Finance Bill 2003 [ Certified Money Bill ] : Committee and Remaining Stages.

I welcome the Minister.

NEW SECTIONS.

Recommendations Nos. 1 and 2 not moved.

Acting Chairman

Recommendations Nos. 3 and 4 are related and both may be discussed together. Is that agreed? Agreed.

I move recommendation No. 3:

In page 13, before section 1, to insert the following new section:

1.–In respect of the year of assessment 2003 and subsequent years of assessment, section 461 of the Principal Act is amended by substituting ‘€2,000' for ‘€1,250'.".

I did not move recommendations Nos. 1 and 2 because the intended effect of all four recommendations is to remove the minimum wage from the income tax net. The first two recommendations, duplicates of amendments that appeared on the Dáil Order Paper on Report Stage, propose to achieve this by way of extending the exemption limits. I am not disposed to that approach and the Minister will be aware of my views. I have opted for a different approach, set out in recommendations Nos. 3 and 4, which would increase personal tax credits for single and married persons.

For some time I have taken the view that income tax was reduced too quickly and in the wrong way. As I have debated this on numerous occasions with the Minister, I see little point in detaining the House by rehearsing the argument. However, both he and I agree that, in principle, a way should be found to remove the minimum wage from the income tax net.

The minimum wage is €6.70 per hour. Assuming the new partnership programme, Sustaining Progress, is passed and agreed, it will increase to €7 per hour next year. This will mean that the percentage of the minimum wage exempt from the tax net will fall from its current level of approximately 90% to under 80% by the end of next year.

The principle is simple. If the Oireachtas takes the view that employers should not be allowed to pay employees less than a certain figure –€6.70 per hour – it follows that part of that money should not be taken by the State in the form of income tax. If the State holds that €6.70 per hour is the least that people should be asked to work for, it should not take any of it.

The way to achieve this is by increasing personal tax credits. I accept the Minister's argument that increasing the employee tax credit to a reasonable level is another approach, although I would not fully pursue that route. Personal tax credits should be increased in accordance with the minimum wage on an annual basis.

Senator McDowell has acknowledged that there is no difference in objective in terms of removing those on the minimum wage from the tax net. It is a priority in the new partnership agreement. The only question is how quickly it can be done. Tax levels on those on low incomes compare favourably with those pertaining in other European Union countries, although that is not an argument for not moving as quickly as possible in the direction outlined by the Senator.

I understand the Minister has managed to keep the threshold of the minimum income removed from the tax net at 90%. The budget this year is very tight. There is also the need to fund essential services, for which Senator McDowell and the rest of us argue every day. In all the circumstances, the Minister has done the best he can on this occasion.

I support the thrust of the recommendation. While the minimum wage has increased from its initial level, it continues to be sparse and parsimonious. A person on the minimum wage is on a minimum standard of living and effectively on the breadline.

From the point of view of saying that we compare well with other jurisdictions that argument might be valid. At the same time, as a result of the returns the Minister is claiming, despite the initial bad prognosis in regard to Revenue, surely he is now in a position to accede to this amendment and to give relief to people on the lower income scale who are barely able to survive. Admittedly their standard of living is somewhat guaranteed by a statutory minimum wage, but at the same time they are struggling hard to keep body and soul together and to maintain a reasonably decent minimum standard of living.

I fully support this amendment. The Minister should reflect on his attitude, as expressed on Committee Stage in the other House, and accept it.

Recommendations Nos. 3 and 4 propose to increase the basic personal tax credits from €1,520 to €2,000 for single persons and from €3,040 to €4,000 for married persons. The cost of the increase proposed by the Senator, taking account of the consequential increase in the one-parent family tax credits, would be €557 million in 2003 and €777 million in the full year. This cost represents more than four times the full year costs of the 2003 budget income tax package and would not be possible in the current economic circumstances. I have already indicated to Senators, or will indicate to them, the other reasons I cannot accept this amendment.

In this year's budget I have made only a limited number of changes to the personal tax system. These will have a total cost of €186 million in a full year. That is all that can be afforded in the current economic circumstances. When the resources were there we made the corresponding improvements, as the following facts will confirm. The value of the personal credit increased by almost 16% in the period from 2000 to end-2002 while the value of the PAYE credit, or allowance as it was then, increased by over 136% in the same period. The value of the standard rate bands for a single person increased by over 29% over the same period, while the exemption limits for those aged 65 and over increased by over 57%. By comparison, in the same two-year period the consumer price index rose by less than 10%.

If the Senators wish to examine the issue going back as far as 1997 they will see that, in terms of income relieved of tax for the standard rate taxpayer, the combined value of the personal credit and the PAYE credit, or allowances as they were then, has increased by over 78% up to the end of 2002. Over the same period the consumer price index increased by about 22%. In 1997, before the Government came into office, a single person with an income above €17,207, or as it was then £13,600, which was lower than the average industrial wage, became liable for the top tax rate. Currently the standard rate band for a single person stands at €28,000 per annum, higher than the average industrial wage. Over the period since 1997, the average tax rate of a single person on the average industrial wage has dropped by over ten percentage points or well over 27% to 17% today. These are the facts.

The Government is committed to sustaining economic growth, strengthening and maintaining the competitive position of the economy and maintaining full employment. Responsible fiscal policies are central to the achievment of these aims and the proposal, as outlined by the Senators, would be inconsistent with this approach. Therefore I cannot accept the recommendation.

Senator McDowell, having marked me in the Dáil for five years, knows we have gone over this ground on many previous occasions. I am well aware of his views on this matter, as he is of mine. Although Senator Higgins was a Member of the Dáil he may not be as aware of my views because he was a spokesperson in another area.

As surveys throughout Europe have shown, and it has also been heralded in the media, the lower paid Irish worker has a better deal than anyone else in the European Union in terms of tax and insurance contributions taken from his wage. We are streets ahead of all the other European countries. A recent OECD survey has shown that not alone are we better than Europe but we are better than most countries worldwide.

People laugh now and say that my budgets favour the rich. The opposite is true. My greatest press supporter,The Irish Times, stated in an article that in Charlie McCreevy's time as Minister for Finance the case could be made that he overdid the concessions towards the lower paid vis-à-vis other categories. We have come from up the tree to the bottom of the tree. That has been possible because of our economic success. My view is that taxation plays a major part as a driver of economic performance. That is a fundamental principle of mine.

In this budget, due to economic circumstances, it was only possible to do a little. I considered doing nothing on taxation in the budget at one stage. What we did do was to keep 90% of the minimum wage out of the tax net. We did it by this particular method, with which I feel Senator McDowell would agree, rather than the exemption limit method which his colleagues in the other House put forward. I know he would be opposed to that method because of its obvious traps which I have practically eliminated. There are few taxpayers now caught at the marginal rate – only people aged over 65. That improvement was recommended by many groups and we have succeeded with it. We have different ways of doing things but both of us would agree that the other way was not the better way.

I am often amused, and Senator Mansergh will recall this because he acted in another capacity in my political party at the time, in regard to the minimum wage. The idea of the minimum wage, which has been regarded as quite revolutionary and socially progressive, was announced by the Fianna Fáil Party about six to nine months before the general election of 1997. The person who advocated and announced the idea as our policy was none other than myself. This well-known, right wing Thatcherite ideologue was the person who foisted this on the Fianna Fáil Party. Funnily enough, the then rainbow Government was not in a position to respond. It agreed it was a good idea but believed it would not be possible and it was not incorporated in its election manifesto. The rainbow Government, led by Deputy John Bruton, and former Deputies Spring and Proinsias De Rossa did not include it as part of their manifesto because they thought it could not be done. It was I who announced it as part of Fianna Fáil policy because it was my idea, a fact which will upset those on the left.

When we came into power we set up the minimum wage commission which reported in due time. We then had the job of implementing it, which comes under the remit of the Tánaiste. There was nothing in the Fianna Fáil election manifesto regarding taking the minimum wage out of the tax net because there was no minimum wage at the time. When we reviewed the programme for Government in 1999, and I think Senator Mansergh was part of the review group, we made it one of our goals to remove people on the minimum wage from the tax net. That spilled over into, and became a goal of, the PPF. If one looked at the Fianna Fáil election manifesto of 1997, about which Senator Mansergh would know a lot, one would not see any reference to this in the taxation area because it only became a goal subsequently for us, the Progressive Democrats and the social partners. I explain for the benefit of the historical record.

I have been over this territory many times and am not sure I have the energy to do so again but I will try. Shortly after the 1997 election the removal of the minimum wage from the tax net did become part of Government policy. It was restated in the programme for the millennium and restated again last year as Fianna Fáil policy. It is again in the draft of the Sustaining Progress programme which is currently being considered by the social partners. It is now long established Government policy to take the minimum wage out of the income tax net. That is for good sound solid reasons.

I do not have the Minister's fixation with tax rates. It would not disturb me to increase the tax credits and to have to find some compensatory method, within the tax system, of paying for that. I acknowledge that things this year are tighter and that there is not scope for net reductions in income tax.

I am not as upset as Members were in the other House, if my reading of the debate is accurate, about the failure to index. I understand the reasons for that. However, it should have been done several years ago because it would have been easier to maintain. We must now move to take the minimum wage out of the income tax net.

I accept some of what the Minister said about the Government's treatment of lower paid workers. He did not front load it because it did happen, although it was primarily as a result of the introduction of tax credits. Nonetheless, I give praise for that. It was a worthwhile and progressive move which will stand to us in the future. I suspect the Minister agrees with me that there is a case for virtually everyone who works to make a social contribution.

That should be done through the social contribution or PRSI system rather than the taxation system. I feel the freedom to say in this House that it would not trouble me if, for example, we looked at the exemption from PRSI or at the €100 threshold in PRSI. However, we should not take income tax from people on the minimum wage. That is the purpose of the recommendations.

As someone who, as the Minister said, worked in another capacity in Fianna Fáil, I enjoyed the visit down memory lane. It is one of the progressive measures in which I share a collective pride. I remember that during the general election campaign in 1997 the then Labour leader, Mr. Dick Spring, was dubious about the proposition, as the Labour Party was about social partnership ten years previously. Without giving too much of a party political broadcast, there have been many occasions when such progressive and radical measures – I add tax credits to that in the middle of the last Administration – have put us at the cutting edge of progress.

Those involved in Sustaining Progress are not just the Government, but the trade unions and many who belong to the community and voluntary sector. Sustaining Progress states that to the extent that there is any scope for personal tax reduction, progress will continue to be made over the three budgets contained within the lifetime of this agreement towards removing those on the minimum wage from the tax net and also the 80%. That is a realistic recognition of the sums the Minister mentioned. It could not have been done before this agreement was negotiated. It is probably unrealistic to expect it to be done in one attempt in the future.

I advise the Acting Chairman that when he speaksex cathedra, he should not make any pronouncements about the merits or otherwise of what was said. I refer to his remarks that the Minister's explanation was a good one.

Acting Chairman

Mea culpa.

I remind the Minister that, notwithstanding the fact that a commitment was not given in the interim period, a clear commitment was given in the run up to the last election that the Government would remove all those on the minimum wage from the tax net.

Not in one year.

Acting Chairman

Let the Senator in possession speak.

One must acknowledge that the Minister has increased the exemption point by €14, which has given a certain amount of relief. However, the clear impression conveyed to the electorate and to a considerable number of people on the minimum wage was that relief would be provided in the first year of the Government's five year term because the economy was flying.

I do not have the Fianna Fáil election manifesto with me, but I have a clear recollection of what is in the taxation section. We committed nothing. It stated that whenever resources were available, any scope for taxation cuts would be concentrated on the lower paid. We said the least of all the parties about personal taxation. Senator Higgins's party promised intermediate cuts in tax rates and the devil and all, but we promised zero. I am sure someone can get me a copy of the Fianna Fáil manifesto. Senator McDowell, who marked me at the time, should know that was all I said on the area of personal taxation.

The Minister said he would not increase tax rates.

I said we would not increase tax rates. However, we did not give any commitments. We said that any resources we had would be concentrated on that area. As regards the PPF, it stated that over time we would take those on the minimum wage out of the tax net. The last Fianna Fáil election manifesto contained the minimum on taxation.

On a point of information, there was not a commitment in the manifesto to do it. There were few commitments as to what would be done in the first year. Any manifesto is a five year manifesto, particularly when one is coming into more difficult economic conditions. I am certain that no one gave the impression or said that it would be done in the December budget. If Senator Higgins can provide any concrete evidence to the contrary, we will be glad to look at it.

There is no point in prolonging the debate because the Minister will not accept the recommendation. Is he committed to completing this measure within the period of Sustaining Progress? Does he accept the principle that we should not take money from people who earn less than the minimum wage?

As regards the second question, Senator McDowell used the freedom of the House to allude to a policy in which I believe. Everybody should make a little contribution to the State. There should be a mythical box in a computer which shows Joe Smith's contribution during his working life. It might only be 1 cent per week during the times he has worked. I agree with the Senator. It does not mean we would take it through the taxation system. It would probably be done through the PRSI or social insurance system. I also believe in that principle. Senator McDowell heard me speak about that in the other House.

Everything in the Fianna Fáil manifesto, the Fianna Fáil-Progressive Democrats Government agreement and the partnership programmes, including Sustaining Progress, is conditional on sustainable public finances. Anything in the taxation system will be done over time. I do not want anyone to get the impression that over the next three budgets everyone on the minimum wage will be taken out of the tax net.

Will it be done over the period of Sustaining Progress?

That will depend on the economic circumstances.

Not necessarily.

The total personal tax package this year is €186 million. I considered at one stage that I would not do anything in the taxation area. The only two things I did related to the employee credit and to the 65 year old exemption which was increased by an amount that did not cost much. Depending on the economic circumstances next year, I will not have any hesitation in doing the same or less.

It is a wish list.

I want to be clear about this. It was the same with the PPF, as the social partners recognised when they included the proviso of over time and subject to the overarching goal of sustainable public finances. If it can be done, we will do it. Senator McDowell will know, having contested the last election, that there was no contest between us and the other parties in the taxation area. We have more credibility in that area than any other party, at least on the experience of the last election.

I agree with the Minister that there should be a contribution, albeit a nominal one, in relation to all services. In regard to the Freedom of Information Bill, I cannot recall how it got enmeshed into the actual debate. The Minister made the point that there should be nothing for nothing. For any service provided a minimal or a nominal contribution should be paid from the point of view of respect for that service.

In regard to the point made by Senator McDowell that instead of doing it by means of taxation contributions from those on the minimum wage it might be more appropriate to do it through the social insurance scheme. In other words, the contribution would find its way into the system by way of the social insurance scheme. After all, these people are on the minimum wage. The social insurance scheme would meet both requirements in that it would bring a certain amount of money into the Exchequer while maintaining it at a reasonable level.

In this area of taxation, Sustaining Progress, states:

To the extent that there is any scope for personal tax reductions, progress will continue to be made over the three budgets contained within the lifetime of this Agreement towards removing those on the minimum wage from the tax net, moving towards the target where 80% of all earners pay tax at not more than the standard rate.

That is what we have agreed to. The Department and I were involved in this wording, which was agreed. That should clear up the point for Senator McDowell.

There are many ways in which we can ensure that everyone makes a small contribution to the PRSI system. I do not want to commit myself to it now because it depends very much on economic circumstances. The Senator will know that I regarded reform of the PRSI system as an integral part of reform of the taxation system and I had intended, probably in the budget which has gone through, if circumstances had permitted, that it would be my final goal over a budget or two to reform the PRSI and levy system which is badly in need of reform. Due to economic circumstances the budgetary situation did not allow me to make any significant changes.

I had worked on many ideas and had them available to spring on my unsuspecting colleagues in the Department of Finance. My colleagues were not that unsuspecting because they had been working on them as well as I had given them notice of what I was going to do over a period. Unfortunately I was unable to do it in the last budget. It is still one of my goals. Their is no point in reforming the tax credit system without reforming the PRSI system also.

I happen to believe fundamentally in the insurance principle for workers. This will shock and appal all the people on the left. Many of those in my party, in Fine Gael and in the Progressive Democrats do not agree the tax and PRSI systems should be merged. I have always believed in this principle as strongly as any trade unionist. There should be some little dot in a box to say that Joe Smith contributed so much during his lifetime, even though he was at the lower end and unemployed for some time.

It is a bit difficult in the context of swiping €635 million out of the fund.

It is a pity Senator McDowell is not in the Dáil and that the people of Dublin North-Central did not re-elect him. Irrespective of my disagreements with him, I thought he performed exceptionally well as Opposition spokesperson and I said so publicly before he lost his seat.

I did my sums in regard to the €635 I took back in the previous budget. I got the Department of Finance to go back over how much money we had provided to the social insurance fund since 1951 or 1952 as the case may be and it owes us billions if a reasonable rate of interest is added. It would take a long time to get €600 million odd every year and to get back the amount the Exchequer has transferred to the social insurance fund. I regard the €635 million as a small repayment of what the social insurance fund owed the Exchequer.

It is commonly accepted that there are two elements in the social insurance fund: the social solidarity principle and the contributory principle. Both are equally valid. I am willing to accept what the Minister has said at face value, but it is difficult to marry it with the notion that as soon as the fund gets into surplus he takes some out to balance his budget elsewhere, which is precisely what he did. That does not stand up in principle. I am surprised to hear the Minister attempt to argue it in principle. It was simply a pragmatic effort on his part to try to balance the books in a difficult year.

Irrespective of the social partners – perhaps Senator O'Toole knows more about it than I do – I am sorry we did not find out what the Minister had intended to do in the last budget. Clearly this is an area where there can be some movement in the next five years. If the Minister does not get the Freedom of Information Amendment Bill through the other House in time he might find out that I had intended to it but it never got into our manifesto either. Perhaps one of the reasons the Minister did not do it last year is that it is difficult to do it without losers.

I have discussed this matter with Senator O'Toole in a private capacity. It is impossible to do it without losers. The only way it could be done would be to compensate losers.

I could not find a way of doing it without losers which is the reason it did not get into our election manifesto. Nonetheless the principle holds good and at this stage it is something that needs to be done. The system is ludicrous given the various exemptions, thresholds, levies and different rates of contributions and so on, and at a time when the Minister might actively consider doing it, three or four years after—

In the PPF there was also a condition that economic growth would be of the order of 5.5% on average. There was a row over whether it had to be 5.5% per year or 5.5% on average. I argued it was 5.5% on average while he argued it was 5.5% per year. The nature of these things is such that one learns to change the words the next time around. On the question of priority there was a concession on our part, which I did not like making, that it be subject to economic development and growth. The real issue would be the order of priorities.

I tend to be optimistic in terms of the economy and on the question of inflation. It would be good to have it on the record that the issue of the minimum wage would be at the top of the Government agenda. The Minister could surprise many on the left if he were to put pensions and the minimum wage at the top of his list of priorities. There are a number of issues which depend on growth.

I have had many rows with the Minister, some in the past six months, but we have also spat on our hands and shook hands on issues and they have all been delivered. The ATM machine is nicely stacked up after today's business. I look forward to that spitting out money in all directions, including the Members of the Oireachtas, in a short period.

Both of us had better be ten years gone before the full story is told about many things. I am glad the Senator has referred to the report of the benchmarking body. That was an agreement that came about voluntarily between the Government and the social partners. When it set up the process and reported, some of the critics expected the Government to say it would walk away from the deal. Part of the PPF was that we would set up this agreement. If the Government were to walk away at that stage we would never again get an agreement with anybody. It was voluntarily entered into as part of the PPF.

People can make any criticism they wish of the process and the outcome, with which they may not agree. Even some of those in the unions do not agree with the result but it was an agreement voluntarily entered into that this was the way we would go about doing it and we would accept it. People on the Government side said it should not be implemented although it had been entered into voluntarily.

In regard to taxation reductions I cited earlier Sustaining Progress as follows:

To the extent that there is any scope for personal tax reductions, progress will continue to be made over the three budgets contained within the lifetime of this Agreement towards removing those on the minimum wage from the tax net .

In the Fianna Fáil election manifesto it was stated there would be no increase in tax rates. Whatever tax concessions were given would be concentrated on those on the minimum wage. That remains the party position.

Two groups have opted out from the new social partnership arrangement, the farmers and the voluntary sector. Did this feature in the negotiations with the voluntary sector as one of the issues which would determine whether they would endorse the new social partnership agreement?

I bow to the expertise of the Senator's colleagues regarding the actual negotiations. To my knowledge they did not break on this point. Taxation did not, on this occasion, form a central part of the negotiations. The trade union leadership recognised, before we reached the table, that the days of big tax reductions were gone and that taxation would not form a central part of this agreement, as it did in other agreements. The Government, in other agreements, gave tax concessions which bolstered up the employer side. Everybody recognised that was not possible in this agreement.

I must give credit where it is due. The trade union movement recognised that and said so long before it was said by employers, Government Ministers or myself. Senator O'Toole, as leader of Congress and the general secretary, David Beggs, signalled that long before negotiations began. The voluntary organisations had disagreements in other areas.

Negotiations with the farming organisations are ongoing and we will wait to see how they evolve.

Recommendation put and declared lost.

I move recommendation No. 4:

4. In page 13, before section 1, to insert the following new section:

1.–In respect of the year of assessment 2003 and subsequent years of assessment, section 461 of the Principal Act is amended by substituting ‘€3,040' for ‘€4,000'.".

I have not tabled a recommendation on the following point but I would like to hear the Minister's views on it. In the context of the various credits available to people in this section and in the wider way through SSIAs etc. a common issue is that of housing. I would like the Minister's view on my next point – I want only a personal view I do not expect him to give a detailed one at this stage. There is a strong case for establishing a scheme whereby young people saving for houses could do so within a determined and locked saving system to be used only for a deposit on a house and could then claim tax credit on it. I know there will be certain difficulties in implementing such a scheme.

SSIAs were intended for elderly people but it appears people of all ages have bought into them. We have had the argument on the first-time buyer's grant. I opposed the Government's decision to abolish that grant, though I said on that day, and since, that it is probably the worst possible way of giving money to first-time buyers because unscrupulous builders have invariably discounted it into the value of the house. Here would be a way, for first-time buyers on a one time only basis, to save in a designated account for a deposit on a house.

Will the Minister consider such an idea? I am not suggesting it could be done in this Finance Bill. I would like to develop this idea further with him if he is open to it. Many Senators on this side of the House and on the Minister's side would welcome such a development which would be of more benefit to first-time buyers than the first-time buyer's grant. It would benefit them more in many ways because they would save more, having received tax credit on their savings, than they would have gained had they received the first-time buyer's grant. Builders would not know about that money and could not, therefore, discount it into the price of the house. Houses could no longer be advertised as attracting extra money by way of the first-time buyer's grant.

I have wanted to raised that issue with the Minister for some time and I am anxious to hear his views on it.

Senator O'Toole put forward this interesting idea quite recently in the Irish Examiner. We looked at many ideas in this regard but I am open to having it looked at again and will do so before next year's budget and Finance Bill. The Senator is proposing that we encourage people to save in a particular fund which could only be used for deposit on a house.

I am loath to commit myself to another runaway success given the popularity of the SSIA scheme. People will be surprised when the final figures for year ending 31 December 2002 are published. People at all levels of income have subscribed to that scheme. That may horrify Senator McDowell and his party but the figures will illustrate it.

I always felt it was a great deal for the taxpayer but a bad one for the Exchequer.

Many people on the lower income scale have also contributed. The balance is fairly even throughout the levels of income. Senator McDowell's party felt the scheme would benefit only the better-off. That is not the case and the figures will prove it. It shows the practical commonsense of the Irish people in that when they see a good deal they go for it. There is nothing extraordinary about this.

Senator O'Toole's idea is an interesting one. I will instruct the Revenue Commissioners to look at the idea and have it assessed before next year's budget and Finance Bill. I am not giving a commitment that it will definitely take place but the principle is worthwhile. While Ministers and politicians should not make predictions I will be interested to see how the housing market pans out by this time next year. There is a fair amount of equilibrium coming into the market in all respects. We will have to wait and see. People said that three years ago and nothing happened. Let us wait and see what happens over the next year. I have expressed that feeling for some time now.

I subscribe to Senator O'Toole's proposal which is an excellent idea. The SSIA was seen as a vehicle for delivering the kind of savings required by people wishing to purchase a house.

I made the point yesterday in regard to the SSIA scheme that 52,000 subscribers to Ark Life, a subsidiary of AIB, and 55,000 in Permanent-TSB are actually losing money as of now. The Government bonus of one euro for every four euro saved has disappeared. The amount invested is now being eroded. People are tied into a scheme whereby they must contribute a minimum amount up to €250 with no indication of light at the end of the tunnel because of the collapse in the equity market.

We should try to provide an escape clause rather than tie people to this scheme, particularly those on low incomes who are trying to buy houses etc. If one opts out of the scheme, as the Minister readily acknowledged yesterday during the Second Stage debate, one will lose money and will also be liable for taxation. Surely it is possible to look at providing a tax concession whereby those who buy out of the scheme will have their tax waived. Nobody foresaw the current situation. We all applauded the Minister when he introduced this scheme. It should be possible to revisit the scheme to see if anything can be done to assist such people.

Acting Chairman

We are straying from the recommendation under discussion.

I agree, but that may save time later. It is inevitable that there will be some drift on the first section of the Finance Bill. With respect, it was the Minister who helped us along that road.

I do now want to go over old history, but I will quickly refer to SSIAs. It goes without saying that if one cannot afford €256 per month, one cannot take full advantage of the scheme. Those who could not afford that kind of money did not benefit from it and, by definition, they are from the less well off sections of the community. My party made that criticism and I stand over it.

It is not known, and there is no way of discovering, the extent to which these were simply displaced savings from somewhere else. My suspicion – it is no more than that because there is only anecdotal evidence – is that a lot of money was shifted by people from less productive savings schemes into SSIAs. People cannot be blamed for that and would have been daft not to do it. From their point of view, it is a perfectly attractive scheme and one which, I hope, many people will benefit from. I note that well over 1 million people hold these accounts.

That does not mean it made sense for the Exchequer to follow this course. The stated aim of SSIAs is to encourage people to save. I am not convinced that more people have been encouraged to save more money to a degree that would justify the cost of over €500 million per year, an extraordinary amount of money and one that would do a lot to keep open many of the hospital beds that will close in the near future.

I beg the Chair's indulgence to briefly mention the housing market, a matter to which Senators O'Toole and Higgins and the Minister also referred. I have become extremely cynical about what we are told by so-called experts and those involved in the housing market. In December 2001, the Minister responded to representations from the CIF and others that the apartment market in Dublin was collapsing and that nobody was building apartments. There was some evidence in terms of permissions granted, etc., that this was the case. However, it is now crystal clear that –in so far as there was a shortage at that time – it was a manufactured shortage and the position was quickly reversed.

Only six months ago, we were told that rents in Dublin were falling – some six to nine months after the Minister reversed the previous policy. It is difficult to credit that the market could have been turned around so quickly unless it was managed in some way. I am suspicious of those – estate agents, the CIF, builders and developers in general – who make representations claiming that the market is either in a state of flux, that there is scarcity or whatever. The Departments of Finance and the Environment and Local Government must introduce some method by which an objective assessment can be made. Vested interests have controlled this market for far too long.

I largely agree with Senator McDowell. Some people are in a position, with regard to housing and other products, to manipulate markets and to withhold or increase supply. Unfortunately, the fact that people are able to do this is something a Minister must take into account when making his decisions.

There is a real issue in regard to housing and I support what Senators McDowell and Higgins and the Minister have said. The market was managed. It drives me mad when I hear about housing being released to young couples looking to put a roof over their heads. Something is happening here. Over 50,000 houses and apartments are being built each year, a figure higher that is than the birth rate. Couples take about 30,000 units per year, leaving 20,000 extra houses or apartments coming on to the market. That figure does not take the death rate into consideration, but I will allow for immigration to account for it.

The Taoiseach at a recent meeting referred to "the big six" as those who owned most of the development land in the Dublin area. That is the language that has been used by Senator McDowell's party for some years and I fully agree with it. The problem is that when a certain level is reached – it is fast approaching – people will not live in some of the older apartments that built ten or 15 years ago and are of a lesser standard.

I watch rent prices continually and use one particular benchmark in that regard, namely, rents in the IFSC. The cost of monthly rental there more than one year ago was over £1,000 per month for a single bedroom apartment. There are four apartments advertised in today's newspapers for €900 to €930 per month. There is no doubt that the rental market is dropping and there is anecdotal evidence that some units are also empty.

I do not agree that the Minister should have rowed back on the recommendations in the Bacon report last year. I said at the time that I wanted him to row back in certain areas and for certain types of housing so that investors would not be in opposition to first-time buyers. He chose to take the broader, easier way which he said would work. Some investors are now getting their tails burned and that may continue to do so in the near future. The coming year will indicate a great deal about the housing market.

I do not want to go over the housing area again because I had to introduce two additional Finance Bills to deal with the Bacon reports in 1998 and 2000. I said at that time – I said it off script on many occasions and it was lucky that I did – that any interference in the market would cause difficulties. As Senator O'Toole said, we are back to where we started. I think I will be proved correct in that the answer to this problem is supply. When supply is greater than demand, prices will go down and when demand is greater than supply, costs go up. I have been proven correct regarding the rental market.

The reverse in the 2001 budget was made with the intention of getting apartments built for letting and that has been done. I am not going to work it all out, but, if Senators consider the position they will see that it will have an effect throughout the housing market. There are only so many people looking for houses and only so many houses available. If somebody has a lot of one product on their shelf or in the form of a house and the bank manager is roaring at that person, he or she will have to start shipping or moving that product. When that happens, prices will drop and there will be a balance.

The Senators and I are coming from different ends of the spectrum. I believe fundamentally in the free market, whether that is with regard to the price of chocolate, cattle or houses and I think I will be proved correct.

Did the Minister mention the price of cattle?

The price of cattle in a free market.

I take it that the Minister is opposed to the CAP.

There is not a free market in housing. The problem is that there are controls.

Acting Chairman

Senators should allow the Minister to speak without interruption.

Greed is the best thing in a free market. It is either that or go broke. If there is enough supply of a product, someone will have to move it.

The problem is that the supply is regulated.

I estimate that, on average, some 45,000 units per year have been provided for the past five years, including some 50,000 in the past two years. That is enough to meet demand. It will be seen who is correct on this. There is a move to interfere in other areas of the market, but I am loath to do that and I urge caution. It might be popular and might look like the thing to do, but, in this type of market, that is not always the case.

With regard to the price of cattle, my first speech in Dáil Éireann in 1977 was on the setting up of the economic planning and development programme of the former Minister, Mr. Martin O'Donoghue. I spoke about the ludicrous situation which then existed regarding guidance prices. I said that any business system, for making matchboxes or anything else, which guaranteed a set price for a matchbox or other product, no matter how many were produced, must fall on its head.

The final number of SSIA holders is not yet available, but I can inform the House that there are approximately 1.17 million of them. The final figures, which will provide information about the number of people who have invested in equity related accounts, will not be available until the annual reports have been published. However, I have read a document which suggests that the number of such people is between 200,000 and 250,000. Those who invested in special savings accounts that are linked to equities, who comprise between 20% and 25% of the total, took a chance and knew what they were doing. They would be laughing at people who invested in fixed interest accounts if the market had increased. I do not favour compensating those who took a chance and knew what they were doing. The SSIA scheme is quite generous and I have no intention of introducing compensation mechanisms. The scheme was introduced to encourage people to save for five years and they knew when they opened an account they would be penalised if they closed it. Most people decided to open safe and secure ordinary deposit rate accounts, but some of us decided to open the other form of account, knowing that we were depending on the market.

The Minister's effort to cajole the farmers to come back in through the doors of Government Buildings to complete Sustaining Progress is impressive. I am sure the fact that he does not favour any form of price control or regulation will be a great consolation to farmers.

The Senator should look at what it has done.

There will be a free market in agriculture in ten years.

Recommendation, by leave, withdrawn.

I move recommendation No. 5:

In page 13, before section 1, to insert the following new section:

1.–In respect of the year of assessment 2003 and subsequent years of assessment, section 466 of the Principal Act is amended by substituting ‘€100' for ‘€60'.".

This relief has fallen into disuse, although if memory serves, the Minister has made clear that he favours the principle of doing something with it. This recommendation is being brought forward as a way of giving recognition and financial support to those who look after a relative with a disability or a child with particular medical difficulties. As matters stand, a tax credit of only €60 per year is given, but we should look to improve the matter over time, if the public funds allow us to do so.

I have proposed this recommendation to get the Minister to elucidate his opinion of this tax relief. I am aware that there are other means, within the tax system and otherwise, whereby the Minister and the State attempt to provide assistance to people in the circumstances I have mentioned. It seems that a case still needs to be made for providing a relief of the kind suggested in this recommendation within the income tax code.

The intention of this recommendation is to increase the dependent relative tax credit from €60 to €100 per annum. The credit was significant for a long time, until the recent past, not for its monetary value but because it opened up the way for other reliefs, including relief in respect of the medical expenses of a dependent relative and mortgage interest relief in respect of a loan obtained for the purpose of a dwelling used rent-free by such a relative. Such relief has not been contingent on entitlement to the dependent relative tax credit since the definition of dependent relative, for the purposes of medical expenses, was changed in the Finance Act 2001. The importance of the dependent relative tax credit, therefore, has declined and I am not inclined to revitalise it. I indicated to the Dáil during a debate on the Finance Bill last year that I would like to make the tax credit certificate so simple that it would not, in effect, contain anything other than the single or married tax credit and tax band. In the circumstances I have outlined, I cannot support the recommendation.

The cost of this recommendation is estimated at €600,000 in 2003 and €800,000 in a full year. As I signalled to Senator McDowell last year, I intended to limit the presence of the smaller tax credits on the tax free allowance certificate. The dependent relative tax credit, for example, is just €60 per year, so it does not benefit those who claim it to any great extent, particularly as the relevant amount of money before one enters the tax credit has been increased. I signalled last year that I intend to remove the credit and other similar credits from the tax code. I would like to make the tax allowance certificate as simple as possible and I would have done so in the budget, were it not for the fact that I wanted to make minimal changes to the tax code this year.

I signalled in the Dáil and in this House that I was thinking of doing nothing, but I made minimal changes – in relation to the employee tax credit and the small increase in the exemption for elderly people – that cost just €196 million, in order to keep 90% of people who earn the minimum wage out of the tax net. If I removed many small allowances, having stated that I intended to make minimum changes, a hullabaloo would have been raised about a cost to the Exchequer of an insignificant sum, such as €5 million or €10 million. Senator McDowell's colleagues in the Dáil would have said that I was imposing taxes on the small people again.

Blind people.

I did not bother to do what I said I intended to do in this area because I would have been misrepresented for doing so. I still intend to make the changes, but I did not do so on this occasion because of political circumstances and not economic conditions.

I do not intend to pursue this recommendation. It will be of interest to some people that the Minister has restated his intention to remove the little support that is given through the tax system to blind people and those with dependent sick relatives.

It was a helpful clarification; the Minister is always frank in relation to these matters.

The blind person's allowance, which was not changed for many years, has been substantially increased since I became Minister for Finance.

Is it not one of the allowances the Minister wants to abolish?

No, I plan to make changes in relation to smaller allowances.

Recommendation, by leave, withdrawn.
Section 1 agreed to.
NEW SECTION.

An Leas-Chathaoirleach

As recommendations Nos. 6 and 8 are related, they may be discussed together by agreement of the House.

I move recommendation No. 6:

In page 13, before section 2, to insert the following new section:

"2.–Section 15 of the Principal Act is amended by the insertion after subsection (2) of the following subsection:

‘3.–The amounts specified in column (1) of this table shall be automatically increased for each year of assessment by a percentage equal to the annualised rate of increase in the Consumer Price Index last published by the Central Statistics Office before the commencement of the year of assessment'.".

This recommendation is self-explanatory. Since he became Minister for Finance, Deputy McCreevy has, quite rightly, received plaudits for the manner in which he has reduced the rate of taxation in successive budgets. When one reflects on the position 15 or 20 years ago, when 60% or 65% of one's monthly earnings was being taken by the State and when taxation was generally acknowledged as a scourge by the PAYE sector, one cannot doubt that there have been considerable improvements. One must give credit where it is due.

A great deal of the progress has been lost, however, as a consequence of the fact that more than one-third of taxpayers will be paying the 42% rate by the end of 2003. This arises directly from the failure to increase tax bands and tax credits. Despite the large increases in the bands and credits last year, an additional 70,000 people were brought into the higher tax bracket for the first time. I accept that the percentage of taxpayers paying the higher rate decreased from 32% in the 1999-2000 to 27% in 2002.

The fundamental point I want to make is that it appears that the progress made in recent years will, in effect, be wiped out in 2003. More than one third of taxpayers will be paying the top rate of tax by the end of the year. The net fallout from this will be that the Government will have saved almost €600 million by not indexing tax bands to wage increases in 2003. Taxpayers will fork out €600 million this year as a result of the Government's decision not to introduce indexation.

The figures to which I refer make clear that the gains and successes of recent years, for which I have given the Minister credit, will be more than wiped out. There was a substantial increase last year, when an additional 72,000 people found themselves in the 42% tax bracket. Substantially more people will be caught in the higher bracket as a result of the fact that the bands and credits have been frozen for the current year.

My recommendations suggest that the Minister should link the tax bands to the consumer price index, which is the Bible beautiful in terms of the impact of the cost of living on the public.

I am on common ground with Senator McDowell. Indexation is a bad principle. I cannot believe that any Fine Gael Minister for Finance over the past 20 years would have accepted it or would accept it now. It removes some of the essential flexibility that a Minister needs in formulating a budget. In really good years one can exceed the requirements of indexation, which the Minister did over a number of budgets. In other years, one might match its requirements or one might be below its requirements. I recall a budget in 1987 in which there was no increase at all in reliefs, bands or allowances.

One cannot foresee circumstances. The social partners recognise that indexation is a bad principle and they do not include it in the taxation section of Sustaining Progress. It is not even implied. They recognise that the tax system has to produce what we need for essential spending. The Government is committed to maintaining the rates at their current levels. The rates represent a significant achievement and it is senseless to talk of returning to our previous position. It is not long since at least 40% of the people, if not more, paid tax at the higher rate.

The Government and the country received great praise from the OECD yesterday for the policy of keeping tax low. It was said that the policy should act as an example to governments in other jurisdictions. It will be quite a battle to maintain the current tax rates of 20% and 42%. When there is pressure on the public finances, as there is this year, it is inevitable that one has to resort to under-indexation, a certain widening of the tax base and other measures. I agree with the fundamental point being made by the OECD, which is that our policy is good for confidence and competition. The Minister has my support in what he has been doing to maintain the rates as they stand. Even if we did not have the particular problems we have this year, tying a Minister to indexation would be undesirable. The Italian economy, which used to be in bad shape, had a principle of indexation known as the "scala mobile”, which sounds like the name of a Rossini opera. We do not want to go down that road.

Senator Mansergh has somewhat, but not entirely, misrepresented my position. There is an argument for indexation and for saying that, in any given year, allowances and credits should increase in line with the CPI for the previous year. That is not to say that I would necessarily have favoured index-linking the reliefs, allowances and credits to the CPI this year. I can see why the Minister did not do so and have some sympathy with his position. However, there is an argument for being explicit so that a Minister who increases income tax by stealth will have to say so.

The Minister has chosen to increase indirect taxation, although he has not said so explicitly. He has done so by giving the nod to various State bodies that wanted to increase charges, and he has increased VAT explicitly. As I said on Second Stage, I am not convinced that this is the time to increase indirect taxes, although one could make an argument for doing so in different circumstances. For the first time in many years, we have a genuine competitiveness problem, partly because of the state of the international economy and largely because of the appreciation of the euro in recent months.

This is not the time to give a 2% push to inflation. If the cost of not doing so would have been to increase income tax or corporation tax, for example, I would have taken that approach. There are times when increasing indirect taxes is the least painful method, but this is not the time to do so because we have to keep a careful eye on competitiveness. The Minister has made a mistake if, as I suspect, he has adopted this method. I read the tax strategy group papers which stated that there was scope for increased charges and indirect taxation, but this is not the time for doing so.

The purpose of these recommendations is the indexation of the tax bands and certain tax credits. Such a move would be costly for the Exchequer. For example, if a figure of 4.6%, representing the best available estimate of the rate of growth in the CPI for 2002 over 2001, was to be assumed, the full year cost of indexing the standard rate band would be about €192 million in a full year. In addition, a similar increase in the main personal credits and allowances would cost approximately €165 million in a full year. Overall, at such a rate of annual increase, costs of almost €363 million per annum could be expected to arise. Clearly, tax expenditure on such a scale would severely limit the Government's flexibility in determining budgetary priorities having regard to the economic realities in any given year.

It is important that the Government retains flexibility as to the size of the personal income tax package as against other priorities and the composition of any package. For example, in this year's budget the employee credit is being increased by 21% to ensure, in light of the limited resources available, 90% of the increased minimum wage is exempt from taxation, although it was increased again in 2002. It now stands at €6.35 per hour. If limited resources were spread equally across all bands and credits, it would be more difficult to target resources in this way.

The overriding aims of the Government's budgetary and economic policy, as set out in An Agreed Programme for Government, are clear. It is committed to sustaining economic growth, strengthening and maintaining the competitive position of the economy and maintaining full employment. Responsible fiscal policies are central to the achievement of these aims and it is not clear that making statutory provision for the indexation of bands and credits would be consistent with this approach. The most recent data from the OECD pertaining to 2002 and concerning a single person on the average production wage show that Ireland has the lowest tax rate in the European Union.

I remind Senators of the fundamental change in the tax system in recent years. Tax credits have been increased, tax rates have been reduced substantially and there has been a significant widening of the standard rate band. These factors make the tax system inherently fairer and all taxpayers have benefited from the increases. The Government already has clear policy priorities regarding personal taxation, including a priority to ensure all those on the national minimum wage are removed from the tax net and that 80% of all earners pay tax only at the standard rate. However, the achievement of these aims is subject to the overarching requirements of sound economic and fiscal policies. We are keeping the public finances in order and thus I cannot accept the recommendations.

Senator Mansergh referred to keeping the tax rates at 20% and 42%, the achievement of which he regarded as significant. He stated that there would be a battle to maintain the rates at these levels and it is the goal of the Government to do so. As the Senator pointed out, we were commended as recently as yesterday by the OECD officials in Dublin for our low tax rates. Low rates give a push to the economy and stimulate growth over and above that of our neighbours.

Senators McDowell and Higgins will be aware of our friends in Europe, particularly Germany and France, which have had difficulties. There has been a stagnation of economic growth and their heavy taxation policies have impacted dramatically on incentives for businesses and employees. Efforts are being made by the German Chancellor and Finance Minister to make some worthwhile changes. They have copied some of the Irish ways of doing things and are finding great difficulty in doing so. We have got it down to what I regard as a reasonable level. If we can keep it at that level, we will have a future competitive advantage.

I know that not everybody in Irish life agrees with my theories on taxation as the engine of economic growth but the proof of the pudding is in the eating. We have been successful in doing it our way. Countries which have tried the other way for generations have failed, something we have learned from the Irish experience. That is not to say we are perfect in every regard and that we cannot make changes but in recent years our ways of doing things are better than those in continental European countries.

In response to Senator Higgins, Senator Mansergh made the point very eloquently regarding automatic indexation for which there is no case. Not alone does the tax credit limit the flexibility of Ministers for Finance into the future but an automatic index to anything is not necessarily a good thing. I have seen this in the areas of public expenditure where we have particular schemes. When the partners come to bid with the Minister for Finance, they never think of doing away with the scheme. I am sure the Senator has experienced this when in government. The scheme might have long outlived its usefulness but with a whole plethora of civil servants behind it, no one ever suggests doing away with it. They all must get their 4% every year. If the Government decided on a 4% increase in expenditure overall, everyone thinks all the schemes must get it when what we should be saying is that all of the increase on this occasion must go to one area.

I will use the example of defence. If I use any other area, it will be deemed that I am making a political point against some of my colleagues. If the Government for some reason decides to allocate all the extra moneys to the Department of Defence, that means those moneys must come from other Departments, that they will not get any increase or the allocations of some must be reduced but that is not the way it is. Every Department and Minister will feel that this is terrible, that they will not be regarded as very strong Ministers unless they get an increase for their Departments also, ever though there might be no need for particular schemes. That is the approach we tried to adopt this year in the Estimates with the assistance of the independent Estimates review committee or the three wise men's report. We gave most resources to the Department of Health and Children. It got the bulk of any increases going. Other Departments had to take hits. That is the proper approach to doing business.

If there were automatic indexation, everybody would have to get the same increase every year. If we were to build this into legislation regarding taxation bands, credits or allowances, we would limit the flexibility of the Minister for Finance. We must always retain maximum flexibility depending on the state of the public finance at any given time. I understand the purpose behind the recommendation but it would not be the way to go. No Government or Minister for Finance would be inclined to tie their hands in that way.

The purpose of a taxation regime is to raise revenue in order to run the State. The purpose of tax bands, allowances and credits is to achieve a balance between the amount taken from one's income or resources, on the one hand, and the amount somebody needs to maintain his or her living standards and keep body and soul together, on the other.

From the point of view of the merits or otherwise of indexation, the principle of indexation is irrefutable. While this might be a difficult year, the whole principle of adjusting or relating income tax allowances and increases to the consumer price index which, as I said previously, is the manual for determining the cost of living, is irrefutable. The Minister is right when he says it would limit the scope of the Minister for Finance. Of course, it would, it would take much of the gloss off the Budget Statement – everybody waits with bated breath to see what the Minister gives by way of various tax concessions, reductions, etc. but the linking of the two together is irrefutable and uncontradictable from the point of view of its merits. One would adjust it on an ongoing, regular basis with the consumer price index, the price of living, in order to ensure a fair balance, between what is taken, on the one hand, and given, on the other, is maintained.

The reality is that the Minister for Finance has a double whammy. On the one hand, he is using price increases as a way of collecting of taxes. He is using inflation as a tax collecting tool. I alluded on Second Stage to the increases that have happened this year. For example, motor tax is up 12%; hospital charges are 26%; the threshold for qualifying for the health boards' drug refund scheme is up 31%; VHI charges are up 18%; cigarettes and alcohol are up 15%; bank and card charges are up 29%; ESB charges are up 13%; college fees are up 9%; parking fees are up26%; Dublin Bus and Bus Éireann fares – announced the week after the budget by the Minister for Transport – are up 9%, while the television licence fee is up 40%. These are just some of the stealth taxes that have been increased. Therefore, the consumer is taking a double hit. On the one hand, the cost of living and inflation are going up and, on the other, while the Minister's case in relation to those over the age of 65 years may have merit, there were absolutely no concessions whatsoever to the vast bulk or huge tranche of people caught in the middle income sector from the point of view of giving them some relief by way of tax bands and credits. I am disappointed that the Minister will not even concede the fundamental principle, although he has acknowledged that there are particular difficulties this year.

The tax strategy group indicated that linking tax bands and credits to inflation – my figures are at variance with those of the Minister – would cost somewhere in the region of €250 million according to the Department's calculations, although there is a variation between the figure given by the Minister sometime ago in his scripted response and mine. This figure of €250 million was based at the time on the pre-budget inflation estimates of 3.2%. However, the decision to raise around €1 billion in indirect taxes means that inflation will be closer to 4.5% or possibly even 5%, thereby further increasing the amount of stealth taxes. Therefore, I am absolutely convinced that the merits of what I am proposing are irrefutable, sound, and should be accepted in principle, perhaps not this year, by the Minister as the way to go in the future to ensure income tax allowances are given in line with increases in the cost of living a la the Bible beautiful, the consumer price index, CPI, as I said previously.

I am not convinced. Will the principle of tax indexation be included in the next Fine Gael manifesto? Even so, would it be in the programme for Government?

That is four years down the road.

If it were included in the programme for Government, would it actually be implemented by any Minister for Finance one would care to name? I just think—

On a point of order, what is wrong—

An Leas-Chathaoirleach

Order, please. Senator Mansergh, without interruption.

Other things being equal, of course it is desirable to index tax allowances and bands. For most of the last five years, this has been done. In fact, more than this has been done but there are other circumstances where one is in the downward part of the cycle where it is not easy to do so. There is a lot of talk about stealth taxes. It is perfectly transparent as far as the public is concerned that the Government has not been able to fully index tax allowances and that to keep the public finances on a reasonably even keel it has also been necessary to increase charges. In some of the instances named – I think the television licence fee was mentioned – charges have not been increased for years, if not decades. This has to be taken into account.

To come back to the point, it is a good principle of fiscal management, in any year's conditions, not just this year's, for the Minister to retain flexibility. What has been done is what he sees as necessary to keep the rates in place. The alternative, as Senator McDowell has pointed out, would have been to straightforwardly raise the rates of income tax but that would have been very undesirable.

I was going to let it pass but as the Minister has come back in I will take the opportunity to respond to one or two of the points he made during his exposition.

A couple of years ago there was something resembling a consensus, perhaps not well-worked out but a consensus nonetheless, on what where the primary drivers of our economic growth and boom. It was traditional at that stage to list factors such as social partnership, the labour market, the existence of a well-educated, English speaking workforce, with some mention too of the taxation system. It is interesting to see how the Minister has quite successfully rewritten history here because he has written off all the factors which most of us regarded as more important. He has now decided that the boom was tax driven, and more specifically that the driver was his own low taxation policy.

I accept that taxation policy has a role. The low rate of corporation tax is probably more important now than at any time in the past ten years. Income tax rates have a lesser role. I do not accept that our economic growth and boom have been driven exclusively by this Minister's policy of low income tax rates. That does not stand up to any examination whatsoever.

He mentions Germany and France. It is easy to refer to the Federal Republic of Germany as a basket case. This is a country which in the past ten years has managed to do something which is almost unprecedented in recent history in that it has incorporated a bankrupt communist state, with a negligible infrastructure, into a functioning Western style social market economy. It achieved this with relatively small tax increases. The Federal Republic of Germany has been a major success. Although it is experiencing some difficulties today it manages to maintain the essence of social welfare and health systems which are infinitely superior to ours. Like France it has a public transport system which is also far superior to ours, and while everybody would acknowledge that it has problems, particularly in the labour market, I am sure our Social Democrat and Green colleagues can overcome these without lectures from the right to help them along the way.

I am not so sure.

I never said the German economy was a basket case. Those are Senator McDowell's words. I did say that the German economy is in some difficulty at present. I am sure the Senator has noted that his Social Democrat colleagues have tabled proposals for change despite loud objections from other wings of their party.

They have been less successful in dealing with the trade union side of their movement than we have been in dealing with Senator O'Toole.

Very true.

I spent a very pleasant five months as Minister for Finance with my colleague, Mr. Oskar La Fontaine, who was Minister for Finance in the German Republic until he decided to vacate the position. He was a most pleasant individual and we had many interesting talks. I notice that he is making his presence felt again in the German press although many people thought he was going to retire. He has announced his retirement three or four times.

The Senator will have noted in recent weeks that Mr. Schröder intends to make several economic and social changes. He has announced very tough proposals regarding the welfare state. I do not know whether the German political system will allow this to occur. I do know the difficulties for my friend Mr. Eichel and the proposals he made regarding some taxation changes and the problems Mr. Schröder has in trying to implement them. I make this point because the German Government recognises that it is necessary to have a pretty flexible and attractive system in the business and the personal tax areas. Germany is not alone in seeing that low taxation policies have helped economic success.

I never said that tax changes are the only drivers of economic growth in Ireland and I do not wish to claim personal credit for this. I do claim personal credit for some tax changes and certainly my party and our partners in Government, the Progressive Democrats, can claim them, but I am not saying that all the development and our recent economic success are the result of tax changes. Each of the items which the Senator refers to, from social partnership to foreign direct investment and lower business tax and so on, has contributed to that success, together with social factors such as the young workforce. Thanks to policies of investing in education, sustained over about 40 years, we had a young, well-educated workforce at a time in European economic history when the rest of Europe was experiencing zero population growth.

Social partnership was another important factor because it created certainty that we could reach comprehensive agreements. We invented social partnership but the idea was modelled on what the Germans had been doing for a long time. We tailored this to Irish circumstances and it has worked very well.

I add to that, as I have always done, that the major change in financial policy was brought in by the Government led by Mr. Charles Haughey from 1987 to 1992. As someone who was a known critic of Mr. Haughey for other reasons in the 1980s, I was the first to compliment him when he went in the other direction. History will be very good to him in that regard, irrespective of troubles in other areas. I have said so in the Lower House, as Senator McDowell knows, and publicly, although some journalists condemn me for it but to say anything less would be unfair to the historical record.

As for my attitude to indirect taxation I am sure Senator McDowell has noticed over the years in my time as Minister for Finance and as Opposition Spokesperson on finance that I believe in low direct tax rates. Other colleagues, and those in other parties, refer to it as lower taxation but I have always referred to lower direct taxation, be it business, personal, capital, or whatever. I am sure Senator McDowell has noted that in all my utterances both here and in the Dáil during his considerable tenure as a Deputy. I allow him to draw his own conclusions.

I agree with the Minister in relation to the fundamental change and turnabout effected under Mr. Haughey's leadership in the post-1987 period. The Minister must acknowledge however, that what Mr. Haughey set out to do in awakening people to the economic reality could not have been achieved without the very magnanimous gesture of the Tallaght strategy.

Can I just interrupt the Senator to make one point? I as a back bencher was the first Deputy on the Fianna Fáil side at that time to compliment Alan Dukes.

I did it before he was ousted from leadership of the Fine Gael Party and I used the phrase it is a great tradition to say when a person is gone that he was a great man. I did it a long time before he went.

I thank the Minister for that.

I accept that.

I recall vividly my work as Opposition Chief Whip at the time, trying to maintain the delicate balance of keeping a minority Government in power, provided it continued with a fiscal policy that would the benefit the nation. The party came under considerable criticism at the time because we were not voting in the Dáil and we adopted that line out of a sense of commitment to the national interest. I recall being lambasted on the basis that the role of the Opposition was to oppose come what may, and we had set aside that fundamental temptation in the national interest.

It was a happy development in relation to the maturity of politics and politicians, and the political system, that we decided on several issues to adopt a bilateral approach, or consensus politics. One of those issues was the welfare of the economy and thankfully that has been maintained by and large in the interim. The second issue was Northern Ireland. These areas were politically sacrosanct from the point of view of a consensus. While we might vary with regard to the margins, the strategy has been largely maintained.

I do not wish to score political points, but increased taxes are the result of the two-year period when public spending increased by 40% while revenue increased at a rate of between 5% and 6%. This fundamental difficulty with the public finances has limited the Minister's ability to make even marginal increases at the top and the bottom rates of tax. I acknowledge what the Minster has done for those aged over 65, but it was the increase in public spending by 40% in the two years leading up to the general election which caused the constraints in relation to tax concessions. We spent 7.5 times what we were earning.

I fully agree that Fine Gael deserves much credit for the Tallaght strategy. In the period in question, the high growth rate of between 8% and 10% and surpluses of up to £4 billion put great strain on infrastructure. The Government had leeway and people from all quarters were pressing us to spend money. The Minister for Finance maintained a substantial surplus for most of the five years in which the previous Administration held office until the downturn hit. I cannot say in which areas Senator Higgins would have refrained from spending during the period.

We still have considerable infrastructural and social needs and I am not sure the criticism that we engaged in overspending can be sustained. Cumulative growth of more than 8.5% resulted in huge bottlenecks which needed to be tackled and which involved increases in spending. People's expectations have risen way above what they were and while that is on the whole a good thing, we must manage demand sensibly. I do not accept the criticism. We used the margins that resulted from the establishment of a healthy financial position. I am not sure that holding money in reserve to alleviate the top rate of tax should have been or should now be the priority.

I bring to Senator Mansergh's attention the example of Campus Stadium Ireland.

It did not go ahead.

Precisely. Millions were spent preparing the plans for the stadium and all of that money has gone into a hole in the ground. The money has been lost on a hare-brained idea.

We shall see. One cannot win them all.

In each of my years as Minister for Finance, I have achieved an overall Exchequer surplus. Debt has been reduced to 34% of GDP, which is the second lowest ratio in the European Union. In the five years of the previous Administration, the Government increased gross public spending by nearly 100% from a figure of roughly €18 billion in 1997. Gross public spending will be of the order of €38 billion in 2003, while the net figure will be around €30 billion. With that money we increased the number of public sector workers, most of whom were employed in the public health area. We increased spending on education, health and welfare, while implementing pension provisions we were anxious to make by giving the old age pensioner an income of €100 per week. As a result of our economic success, we were able to achieve things in the social arena about which we could only dream in the past.

We were able to provide €5 billion in tax reductions, the details of which I outlined earlier. Those provisions gave us the most attractive direct taxation regime for the lower paid in the European Union and among OECD countries. We reduced the national debt as a percentage of GDP as well as in absolute terms. I have invested a great deal of money in the national pensions reserve fund to provide for future demographic change. Senator Higgins might disagree with our spending decisions as he has a different perspective, but that is where much of the money went. I paid off debts which were hanging around and for which there was no credit, including the debt incurred from the break up of An Post and Telecom Éireann many years ago. I used €800 million to pay off the overhanging liability in that area in one year. I paid off other liabilities which had built up and which will not now be carried over.

Senator Mansergh asked about the areas of public spending in respect of which people would have had me make cutbacks in the past five years. I recall hearing demands on the radio every morning from politicians and lobby groups for greater spending in their areas. People wanted more changes in taxation at every level to reduce the top rate and to take people out of the system at the bottom. All of that was done. I increased spending when we had the resources. During the lifetime of the previous Administration, the economy grew by roughly 50% which is something that has been achieved by no other country in the developed world in recent economic history. The population began to increase and we experienced the problems of immigration rather than of emigration.

Senator Mansergh and I spent every hour of our waking political lives worrying about how we were going to find jobs for the masses of young people who were coming into the labour market. We reduced unemployment from 18% to less than 5% and instead of seeing between 40,000 to 50,000 people leaving the country each year, we saw between 20,000 to 40,000 coming in. Instead of worrying about finding jobs for people, we found ourselves formulating an employment policy to allow more people to enter the country to take up vacant positions.

These are the problems of economic success, but as a famous actor once said "I have been rich and I have been poor and rich is better." I remember the days when there was no congestion on the Naas dual carriageway because there was nobody travelling to work and my attitude is that rich is better. Few people could afford a car and there was perhaps one for every three or four households where I used to live. Now there are households with four and five cars. The problems of society which have been mentioned must be looked at in the context of that success. We increased spending by 40% over two years and with the turn in the economic tide, I made adjustments. Last year the spending target was 14.4% and we came in at 13.9%. The figure this year should be about 7%. We cut our cloth according to our measure.

I ask those commentators who refer to problems resulting from allowing spending to grow by 40% over two years what they would have done differently. On what would they have refused to spend money? If I had limited spending to half the amount over the two years in question, aside from the political ramifications of people roaring for greater spending and reduced taxation, I would have increased the surplus. The effect of increasing the surplus would have been to reduce our debt even further.

I could have taken additional money out and invested it in the national pensions reserve fund. Leaving aside the political ramifications of that action – with people crying for better hospitals, schools, etc. – I would have been saying to my Cabinet colleagues that we had plenty of money and that we should reduce the national debt even further. At that stage I bought the national debt down from approximately 70% to 50%.

If I had said I wanted to put more money into the national pensions reserve fund, Senators McDowell and Higgins – who were both Deputies at the time – would have claimed I could not do so because the roads to Ballyhaunis and Claremorris were falling apart and more money was needed to facilitate their repair. People want more social needs assistance and want social welfare funding to be increased. Had I been able to hold out and achieve that goal, the surplus would have increased. When there is a surplus at the end of the year, all that happens is that the debt gets lower. It is not put in another place and held there for the next year so that we can spend it then. That is the way we have been doing business in public financial terms since time immemorial.

The case could be made that perhaps reserve funds should be set up so that they could be thrown into the economy at various stages. That would not count at all in EU terms for the 3% stability pact. There are anomalies in the stability and growth pact and I have spoken about them at many fora, but this is the first opportunity I have to spell out the position in clear terms. I have heard eminent commentators discussing this great increase. I will provide an example and I am willing to listen to an opposite view. The policy we adopted of increasing spending in the social areas with the largesse that we had available and striking a balance between that and taxation changes was the best economic prescription. At the same time, we ran overall budget surpluses and overall Exchequer surpluses.

In the 1980s, I thought it would be a major achievement if a Government could achieve current budget balance. It was only from the mid-1990s onwards that Senator Mansergh and I, when working on the Fianna Fáil manifesto, began to realise that we might achieve an overall Exchequer balance. We never dreamed that would occur in the 1970s or 1980s. I would have seen it as a major achievement if a Government got back to a current budget balance. However, we achieved an overall Exchequer balance and a surplus. I do not know how this relates to the matter under discussion, but I wanted to use the opportunity, while within the hallowed walls of this House, to put this on the record.

I know we have drifted somewhat, but we are discussing a fairly general recommendation regarding an important section of the Bill. There is probably more sense in trying to elucidate something of the Minister's attitude to these issues, rather than moving rapidly through a list of recommendations we know the Minister will reject. Senator Higgins and I have read his lengthy scripted speeches delivered at the Select Committee on Finance and the Public Service and in the Dáil, so we know what he is going to say. It is perhaps better to spend the time trying to find out his attitude for the future.

I will not dwell on historical facts, but I am interested in the Minister's references to the stability and growth pact. It appears that he is being unduly careful, certainly in the scripted comments made over the past few years.

I would not have been as careful in the meetings.

I can imagine. Since we are having such a frank exchange of views, I thought I would encourage the Minister to put it on the record of the House.

I know the Senator might not take as much interest now that he is no longer a Member of the Lower House, but he may notice that the Commission came forward with its proposals and recommendations which were to take account of Ireland's situation. The Commission has been beaten back—

That is what I wanted to ask.

Even though we have been at odds with the Commission in many areas, its proposals were to recognise low debt countries.

I still take an interest in these matters. I have not given up on the people of Dublin North-Central and I like to persuade myself at times that they have not altogether given up on me.

I agree with the Minister. I note what the Minister for Transport, Deputy Brennan, said a few months ago when he effectively blamed the stability and growth pact for the failure to deliver on public transport in Dublin and the failure to make real progress on the metro. This is completely at variance with Government statements which indicated that it was a "sovereign commitment".

It is useful and important to debate this matter publicly. I know the Minister has been making the point with the Commission and at Council meetings. Before we have a difficulty with the 3%, it is important that countries like Ireland make that argument publicly.

In 2003, Ireland will probably end up, in GGB terms, with a deficit of 0.6%. Everyone is supposed to be close to balance or in surplus. There is no rule about it, but it would generally be taken to be 0.5%.

They never really implemented that.

I was about to deal with that matter. There was a hint that this was going to be a bit of a laugh and that Ireland could possibly be criticised and have maybe a deficit of 0.6%. We were regarded as close to balance on the basis of the cyclically adjusted budgetary balance, which is a very complicated method of calculation used in recent years – it is too complicated for any politician to examine – and which brings it to a particular level. The Exchequer borrowing requirement for this year will be 0.6%, while it is projected as being 1.2% for 2004 and 2005. That does not mean that I must adhere to those particular figures and I will make whatever changes are necessary in the budget. That is also cyclically adjusted going forward.

We are at the very edge in terms of what is allowed. The EU will not allow a small country such as Ireland to move up to 3%. Germany and France have arrived at 3% and Portugal went beyond it. However, Ireland would not be allowed to approach that figure because it would be regarded as being too dangerous for a small country to do so. This stability and growth pact is very restrictive, particularly at the level of low debt such as ours.

We are in Gordon Brown's camp. He wants to do something with public services and we want to do something regarding infrastructure. The UK has the third lowest debt ratio. It is not part of the euro and its figure stands at approximately 39% or 40%, depending on how it is calculated. Mr. Brown will deliver his budget, which was delayed because of the war in Iraq, on 8 April. The financial situation in the UK has been deteriorating in the past year. In November, Mr. Brown announced that borrowing would be in the order of £10 billion and it has now gone from that to £20 billion. It could still be revised upwards to £30 billion. The UK will probably be next to reach the 3% mark, but such a development is not as serious because it is not involved with the euro.

We have low debt but very poor infrastructure. If we learned anything in 1999, 2000 and 2001, it is that investing money in infrastructure is not necessarily the best action. Doing so stokes up inflation. I will give an example to prove this point. A few years ago, the CIF advised us not to put all the projects on stream at the same time because we did not have the capacity. We were cautioned to hold back, but a year ago the CIF was telling us to release them. It is a basic economic principle that too much money taking too few goods means a rise in price. The construction industry and civil engineering firms quoted any price they liked because there was a small pool to do all the work. We were getting less value for money in those areas.

The terms of the stability and growth pact are very restrictive. We made a big effort and luckily we were in the same camp as the UK. I had my differences some years ago with Mr. Solbes, but we are very friendly now.

As already stated, the terms of the pact are restrictive. Belgium has a debt ratio of approximately 100%, Italy 109% and Ireland 34%. Belgium has a high debt ratio, while Ireland has a low debt ratio. When we joined the euro everyone was supposed to reach a level of 60%, which seems to have been forgotten. I am willing to accept that there should be a matrix of different rules for smaller and larger countries. I do not want the Irish economy to be compared to its German counterpart. We have a population of 4 million, while Germany has a population of approximately 80 million. They have a very good road and railway network, therefore, it appears stupid to compare this country to Germany.

Is the Commission proposal off the table?

No, it is not totally off the table. The Heads of Government will return to the matter.

I recognise why the Commission set out these simplistic rules and did not differentiate between current and capital expenditure because people would be creative in that regard. I accept that the rules are simplified, but there should be a matrix in relation to a country's size, debt ratio, levels of infrastructure and so on. I recognise that the proposal being put forward has some drawbacks and I also recognise the validity of the question "If we begin to go down that road where will it end?" It is a finely balanced argument for which I have made the best case possible. I have been more forthcoming here than at other fora.

The Minister referred to employment during his recitation of the general achievements, etc., of the Government. If I recall the official statistics correctly, 23,000 additional people were recruited to the public service over a 12 month period and 50% of these individuals were recruited to the health service, which is already bloated.

Numbers in the health service increased from 68,000 to 96,000 in five years. Many of these people were recruited over an 18 month period.

Without these Civil Service jobs, employment figures would have decreased by 5,000. What are the Minister's plans in relation to his responsibility for the public service?

Something which has not been widely commented on is the cap I placed on public service numbers. During the term of the previous Government, the number of public servants increased by 50,000, of which approximately 40,000 were recruited to the health service. I imposed a cap on these numbers in the budget and indicated that there must be a reduction of 5,000 over the next two years. Much of this will be achieved through natural wastage, etc. It is important to put a cap on numbers because we cannot continue to expand at the previous rate.

Most of the 40% increase over the two years relates to public pay and pensions. More than half of the net current budget is spent on pay and pensions. As any business person will know, control of expenditure is related to the numbers of people employed and the rates at which they are paid. If the numbers employed are increasing and the rates being paid are substantial, it does not take a great mathematician to work out that costs will increase. A good deal of the increases have gone on pay, and one can understand why this is the case. Health is a caring service, involving doctors, nurses paramedics and so on. The same applies to education.

The policy is to cap the numbers at approximately 280,000, reducing it by 5,000 over two years. This will not be a great imposition because much of it will be achieved by way of natural wastage. I have sent a clear signal that this is the limit. Proposals coming before the Government over the years have included additional numbers such as one assistant secretary, four principal officers, two assistant principal officers, etc. Just to announce the weather on days the Cabinet meets would require additional staff. All areas of the public service, from the Civil Service to agencies, see this as another way of acquiring additional staff. I sent a clear signal in the budget that there will be a cap on numbers in the public service at approximately 280,000. I am pleased to be able to reiterate that policy because it has not been commented on since the budget.

I understand the motivation in limiting the numbers, but there will be problems in regard to implementation. People move out of the public service and some people die. The people who move out are typically those who get better jobs.

Or retire.

Yes. The middle-ranking people who move out before reaching retirement age are those who get better jobs in the private sector which pay them more money. These people are a real loss to the system. The dead weight people who do not move out remain as constants. One will lose quality people by imposing an absolute cap which does not discriminate.

Previous caps were very rigid. This proposal is more flexible. Departments and agencies will have more flexibility in moving people around. It will not be a rigid cap of the type that caused many difficulties in the past.

There has been a problem in recent years in relation to nurses. Some of the major hospitals and health boards have been recruiting nurses from the Far East and the Philippines at considerable expense. This has not solved the problem because most of them are here on two-year work permits and will presumably return home at the end of that period unless their work permit is renewed. Will this recruitment policy be affected by the cap?

No, front-line services will not be affected. Previous capping was rigid, but the current policy will be flexible. The figure stands at 280,000, but one can play around within it.

I wanted to give the example of the Government's commitment to increase numbers in the Garda Síochána by 2,000. How does that sit with the overall cap?

Senator Mansergh must be allowed to ask a question and the Minister can reply to both questions.

Given the figures in recent years, no one could accuse the Government of being anti-public service. The public service has expanded and blossomed. I do not like the implication that public servants,per se, are less productive than others in the marketplace. I have equal respect for people who work in the private and public sectors. They both do essential jobs. The only difference is that in the public sector it is not easy to measure productivity and output by means of profit. From my experience in the public service, there is a lot of unexploited scope for redeployment. That is why the overall cap is a good idea.

Under the previous Government, there was a reduction of approximately 1,000 in the number serving in the Defence Forces and a corresponding increase in size of the Garda Síochána. New functions will arise which will require proper staffing, but in a large public service it should be possible to redeploy people. That aspect has been unexploited and perhaps this new system will provide an incentive to pursue it.

The debate on the stability and growth pact was interesting. Ireland's comfortable position within the parameters of the pact is a cause of confidence. Germany greatly distrusted the financial discipline of countries such as Ireland and insisted on the adherence by all member countries to the straightjacket of the pact. It is, therefore, ironic that it should be the first country to reach the ceiling imposed. At the time of the application of the pact in late 1998-9, the Minister had a good relationship with his German counterpart, Oskar Lafontaine. It was a case of one maverick getting on well with another. I mean that in the best sense.

I will take it as a compliment.

If the bigger countries impose pressure to modify the pact, we should seek to ensure that any changes accommodate our interests. Speaking in the presence of the former Minister for Public Enterprise, I caution against the suggestion that we seek an exemption to fund public transport projects on the basis of our low level of debt. While I am in favour of public transport, I am against wasting huge sums of public money. I am not satisfied that matters are under control or that the most economical methods of making progress are being pursued. It would be deplorable if we were to almost bankrupt ourselves because we thought we were adopting something costing €4 billion which then escalated to a cost of €8 billion or €12 billion.

There may be a case for following the example of other cities and pursuing a more incremental approach by extending the infrastructure organically. In this regard, I wonder if it is the best approach for Governments to announce grand plans covering the next ten, 15 or 20 years. While the Luas light rail system will be a great success, we should work within our capacity constraints and in this regard it must be asked if we could achieve more by taking an incremental approach.

We are straying from the recommendation.

Drawing lines on maps has always struck me as being fictional or utopian.

When I was a member of a Fianna Fáil think tank, I suggested that Senator O'Rourke's former Department should be called the Department of Public Enterprise to emphasise that, like businesses, the State must be enterprising in its approach.

I disagree with Senator McDowell's suggestion that the best people leave the public service. Many are not in a position to leave because of mortgage or family responsibilities. I was able to take a career break under a scheme introduced by the then coalition Government in 1986. From there I was able to pursue risk in the knowledge that I could have returned to the public service.

Being an entrepreneur, I believe it is critical that vision and enterprise be part of the public service and the Civil Service. In this regard, it cannot be repeated too often that many public servants are visionary and entrepreneurial. They are not bureaucratic.

I tire of talk about the Germany. I visited that country when the Berlin Wall came down and revisited it six years later. During that period, the infrastructure of East Germany had been transformed. The German Government should be applauded for having the guts to proceed with it. Germany continues to carry the burden of rebuilding the former East Germany. Similarly, in the early 1980s there was incessant criticism of the proposal to build the DART network from Bray to Howth. It took guts to build it, but today there would be chaos in its absence. We must take risks for the future and leave an infrastructure for the next generation. When I moved to Newbridge from Dundalk in 1955, there was talk of bypassing Newbridge, but nobody had the nerve to proceed. It took almost 40 years to do so.

Technology is undergoing incessant change. Likewise, people in business must change constantly or they will lose out. There is a need to keep pace with infrastructure developments. The problems we face today are the result of hesitation over previous projects. It is the reason there is so much congestion.

Having been a public servant, I find that those who are most critical of the public service never worked in it. People should stop criticising the public service.

I agree with much of what Senator White has said. It took almost 40 years for the Newbridge bypass to be completed. A late Fine Gael county councillor and business person, participated in a campaign in the 1950s opposing the building of the Naas bypass. I recall him saying in the 1970s or 1980s that he had lived long enough to be part of the campaign to stop the construction of the bypass and the campaign to build one.

Anybody who has worked with public servants is aware of their dedication and commitment. The danger is that previous retirement packages, such as the one introduced in the late 1980s, were too rigid. Many people left under then, but eventually they were all replaced. The proposed cap on the overall numbers allows for more flexibility.

I do not understand how it will work. Will it be done on a departmental basis?

I will give the details. We are still agreeing with Departments the relevant figures to be achieved over two years and how the numbers can be reduced by 5,000.

Will it be done on a departmental basis?

Yes. It will include all the agencies under them. It will not be done in the crude way it was done before where so many—

And every teacher was replaced.

That is right.

The issue of Garda numbers was raised. My colleague, the Minister for Justice, Equality and Law Reform, Deputy Michael McDowell, has dealt with that problem. Increased numbers are part of Government policy over five years.

Is it caught by the cap?

The Senator can take it that there will not be 2,000 extra gardaí in the next number of years. Is anyone surprised by this? The Government intends to be in office for five years.

The fifth year will be very exciting.

There would be some difficulty in training that number.

In regard to transport – the former Minister for Public Enterprise is present – I have come to the conclusion that Senator Mansergh may be correct. Senators may have noticed how our colleague across the water, John Prescott – he is not a particular friend of mine but I sat with him through a dinner one night in the United Kingdom and found him most entertaining – is up to his ears in difficulty regarding the rail network and overruns in regard to grandiose plans. We can learn from the United Kingdom's experience.

The debate about tax illustrates the difficulties in trying to make changes. I recognise the benefit of having rules. Long before the budget I said I had come to the view that we should be stringent in regard to the country's finances. That is where I come in as those who have followed my political career know. I will not stray from it. The rules of good financial management are in place to keep us on the right path. We learned an expensive lesson when we went off the rails 20 or 30 years ago. It has taken a long time to dig ourselves out and I intend to stick to the rules for the duration of my period in office as Minister for Finance.

Recommendation put and declared lost.
Section 2 agreed to.
NEW SECTIONS.

I move recommendation No. 7:

In page 13, before section 3, to insert the following new section:

"3.–Section 446A of the Principal Act is amended in subsection (2) by the substitution of ‘€1,540' for ‘€770'.".

We will not stray as far from the CPI as on the last occasion, although it was interesting, rather than pushing futile amendments as Senator McDowell says, to listen to the Minister elucidating on where we were and where we were going.

This goes back to the controversial introduction of the concept of individualisation by the Minister. We remember the furore at the time. The perception was that it discriminated against the stay-at-home spouse looking after the family home or dependent or disabled relatives etc. The Government with skill and aplomb sent certain Members in a well orchestrated move out to the plinth – Deputy Marian McGuinness was one – to oppose the measure stridently. From the point of view of the revolt, the Minister responded quite positively by introducing a measure which gave an allowance of €770 to the stay-at-home spouse. It was welcomed and seen as an effort to address the imbalance in the allowances and concessions available to someone who goes out to work as against somebody who makes a sacrifice and stays at home.

That person is still working.

Absolutely. The problem I seek to address in this recommendation is that the amount has not been increased. An increase is long overdue. That is the reason I propose doubling the allowance from €770 to €1,540.

The intention of this recommendation is to double the home carer's tax credit from €770 to €1,540. It is estimated that to increase the credit as proposed would cost in the order of €72 million in the first year and €103 million in a full year. Given the resources available to me in budget 2003, I made only a limited number of changes in the personal tax system at a total cost of €186 million in a full year. Apart from the increase in the employee tax credit which is designed to ensure 90% of the minimum wage will continue to be exempt from tax, there were no increases in the generality of personal tax credits nor in standard rate bands. The budgeting position would not allow it. In the circumstances I am sure Senators will appreciate the reason I cannot possibly accept this recommendation which would be extremely costly relative to what was possible to devote to tax changes in this year's budget.

This recommendation is obviously, as Senator Higgins said, intrinsically linked to individualisation which the Minister did nothing further to advance in the budget. Does he remain committed to the individualisation process? I have never been particularly in favour of it as, no doubt, he will have noticed. It did not appear in the Labour Party manifesto either.

There are difficulties in regard to alleviating the hybrid situation in which we find ourselves. The Minister has done half of the job and left us with three levels. There was a distinct clear logic in what he was trying to do but he has only gone half way and introduced an anomalous situation which may be all right for a few years but which will not stand over a long period.

I have gone more than half way. The increase of the first year was followed by the same increase in the following two years in which it did not attract the same attention. The figure for the single standard rate band – the more appropriate term – is €29,000.

We have discussed the history and the furore on many occasions but it was not individualisation. It is probably better not to use that term. Individualisation means dividing everything, band, rates etc. This is the reason we have a standard rate band. The standard rate band for a single person is €29,000 and for a married couple, with one income, it is €37,000. I have gone up to that level but been unable to do anything in this year's budget to move it forward. It is still the goal of our policy and the agreed goal of the social partners to have a single standard rate band. The debate has moved on.

The Senator was quite gracious in what he said. I knew the Labour Party would not approve of it. I have noted that my former classmate, now Opposition spokesperson for the Labour Party, Deputy Burton, has not majored in this subject. I know it was a major issue for Senator McDowell who believes strongly about this area. I am aware his views would not be shared universally among the rest of the Labour Party. I pointed out when this started many years ago that for as long as I could remember the Labour Party activists always wanted some change in this area. It is still the goal of the Government and the social partners.

In the Fianna Fáil manifesto of 1997 there was a proposal for a home carer's allowance of £2,000 but it was recognised even then that there would be a problem in this regard. When I introduced what was known as individualisation but what is more correctly termed the widening of the standard rate band, I brought forward that proposal and introduced an allowance £3,000 payable at the standard rate which was then, I think, 22%. It has now been changed in tax credit terms to €770. I had intended waiting until the process was complete before bringing it into effect but I brought it forward then and have not increased it since.

It is my intention to complete the process of having a single standard rate band on the basis of equity. I will not go over the debate again. I know Senator McDowell has different views on this issue, as have some people in my party. There are Deputies and Senators in Senator Higgins's party who support me privately and others who oppose violently. As I said in that great debate many years ago, I did not think this issue would set off such a wide-ranging debate.

I remember that debate well. I am not telling Cabinet secrets when I say that I was one of the strong supporters of the measure. It is the mark of a true socialist when a person can be adjudged on their merits. The single standard rate band will be the proper conclusion when it is introduced. I thought at the time that the word individualisation had a selfish ring to it. It suggests that everything is about oneself. The single standard rate band is the correct way to apply it because each person has a worth and should therefore be adjudged on that worth. I always thought it was a fine measure and I said that on many occasions.

That was an issue on which the tax strategy group, of which I was a member, was bypassed and wrong footed by the Minister. Nonetheless, I strongly support the measure. Perhaps, as the Minister half hinted earlier, there is scope for its extension to the social welfare system in due course.

The change made then was a reflection of changing social reality. I remember being told by one of my children that no one under the age of 40 was in the Opposition camp. At the same time, people, particularly spouses who worked all their lives at home, were sensitive to the notion that their situation would be frozen. That was corrected after the budget and I support its completion. I am sorry that Fine Gael still seems intent on trying to reverse that.

One must remember that the system thende facto discriminated against the second spouse at work who, more often than not, was the woman. If their spouse was earning any reasonable amount of money, they immediately went into the top tax band. That was actively discouraging. Economic circumstances today are such that most married couples in the younger generation need some income outside the home. That is tailored to the modern social reality.

It is perfectly legitimate, as some columnists and politicians do, to regret the social change which has taken place. Undoubtedly, there are losses as well as gains. I do not dispute that. In the past 20 or 30 years children have had the benefit of a full-time parent in the home. However, that is unlikely to be the position for those born now. One may or may not regret that, but the reality has changed and the tax system must reflect that. I am glad the Minister is committed to carrying that through to completion.

As regards the misrepresentation of the Fine Gael viewpoint, we want equal treatment for stay-at-home spouses and for people who go to work. As regards the allowance, the fact it has not been indexed in the meantime suggests it might as well be abolished. The Minister has not indicated any intention to increase it. It will shrivel up and lose its value.

He introduced other measures which partly obviated it.

I agree with the Senator. The Minister said that. However, the allowance is an integral part of the relief system. It should have been index linked. I feel strongly about it, therefore I will press the recommendation.

Recommendation put.

Bradford, Paul.Browne, Fergal.Burke, Paddy.Burke, Ulick.Coghlan, Paul.Coonan, Noel.Finucane, Michael.Hayes, Brian.Henry, Mary.Higgins, Jim.

McCarthy, Michael.McDowell, Derek.McHugh, Joe.Norris, David.O'Toole, Joe.Ross, Shane.Ryan, Brendan.Terry, Sheila.Tuffy, Joanna.

Níl

Bohan, Eddie.Brady, Cyprian.Brennan, Michael.Daly, Brendan.Dardis, John.Dooley, Timmy.Feeney, Geraldine.Fitzgerald, Liam.Glynn, Camillus.Hanafin, John.Hayes, Maurice.Kenneally, Brendan.Kett, Tony.Leyden, Terry.

MacSharry, Marc.Mansergh, Martin.Minihan, John.Mooney, Paschal C.Morrissey, Tom.Moylan, Pat.O'Rourke, Mary.Ó Murchú, Labhrás.Ormonde, Ann.Scanlon, Eamon.Walsh, Kate.White, Mary M.Wilson, Diarmuid.

Tellers: Tá, Senators U. Burke and Higgins; Níl, Senators Minihan and Moylan.
Recommendation declared lost.

I move recommendation No. 8:

In page 13, before section 3, to insert the following new section:

"3.–Section 448 of the Principal Act is amended in subsection (1) by the insertion of the following paragraph after paragraph (b):

‘(c) For the purpose of this section the deductions and allowances, as appropriate, specified in sections 461, 461A, 462, 462A, 463, 464, 465, 466, 466A, 467, 468, 472, 472A and 473, shall be automatically increased for each year of assessment by a percentage equal to the annualised percentage rate of increase in the Consumer Price Index last published by the Central Statistics Office before the commencement of the year of assessment.'.”.

Recommendation put and declared lost.
Sections 3 to 5, inclusive, agreed to.
NEW SECTION.

I move recommendation No. 9:

In page 14, before section 6, to insert the following new section:

"6.–Section 112 of the Principal Act is amended by the insertion of the following subsections after subsection (2):

‘(3) Without prejudice to subsection (2) an award under the provisions of the–

(a) Organisation of Working Time Act 1997,

(b) Maternity Protection Act 1994,

(c) Adoptive Leave Act 2001,

(d) Carer's Leave Act 1998,

(e) Parental Leave Act 1998,

(f) Protection of Employees (Part-Time Work) Act 2001, and

(g) Employment Equality Act 1998,

shall not be deemed to be an emolument except to the extent that a Tribunal, Rights Commissioner, the Labour Court or a Judge of a court so declares.

(4) An award for the purposes of subsection (3) shall include a settlement of an action or proceedings approved by a Tribunal, Rights Commissioner, the Labour Court or a Judge of a court.

(5) An award under the Unfair Dismissals Acts 1977 to 1993 shall be presumed for all purposes to be an award in respect of which tax has been paid and no further liability shall attach to either the employer or employee.'.".

This recommendation sets out the protective legislation relating to workers. The problem I seek to address has arisen as a result of a recommendation, which is now being followed as a general rule by one inspector of taxes, to the effect that an award made under any of the legislation to which the recommendation refers is taxablein toto. Such awards are normally made on a twin basis.

Let us consider the example of a person on maternity leave who wanted, as is her statutory right, to return to work and her employer refused to take her back. That person subsequently has recourse under the maternity legislation and an award will be made to them on two fronts: first, compensation for loss of earnings; and, second, in terms of damages. The normal tax regime applies to the loss of earnings and income tax deductions are made therefrom. However, awards for damages have been brought into the general scope of taxation. That is fundamentally wrong. When a person receives an award in court for injuries sustained in a road traffic or other accident, that award is not taxed. However, we are faced with a situation where the damages element of an award will be subject to tax. That is manifestly unfair and there appears to be a marked lack of consistency in terms of how the Revenue Commissioners apply the law.

The recommendation seeks to exempt from income tax various types of compensation payments made to employees under the listed provisions in respect of discrimination, harassment, etc. There has been some publicity recently regarding the tax treatment of equality awards. In a recent article inIrish Tax Review it was incorrectly suggested that Revenue had changed its position and was now proposing to tax these awards. There has been no change in Revenue's view of the tax treatment of such awards. Revenue has always held the line that general awards of this nature are taxable under the Tax Acts. This is in line with case law where the courts have consistently ruled that anything received from being, having been or becoming an employee is taxable under Schedule E as part of the remuneration of the office of employment.

The recommendation proposes their exemption unless a relevant authority, a tribunal, Rights Commissioner, the Labour Court or a judge, declares them to be taxable. This would effectively mean that such an authority would have absolute discretion, without any objective criteria, in deciding whether the payments were taxable. I could not accept this particular procedure.

I am not convinced that the awards in question should not be taxable, particularly when one considers that we tax unemployment benefit. If payments of this type are to be exempt from tax, a statutory exemption will have to be enacted. Furthermore, such exemption would have to be considered in the context of the nature of payment of these awards. Many are settled out of court and often involve a global sum in full and final settlement of all actions. The element of the award relating to harassment, etc., would have to be isolated from any other compensation element such as, for example, loss of normal remuneration or from normal earnings.

As stated when we discussed this matter in the Lower House, I am willing to give it further consideration. I will ask my officials and the Revenue Commissioners to investigate it in the context of next year's budget and Finance Bill. In the meantime, I cannot accept the recommendation.

I welcome that the Minister is prepared to consider this in the context of next year's deliberations. There is a marked lack of consistency in this area. The Minister said unemployment benefit is taxed, but that is a substitute income for somebody who has dropped out of employment. Provided the person in question has enough social insurance stamps, they qualify for such a payment. This change has come about because a very perceptive inspector of taxes decided the damages element of an award should be taxed in the same way as the loss of earnings element.

The Minister's argument regarding unemployment benefit is not valid. However, I welcome his indication that he will take another look at this. That is a change in attitude from the position he adopted on Committee Stage and on Report Stage in the Lower House.

SECTION 6

Recommendation put and declared lost.
Question proposed: "That section 6 stand part of the Bill."

How does the Minister anticipate that this will happen in circumstances where people are not eligible to pay PRSI in the first instance? Do the same exemptions and thresholds apply? Will the sum total of what one receives in cash plus the benefit-in-kind put one over the threshold?

So the limit does not apply in any event.

Question put and agreed to.
Sections 7 and 8 agreed to.
SECTION 9.

Recommendations Nos. 10 and 11 are related and may be discussed together by agreement.

I move recommendation No. 10:

In page 28, subsection (1)(b), line 47, to delete “€8,000” and substitute €8,600”.

The purpose of this recommendation is to introduce an improvement to mortgage interest relief. We have already strayed into the area of housing and housing policy. The burden being placed on first-time home buyers and owners is becoming increasing impossible. I am seeking to increase the limit for a married couple from €8,000 to €8,600 and in the case of a single person, from €4,000 to €4,300.

These recommendations seek to assist first-time buyers. They looked at last year's budget and saw investors in the housing market getting, for example, a concession with regard to stamp duty which would cumulatively be worth something in the region of €12,000 to €15,000 on the capital cost of a house in Dublin city. Investors also got concessions in that they could claim interest relief on mortgages for the purchase of houses for reletting at the top marginal rate of 42%. First-time buyers, by contrast, got a very small concession and it only applied at the rate of 20%.

To exacerbate the sense of injury, the Minister in this year's budget introduced a number of measures which militated considerably against first-time house buyers. First, he abolished the first-time buyer's grant. It had not increased for a number of years but was relied on heavily by those getting into the housing market for the first time for the furnishing of one room or more or putting electrical installations in a kitchen. It made a difference and to wipe it out as something of no consequence shows a marked lack of appreciation of the difficulties encountered by young people and first-time house buyers. Despite this, it was abolished without warning in the budget. There was a public outcry and many are still aggrieved that this measure, a component that people built into their thinking with regard to putting together the money for a house, was done away with in one fell swoop.

The second imposition that the Minister introduced was the 1% VAT increase on house prices from 12.5% to 13.5%. The impact on the cost of building a house is dramatic. A huge burden is added in respect of the additional mortgage that must be negotiated by house buyers to get a roof over their heads.

The third measure the Minister brought in which militated negatively against the welfare of young people was the 50% increase in stamp duty on sites. That is the reason I sought to introduce some further margin of relief for the people concerned.

The extension of the period for which relief may be claimed is a measure that anybody could stand over in terms of trying to ensure that, for a guaranteed period, people would be able to enjoy the additional relief I seek to give them.

I would be the last person to deny the underlying problems which Senator Higgins mentions. Getting young people into the housing market is a real problem. I hope one of the achievements of the Government over the next three or four years is the improvement of the affordability of houses. There is a sense of injustice in that it seems much more difficult for young people at roughly the same stage of life and in roughly the same occupation to get into the housing market than it was for people of my generation 20 to 30 years ago. In addition, young people see professional people with more money than they know what to do with investing in property and driving up house prices.

My problem with this recommendation is that it would not be an efficient way of achieving what is desired any more than the first-time buyer's grant was. That had long since been absorbed into house prices, though it may have provided some psychological comfort. The house price is, unfortunately, related to what people can afford to pay. The doubling of mortgage relief would not necessarily increase the capacity of a first-time buyer to pay because the price and the loan would be lifted by a corresponding amount.

The changes made by the Minister were meant to mitigate and modify the effect of getting rid of the first-time buyer's grant. I accept the argument that they do not do this completely. On the other hand, the price and affordability of houses depend on more factors than mortgage relief and grants available. The Minister has spoken at length about what is needed to moderate and bring down prices, much of which has to do with supply and demand. If we can spread employment opportunities around the country, it will lead towards something of great interest to the constituency which I shadow, that of decentralisation.

Particularly in Tipperary.

There are a couple of separate arguments but they come together to some extent. It was wrong to get rid of the grant, which is not to say I do not accept the Minister's general thesis that the grant was increasing house prices, which it was. However, it was being run into the price in terms of the full repayment over, typically, 20 years. It is correct to say that over 20 years the buyer would be paying €3,000 more than he or she would otherwise have paid. However, it gave him or her extra money at the point of purchase and provided for the deposit on a house or carpets and curtains. It was still of benefit up front, although over time the overall price of the house went up because of it. On balance, it was wrong to get rid of it.

If the Minister's argument is accepted, the same argument applies to mortgage interest relief generally, as I am sure he knows. If people's capacity to repay is increased by subsidising their repayments over the first five years, they are encouraged to get higher mortgages because, typically, first-time buyers mortgage themselves to the maximum possible extent. That, in turn, increases their capacity to buy what is on offer at a given price. If the Minister follows the logic of his own argument, he should be, rather than increasing mortgage relief, looking to abolish it also.

I think I have some idea of how the Minister works in these matters. He ended up extending mortgage interest relief simply because he was obliged to do so or because political circumstances put him in a position where he felt he had no other choice. I would be interested to hear how he differentiates between the two examples given. How can he justify getting rid of the grant while extending mortgage interest relief?

These recommendations relate to the enhanced ceiling on mortgage interest payments that qualify for tax relief which is available in the case of first-time buyers. Section 9 proposes that the existing ceilings be increased from €3,175 to €4,000 for single persons and from €6,350 to €8,000 for married and widowed persons. It also extends the period for which the higher amount of relief may be claimed from the present five years to seven. Senator Higgins's recommendations propose that the interest ceilings be further increased to €4,300 and €8,600, respectively.

Section 9, by making the improvements that it contains, recognises the difficulties faced by first-time buyers in current circumstances. It provides additional relief for those who have had to raise, or will have to raise, large sums for their first house. The new mortgage interest relief regime will mean that full interest relief will be available for a couple on mortgages of up to about €170,000. The most recent data available from the Department of the Environment and Local Government suggests that the average mortgage of first-time buyers is €122,600 nationally and €162,200 in Dublin. The increase in the limits on relievable interest provided for in the Bill is significant and I do not see that there is any need to increase the ceiling further as proposed in the recommendations.

The estimated full year cost of the improvements for which I am providing in section 9 is €8 million. In present circumstances, that is as much as I am prepared to incur in improvements in this area. The abolition of the first-time buyer's grant was debated in the days between the announcement of the abridged Estimates and the budget. I announced the changes in mortgage interest relief incorporated in this Bill on budget day. Senators referred to the first-time buyer's grant, the VAT increase and the increase in stamp duty which applies to sites in certain circumstances. The latter charge is probably more relevant to Senator Higgins's county than to Dublin. Senator McDowell could have guessed some time ago that I intended to abolish the grant. If he re-examines the records of the debates at the Joint Committee on Finance and the Public Service, he will find that I mentioned that it was a total waste of resources.

The Minister said economists had advised him to abolish it but that is usually an indication that he will not do so.

The Senator has the measure of the Minister.

I mentioned during the debate on the Freedom of Information (Amendment) Bill 2003 that when Senator McDowell was a Member of the Lower House, he said he enjoyed reading the tax strategy group's documents because he then knew what I would not do. I accept that the Senator and I differ in relation to the first-time buyer's grant which was not introduced as a sop to house buyers but as a means of reinvigorating the building industry which was on its knees at the time. It encouraged demand, brought people back into the housing market and helped the building industry. I agree with economists who suggest that it has been built into the price of houses and trousered by builders for a considerable time. It has been difficult to abolish it, as it has been with every other scheme. It is not easy to explain to individuals who thought they would be able to spend €3,800 on new carpets or curtains that they will benefit to a similar extent over a period of time.

Senator Mansergh has read many fine articles during the years in relation to free trade. When Seán Lemass announced in the 1960s that Ireland was to join the Anglo-Irish Free Trade Area Agreement, he tried to argue that it would be good for everybody in the long term. When we joined the EEC in 1973, we had to argue that free trade would be good for everybody. It was hard to explain to workers in factories in Athlone, Mullingar, Athy and Kildare that went to the wall that free trade would be good for them in the long run. Free trade has been very good for the country and we have benefited from a larger market. It is hard to explain to people that, although they are suffering now, they will benefit in the long term. I can understand the reason an individual who is suffering would not appreciate the point too much.

The decision to abolish the first-time buyer's grant and increase mortgage interest relief will result in a more effective system than that currently in place. Senator McDowell has argued that there is no great long-term difference between the two approaches as the new benefits will be built into the price of houses. I could argue, as officials in the Central Bank do, that reductions in interest rates encourage more people to participate in the property market. One of the objections to a reduction in interest rates in Ireland which is part of the global market is that it would further stimulate the housing market. The independent central bank in the United Kingdom, under the governorship of Eddie George, has been quite reluctant to reduce interest rates in recent years, although it has changed its position recently. It has always referred to the effect of such a move on the housing market, which is understandable in the light of the upturn in the housing market there in the 1980s. One could argue, similarly, that reducing interest rates creates more demand.

The fact that people had more money in their pockets as a result of the boom and reductions in taxation meant that more money was available for purchasing houses. This resulted in inflation as builders increased prices when they realised that demand was greater than supply. The additional funds available to people also had an impact on the price of public houses. Young people throw their money across the counter in pubs and do not even bother to count the change. The price of drink in some pubs changes between 9.30 p.m. and 11 p.m. God be with the days when a publican in south Tipperary would have the same customers every night who would order the same three pints perhaps three nights each week. Customers would know the exact price of a pint and, if a publican increased his price by 2d, it would be the talk of the village and they would transfer their custom to another premises two miles away. Senators McDowell and Higgins will recall that when I reduced the VAT rate from 21% to 20%, following recommendations from the social partners, I said I thought it would have very little effect on the price of goods. I did not believe the reduction would be passed to consumers in a buoyant market with a high level of demand and I was right. I said I would keep it under review and increased it at the next opportunity.

The increase in the following years was certainly passed on.

That is what happens when there is a high level of demand. The abolition of the first-time buyer's grant can be compared to interest rate changes but I do not think it will have the same effect. The new measure is targeted at the individual who will benefit when he or she completes the transaction by signing up for a mortgage and starting to make repayments. The new system which involves tax relief at source for mortgage interest relief will be far more effective.

First-time buyers who do not purchase new houses, who comprise 15% of the total, will be in a stronger position as a result of the budget. VAT is not charged on second-hand houses. There is no stamp duty on such houses with a value of less than €195,500 and it is charged at a reduced rate of 3% on houses worth up to €254,000. There is additional value to a couple over seven years of new mortgage interest relief of €2,818. If one assumes an average purchase price of €179,000, first-time buyers will pay €1,591 of extra VAT but they will gain an additional €2,818 over seven years, giving a net gain. Without wishing to break the rules of Cabinet confidentiality, I am sure Senator O'Rourke will confirm that I would have liked to have abolished new house grants a considerable time ago. It was not a secret that I was trying to do so.

I would like to address a number of the arguments made by the Minister who is like Mandrake the Magician in the manner in which he can produce figures.

This is like a debating club.

The Minister reminds me of Senator O'Rourke's friend, Michael O'Leary, in that respect.

Senator O'Rourke has given chapter and verse on the subject.

It is badge of honour to be bedevilled by Mr. O'Leary as it means one is not greedy like he is.

The Leader's late esteemed brother once produced a famous phrase in the Dáil: "Baffle them with scientific confusion."

That is about it.

There may be some relevance in the Minister's comment that the abolition of the first-time buyer's grant is of lesser consequence in the greater Dublin area – or the Pale, which includes the Minister's constituency – than in County Mayo, for example. A young couple in Dublin will have to spend as much money on carpets, a cooker, microwave oven or washing machine as a young couple in County Mayo. I can testify, on the basis of the experience of my siblings, to the fact that the first-time buyer's grant helped with such costs in no small measure. Young people trying to purchase a house face an extremely difficult situation.

They were relying on the grant and have suffered as a result of its abolition, irrespective of any later decisions on the part of the Minister. He may have breached Cabinet confidentiality today but did not do so in the run-up to the announcement of the decision. Those who had not signed a contract were caught and are still bearing the brunt of the pain of his decision.

The promise to introduce the £1,000 grant was probably the only sensible proposal in the infamous 1977 manifesto. It succeeded in swinging a considerable number of votes and seats and helped to give Fianna Fáil an unprecedented majority of 20 seats. It is simply untrue to claim that wiping the grant off the face of the earth is of no consequence. Senator Mansergh said it was an inefficient method of helping first-time buyers but I would like him to outline an efficient system that will compensate for this considerable loss. As far as young people are concerned, a grant is a grant, money in hand is money in hand and a relief is a relief.

Senator Mansergh made the point that the maintenance of the grant would cause house prices to continue to increase, thus necessitating larger loans. We are all familiar with the practices of the building trade in respect of reliefs and concessions, whether they are tax reliefs or grants. There is no doubt that they were gobbled up in many instances by unscrupulous builders who saw the grant as a neat device for increasing house prices.

We have a major problem trying to enable young people to put a roof over their heads, not only in Dublin. Senator Mansergh mentioned the manipulation of the market by the building trade. It is patently wrong that six or seven large building enterprises can control matters by sitting on rezoned land banks for which they have got planning permission. They release these areas on a drip-by-drip basis to ensure market prices are kept high and inflated. The same problem is evident in rural towns.

Something major will have to be done. The Minister should recommend at Cabinet to the Minister for the Environment and Local Government that land banks on the periphery of every town and some villages should be built up by local authorities which would be fully serviced with a water supply, sewerage systems, telephone cables and electricity. They could be sold off at a reasonable price.

One could not describe Ballyhaunis as a metropolis. The Minister plied his trade there for many a year.

I have great memories of it.

The people of the town remember the Minister very fondly also. It is a case of mutual admiration. We actually go back a bit in that regard. The Minister still plies his wares in Ballyhaunis. He is a partner in a thriving accountancy firm, Tynan Dillon and Company, which does well out of the local economy, and also sponsors a golf classic in the town every year.

There is a need for a radical re-examination of the housing market. It is a big problem which has not been tackled. I intend to press my worthwhile recommendation.

Recommendation put and declared lost.

I move recommendation No. 11:

In page 28, subsection (1)(c), line 48, to delete “€4,000” and substitute “€4,300”.

Recommendation put and declared lost.
Section 9 agreed to.
Sections 10 to 13, inclusive, agreed to.
SECTION 14.

I move recommendation No. 12:

In page 43, between lines 11 and 12, to insert the following:

"(3) The Minister shall on or before 31 December 2003, report to both Houses of the Oireachtas on the implications of the application of this section for persons on low incomes.".

As we have only a few minutes left, let us broach the subject of special tax breaks and allowances. While I broadly share the Minister's view on allowances and incentives, I seek further clarification. Where there are deficiencies in development, the tax system is an appropriate way to encourage people to invest in areas that would not otherwise have attracted investment.

The Minister has made some announcements – I am not sure I would call them measures – to curtail various reliefs at the end of next year, including film relief. I am not sure what he is trying to achieve. I find it difficult to believe he intends to abolish the urban and rural renewal reliefs forever. They do have a role if applied in a discriminating fashion with particular policies and developmental aims in mind. Will the Minister state his intentions in this regard as this would be helpful for all concerned?

As far as I know, the scheme in County Leitrim and the Shannon Basin is doing reasonably well, although there are some developments one would prefer not to see, as with the holiday schemes. The take-up has not been too bad. I am more familiar with some tax-led developments in the city and they have generally been good. I acknowledge that the £25,000 cap the Minister introduced some years ago was a very effective anti-abuse measure, rather than an anti-avoidance measure. Provided there is a particular developmental aim in mind and we look at the dead-weight effect, we should not abandon certain reliefs and say they are bad. However, we need to understand exactly what we are doing.

The comments the Senator has made encapsulate my views on the subject. The purpose of a tax relief should be to encourage an activity that would not be encouraged otherwise. If it tips the balance in favour of encouraging somebody to engage in such an activity, it should be done. There should be a time limit so as to have the maximum effect. The danger with all tax schemes, as with grant schemes, is that they are brought in for a particular purpose but never abolished.

I have introduced some targeted tax schemes this year. A somewhat controversial one concerned a small adjustment I made in respect of private day care hospitals. However, I am in favour of introducing them. The Senator referred to the rural renewal scheme, for which I claim credit. It had an extraordinary effect on some counties, particularly County Leitrim. The Senator knows that the attitude of the people in that county has been quite extraordinary, indicating that the scheme has had considerable benefits.

No Minister for Finance has introduced more incentive reliefs or closed off more tax avoidance loopholes. The most significant tax abuse I addressed was by way of a cap in my first Finance Act. When I introduced it, my officials were dubious but the measure had a beneficial effect—

Is this all a puff of smoke?

It is not. Some of the reliefs have been in place for over 20 years and it is time to bring them to an end. Those who benefit from focused tax reliefs are high income earners. We produced a report for the Revenue Commissioners indicating that a survey of such earners suggested that some paid only X% of tax while some paid none. That is the downside but the desired economic activity would not have occurred only for them. Those who benefit most from such economic activity are high income earners.

What is the film relief argument?

An official of mine could help the Senator in that respect. The best tax break, even better than that achieved through the SSIA scheme, is achieved through film tax relief.

Clearly, it works.

I renewed the relief some years ago and accept that it has had extraordinary benefits. The United Kingdom copied and improved upon some of our provisions.

Why abolish it?

There is the downside to it, because some of the Opposition look at all these high income earners not paying any tax. Even in my own party Senator O'Rourke will have heard at party meetings more socialist outpourings than one would ever hear at the Labour Party.

From genuine socialists.

Before the budget I was asked to cut down reliefs for these high income earners and I said I would oblige. I am closing off all those reliefs by the end of December 2004. I readily accept the merits of tax breaks but the people who benefit from them are high income earners.

Does the Minister include the possibility that he might reconsider the film relief provision?

It is very open.

Acting Chairman (Mr. Leyden): I am required to put the following question in accordance with an order of the House of this day: “That recommendation No. 12 is negatived; that the sections of the Bill undisposed of, Schedules 1 to 6, inclusive, and the Title are hereby agreed to; that the Bill is accordingly reported to the House without recommendation; that Fourth Stage is hereby completed; and that the Bill is returned to the Dáil.

Question put.

Bohan, Eddie.Brady, Cyprian.Brennan, Michael.Daly, Brendan.Dardis, John.Dooley, Timmy.Feeney, Geraldine.Fitzgerald, Liam.Glynn, Camillus.Hayes, Maurice.Kenneally, Brendan.Kett, Tony.Kitt, Michael P.Leyden, Terry.MacSharry, Marc.

Mansergh, Martin.Minihan, John.Mooney, Paschal C.Morrissey, Tom.Moylan, Pat.O'Rourke, Mary.Ó Murchú, Labhrás.Ormonde, Ann.Phelan, Kieran.Ross, Shane.Scanlon, Eamon.Walsh, Jim.Walsh, Kate.White, Mary M.Wilson, Diarmuid.

Níl

Bradford, Paul.Browne, Fergal.Burke, Paddy.Burke, Ulick.Coghlan, Paul.Coonan, Noel.Feighan, Frank.Finucane, Michael.Hayes, Brian.

Henry, Mary.Higgins, Jim.McDowell, Derek.McHugh, Joe.Norris, David.O'Toole, Joe.Ryan, Brendan.Terry, Sheila.Tuffy, Joanna.

Tellers: Tá, Senators Minihan and Moylan; Níl, Senators U. Burke and McDowell.
Question declared carried.