The principal purpose of the Bill is to give effect to the taxation changes which were announced in the supplementary budget of 21 July. A number of other minor tax measures are also incorporated in the Bill.
There has been considerable debate on the merits of the supplementary budget. Some critics would maintain that there has been an undue reliance on indirect taxation; others would argue that we might have taken a more austere line in reducing public expenditure. There is unanimous agreement, however, among informed commentators on the need for a budget in July. It was evident not merely to those who are familiar with the management of the public finances, but even to the average person in the street, that something had gone seriously wrong. There appeared to be no longer an effective control on public spending with the consequence that we were facing in 1981 an excess of about £500 million on the budget estimate of last January for current spending.
This is the background against which the decision was taken to introduce a supplementary budget. The evidence in relation to the £500 million under-estimation in the budget is quite clear in the large number of Supplementary Estimates put through the Dáil in recent months, particularly in the past two or three weeks. The decision had nothing to do with simplistic allegations of a drift towards a solely monetarist approach. In view of the appalling increase in the gap between spending and revenue, the only responsible course was to act quickly in order to avoid the worst effects of a lack of budget control. We knew, when coming into office, that we were inheriting a difficult budget problem and that the position was much worse than we had been given to believe in January. We did not know, however, that the situation had been allowed to deteriorate to such an extent.
The supplementary budget has not solved our problems; it is no more than a first step in the right direction. We are still faced with a deficit for 1981 in the region of £800 million. For 1982, the opening position looks like being considerably worse despite the fact that the measures taken in July will reduce by about £450 million the gap between spending and revenue. Next year the cost of meeting our debt commitments will be nearly £400 million more than this year. I would like Senators to take careful note of this statistic because it illustrates the magnitude of the problem caused by accumulating debt. If we were to do no more than balance this increase by higher taxation, we would have to impose some extremely severe increases in taxation. This continuing spiral of debt funding is a drain on our resources and there can be no doubt that in the longer term it severely handicaps our efforts to improve the economy and increase the employment opportunities which we so urgently need.
Let there be no doubt about it — we could not afford to wait any longer to take corrective action. The slide in the public finances in the first six months of this year had been far worse than anything we had experienced previously. We were moving almost inevitably towards a situation when really harsh policies would be necessary to protect our economic independence. Between 1970 and 1980 Government debt increased eightfold from £1,000 million to £8,000 million. Foreign borrowing accounted for an increasing proportion of this debt. At end-1980 our foreign debt was over £2,200 million, compared with only £362 million as late as 1974, and by mid-1981 it had almost reached £3,000 million — up 35 per cent in six months. As a result, the cost of servicing debt is absorbing an ever-increasing share of our tax revenue. Another consequence of this trend is that overspending has encouraged the economy to develop on an artificial and ultimately unsustainable basis. It has led to excess spending on goods and services that we could do without, and much of this spending has been on imports to the benefit of foreign economies.
Most of the other member countries in the EEC will be near to having a balanced budget this year but two of them, Belgium and Italy, regard their position as very serious because they face deficits in central Government spending of the order of 5 per cent to 6 per cent of their GDP. Our prospective 1981 deficit is 8 per cent of our GDP. Belgium and Italy have seen fit to take corrective action and have been informed by the EEC Commission that they cannot afford to support such high deficits. We too have been advised by international institutions such as the EEC and the OECD that we should in particular aim to stop borrowing for current spending with all possible speed. This advice has been given after due consideration of our position and it would be unwise to ignore it.
Our balance of payments deficit is also a source of concern to the Government. The rapid growth in imports, indirectly caused by the Government deficit, has led to a balance of payments deficit, now likely to be more than £1,400 million or 14 per cent of GDP in 1981. The practice of borrowing more and more money to pay our way from day-to-day must be eliminated. This is an essential precondition for economic success. The supplementary budget introduced in July has made a useful start in this direction. We must build on this, as rapidly as we reasonably can, and provide a blueprint for a more stable future.
That is the general background. Even after the difficult measures we have taken, we are faced with a budget deficit of about £1,100 million. That is a rather daunting figure. That is also the scenario for the budget deliberations currently in train.
I now turn to the individual provisions of the Bill. Part I of the Bill deals with customs and excise provisions. Sections 2 to 7 confirm the budget increases in the excise duties on alcohol, tobacco products and hydrocarbon oils. In the budget statement in July it was emphasised that increases in these duties were unavoidable if we were to redress the difficult financial situation and to help pay for the concessions announced in the budget.
Section 8 confirms the road tax measures announced in the budget. Provision is made for the re-imposition of road tax on cars not exceeding 16 horse-power and on motor cycles at the rates which applied prior to August 1977 and for an increase in the rate of road tax on cars exceeding 16 horse-power from £6 per horse-power to £8 per horse-power. The abolition of the annual registration charges of £20 in respect of cars not exceeding 16 horse-power and £5 in respect of motor cycles, and the reduction in the initial registration charge in respect of these vehicles to the 1977 levels are also provided for. These charges came into effect on 1 September last and are expected to yield £8 million in 1981 and £27.5 million in 1982. The abolition of the road tax in 1977 resulted in a loss of badly-needed tax revenue and a narrowing of the tax base. We all know the background to that decision.
Section 9 deals with a technical matter. It revokes an order adjusting the structure of the rate of excise duty on cigarettes imposed in the July budget. The adjustment ensured that there would be no change in the amount of excise duty on cigarettes as a consequence of the increase in the rate of VAT from 10 per cent to 15 per cent on 1 September. The order is no longer necessary as the provisions are now incorporated in section 4 of the Bill.
Part II of the Bill contains the value-added tax provisions. In summary, the Bill confirms the July budget resolution on VAT and also provides for a number of important new concessions. The first of these relieving measures is covered by section 11 of the Bill which gives effect to the increase in the annual turnover registration thresholds mentioned in the budget statement in July and intended as an incentive to small business. Under the new limits now being provided for, a trader whose business consists entirely, or almost entirely, of the sale of taxable goods will not have to register unless his annual turnover is likely to exceed £30,000 and other traders will not have to register unless their annual turnover is likely to exceed £15,000. The new £30,000 limit compares with existing ceilings of £18,000 and £9,000 and the figure of £15,000 covers the category heretofore catered for by a threshold of £3,000. The increases are very substantial. They simplify the present system since they reduce the number of thresholds to two and are expressed in annual terms and they largely restore and in some cases improve to a considerable extent, even in real terms, the levels set originally in 1972. The new levels should allow as many as 500 traders to discontinue registration for VAT purposes and of course will remove the necessity to do so for many traders not at present registered. The cost in 1982 is expected to be somewhat less than £¾ million.
The section also contains, in subsection (d), a technical provision to ensure that immovable goods supplied by one taxable person to another, where both are registered together as a group for VAT purposes, will not thereby be relieved of any VAT otherwise properly chargeable on such a transaction.
Sections 12 and 13 give effect to the VAT changes announced in the July Budget. These were the increase in the lower rate of VAT from 10 per cent to 15 per cent, the compensating increase in the flat-rate addition from 1 per cent to 1½ per cent for unregistered farmers and the extension of the 3 per cent effective rate for building to agricultural contracting services. In case there should be any misunderstanding on this point, I should like to emphasise that under these arrangements the farming community as a whole will not have to bear a net increase in their VAT burden. This is ensured by the increase in the flat-rate addition which is in proportion to the increase in the lower rate and by the special provision for agricultural contractors which will cost upwards of £1 million in 1982. The reduction in the rate of VAT applying to the specified contracting services should be particularly valuable in helping to retain these services in rural areas.
Section 14 provides for another relieving measure, namely, the deferment, in respect of the taxable period 1 September to 31 December 1981 of the VAT increase on tourist services supplied to tour operators, travel agents or car hire firms for the benefit of visitors from outside the State in those cases where prices were settled prior to 1 January 1981. The provision when enacted will allow, for a further four months, the completion of important, long-standing contractual arrangements involving visitors from outside the State without increase of VAT.
The concession was considered necessary in order to allow the industry to fulfil these commitments without incurring extra costs which in many cases, would be difficult to pass on to the consumer. This arrangement will apply retrospectively to 1 September and the value of the concession to the industry is estimated at up to £500,000. It is hoped that this measure will be taken as reflecting the Government's confidence in the underlying soundness of the tourist industry in this difficult trading period.
Section 15 is a purely transitional measure covering the position of traders at present registered for VAT and who may be affected by the increase in the thresholds now proposed in section 11.
In Part III of the Bill there are two stamp duty sections. Section 16 imposes a special £5 million levy on the banking sector. The base for the levy will be the current and deposit accounts of each bank, subject to certain adjustments and a stamp duty will be charged on this base to obtain the required amount. The duty is to be paid to the Revenue Commissioners within 14 days of the passing of the Bill.
Section 17 introduces a new stamp duty of £5 per annum on credit cards and certain charge cards, which will complement the existing duty on cheques which was recently increased. Supplementary cards issued to individuals will not be liable. This duty will operate from early next year.
Section 18 in Part IV is a technical provision dealing with the application of section 54 of the Finance Act, 1970 which empowers the Minister for Finance to raise money for the Exchequer by means of the creation and issue of securities. Section 18 confirms that a loan agreement is a security for this purpose. It also clarifies the position in regard to expenses in relation to Government financing operations other than the issue of securities — for example, leasing or similar agreements for the provision of some capital items in the Public Capital Programme.
I have given a resumé of the provisions in the Bill. For the most part it is concerned with the taxation changes announced in the supplementary budget. Further legislation will be introduced in the near future to provide for an income tax credit system and for the weekly payment of £9.60 to the spouse working in the home.
Before concluding, I would like to return again briefly to the situation which has led to the introduction of a second Finance Bill this year. The taxation changes, which are incorporated in this Bill, are designed to increase tax revenue and thus help to maintain within reasonable limits the huge burden of State borrowing. There is another simplistic view abroad in some political circles that a policy of reducing our dependence on borrowing is an anti-employment policy. On the contrary this policy must be followed if we hope to sustain a growing number of worthwhile jobs. If we squander money on day-to-day spending we have to cope with the problem of a rapidly increasing debt which will diminish the opportunities for investment. Here I refer to productive capital investment which would be the basic issue. Let us be in no doubt about this. We have to make a choice between higher living standards and higher employment. The harsh reality is that living standards of most citizens have been moving ahead in recent years at a rate that the country simply cannot afford. The sad consequences of this have been a considerable loss of competitiveness in the marketplace, a burden of national debt that is crippling the economy and lost job opportunities for the growing numbers out of work.
In the past week we have given a practical demonstration of our determination to provide employment with the introduction in the Dáil of the Youth Employment Agency Bill. This, I am confident, can have a dramatic impact on our efforts to provide jobs for our growing young population. Employment has to be our greatest priority and this new initiative provides us with a basis for a radical change for the better in providing job opportunities.
It is wishful thinking to suggest that an upturn in the world economy will lift us out of difficulties without a contribution from ourselves. Of course, we must sustain a very high level of investment and this inevitably requires borrowing. It is unfair, however, to create the impression that all our borrowing is being used to create more wealth for the nation when in fact a large proportion of it is needed simply to meet our day-to-day expenses. We have to reverse the trend whereby we have been spending our way out of every problem, without any thought to the longer-term problems accumulating as a result. Otherwise we cannot provide a basis for durable economic growth.
Fundamentally our economy is sound and we have the potential to provide greater prosperity for all our people as time goes on. There are now grounds for hope that the worse of the present world recession is over and we must be ready to take full advantage of the employment opportunities that an upswing in the world economy will provide for us. But we must be reasonable in administering our affairs if we hope to gain the maximum benefit. We have to exercise the same degree of responsibility as other countries in regard to the management of our finances.
I commend the Bill to the House.