minister for Finance.
As I noted, the Government has decided that it is not just public service employees who should contribute to tackling the serious problem of the deterioration in the public finances through a deduction from their remuneration but that professionals who provide services to the Government also should contribute their fair share through an 8% reduction in fees. A twin-track approach will be taken to securing this reduction in professional fees. Administrative steps will be taken by Departments and public bodies who engage the services of professionals through a public procurement process to secure best value for money or who engage professional services on a scale of fees. For professionals such as those engaged under the general medical service who traditionally have had their fees and contracts determined through negotiation, this legislation provides for a separate process for reducing their fees.
My Department will write to all Departments requiring that they and all public bodies under their aegis revise the scale of fees for legal services downward by 8% from 1 March next. The Departments also will be required to review the notice and change provisions of all contracts for all professional services to give notice that there will be a reduction in fees for services of an amount equivalent to an 8% reduction from 1 March. Professionals who are unhappy with this approach will be given the option of withdrawing from their contracts and ending the provision of services.
Sections 9 to 11 allow for savings of 8% reductions in fees. The sections provide for a process of consultation which will allow the Minister for Health and Children or any other Minister to determine payments, taking account of the views of the professionals involved, their contracts, expenses and obligations and the ability of the State to continue to provide health or other services without a reduction of payments to the professionals concerned.
I trust that all professionals, who have and continue to enjoy the benefit of a substantial contribution to their income from taxpayer funds will co-operate fully with the steps now being taken by Government. I intend that the savings will be made by reducing the voted allocation of the relevant Departments and bodies.
Section 12 facilitates the payment of grants under the scheme of investment aid for farm waste management on a phased basis. The early child care supplement, ECS, is a direct, non-taxable payment paid to the parents of eligible children by the Department of Social and Family Affairs on behalf of the Office of the Minister for Children and Youth Affairs. The payment is designed to assist parents with the higher costs associated with caring for preschool children. When the ECS was introduced in 2006, it was payable in respect of all children eligible for child benefit who were under six years of age, the rationale being that six is the age at which school attendance becomes compulsory. The approach ensured that no child would lose eligibility for the payment before starting school. However, most children start school well in advance of their sixth birthday and it is considered that a more targeted approach is appropriate given the pressures on the public finances. For this reason, the age limit for eligibility is being reduced to five years, and the amount payable in respect of each child in a calendar year is being reduced from €1,104 to €996, to be paid in monthly instalments of €83. The savings resulting from these changes will amount to approximately €77 million in a full year.
An annual review of the operation of the measures in the Bill is provided for in Section 13. This will involve consideration of whether the provisions of the Bill continue to be necessary, and the making of findings as the Minister thinks appropriate. A report of the review will be laid before each House of the Oireachtas. Following the enactment of this legislation and the imposition of the pension-related deduction, I propose to make the necessary savings each year by bringing the proceeds to account as appropriations-in-aid in departmental Votes. The net Exchequer grants for the health and education sectors and the local government fund will be reduced by the amount of the contribution, with the proceeds of the deduction remaining with the relevant bodies and agencies. The funding of these sectors will remain unchanged. For 2009, the changes will be made in the forthcoming Revised Estimates volume.
This Bill asks public servants and other members of the community to contribute to the required expenditure measures. While the changes have been met with concern by many, we must ensure that the sectors covered in the Bill play their part both in pulling the country through the current difficulties and in ensuring that our long-term decisions are based on sound and sustainable policies. Now that the details are publicly available in the Bill I am confident those affected, though they may not agree with it, will understand why it is happening and why it needs to happen. This Bill must be seen in its short-term context in which all those who are able to do so must shoulder some of the burden of solving the current national difficulties. I commend the Bill to the House.