Dáil Éireann díospóireacht -
Tuesday, 23 Apr 1985

Vol. 357 No. 7

Finance Bill, 1985: Second Stage.

Minister for Finance (Mr. Dukes)

I move: "That the Bill be now read a Second Time."

This Bill is intended to give statutory effect to the tax measures introduced in the budget and it also incorporates a number of other tax changes which are considered to be necessary or desirable.

The new tax structures announced in the budget are, for the most part, already in operation. The VAT changes generally came into effect on 1 March and the income tax changes on 6 April. As a concession, to allow for transitional difficulties, the VAT change in respect of new private house building does not take effect until 1 May. It is much too early to assess in any detail the impact of these major tax adjustments. They have been well received generally and I am satisfied that they will have a substantial, positive effect on the economy.

There has been a widespread recognition for some time of the need for reform of our tax structure. Because of the budget constraints, there is no prospect of significant tax reductions in the short term but this does not rule out the possibility of restructuring. On the contrary, high levels of taxation simply highlight the imbalances in the structure and the need for reform. We could have decided to approach the problem by minor selective adjustments — a little increase here and a little reduction there — but this would be no more than tinkering with the system on the margin without tackling the basic problem. This is why the Government decided that some fundamental changes were required now without further delay. They decided that the income tax and VAT structures — the two principal sources of irritation — should be considerably simplified. This is the more rational course, it achieves a fairer distribution and, as I have already said, it will have beneficial effects on the economy. There has been an improvement in take home pay for all income taxpayers. This improvement may in some cases be fairly modest — this is an inevitable consequence of the progressive character of our income tax code — but it is nonetheless a step in the right direction. In line with the commitment in the national plan, Building on Reality, we look forward to maintaining this trend over the next few years.

Our future policies on taxation will be determined in accordance with the criteria of the national plan. In the first instance, there will be no increase in the overall real level of taxation. It is the Government's belief that further increases in taxation as a percentage of our GNP at this time would have a detrimental effect on the economy and on employment. Consequently, in lowering the budget deficit to meet the target in the plan, the emphasis must be on reducing public expenditure rather than increasing taxation. We are committed to adjusting income tax bands and allowances so that the overall tax burden on income taxpayers will not increase.

It would be unrealistic, however, to anticipate substantial tax reductions in the short term. These will not be possible while we have to face a large budget deficit. If we are to maintain and strengthen confidence in the economy, this deficit must be gradually reduced and then phased out. We have set a target of 5 per cent of GNP by 1987, down from this year's figure of 7.9 per cent. This may seem a rather modest target, given the increasing burden of debt, and some would regard it as insufficient progress. It will require, however, that we continue to exercise stringent controls on expenditure while maintaining a relatively high tax yield. Specific reductions in taxation will have to be balanced by increases elsewhere and by higher yields from improved collection procedures.

While the budget changes are quite substantial by any standards, they are only one phase in the process of tax reform. We still have much to do before we can be satisfied with the structure of our tax system. We have to widen the tax base further by limiting concessions and bringing more areas of activity into the tax net. We are making headway against the problems ot tax evasion. We are planning the introduction of a child benefit scheme which will unify in a single payment State support towards the cost of rearing children and tax this payment as appropriate. This will achieve a more equitable distribution of the benefits of the very significant level of support for children which is funded by the taxpayer. We must bring about substantial improvements in collection arrangements because inadequate collection procedures reduce the benefits of achieving an equitable system of taxation. The Commission on Taxation are at present preparing a report on tax administration and I am awaiting their findings with great interest.

While the Finance Bill is essentially a taxation measure, it necessarily reflects the policies of the budget. This affords an opportunity for discussion on overall strategies for the economy and the public finances in particular. From the very beginning, it has been the policy of this Government that a responsible approach to the public finances will pay worthwhile dividends in the longer term by strengthening the capacity of the economy. We have been under pressure to take short term initiatives at the expense of our longer term interests and we have resisted this. The result is that there is a growing confidence in the economy. We have come through the worst phases of recession and we have preserved the capability to take proper advantage of new opportunities. We have achieved our budget targets and, while some critics might dismiss this as book-keeping, the reality is that it is a critical factor in the overall economic situation and we should never lose sight of this. I dread to think what the consequences would be if the spendthrift policies of some years ago were continued. We will continue the policy of adopting a prudent approach to the public finances because any other policy would be irresponsible and damaging to the economy.

The recent publication of the end-quarter figures for March led to some wild speculation that a second budget was planned for 1985. There was no basis for this kind of comment. While some receipts fell short of expectations, it is much too early to draw conclusions about trends for the year as a whole. We have seen from previous experience that trends can vary quite significantly in the course of the year and that it would be wrong to arrive at conclusions for the year as a whole from the results for the first three months. I have no reason at this stage to be other than confident about the likely outcome but, should it happen that a significant overrun begins to emerge during the course of the year then the Government will take whatever steps are required to keep the budget in line with targets.

Mr. O'Kennedy

Whatever that means.

Mr. Dukes

The Deputy should resist the temptation to go off on a flight of fancy about what that might mean. I have no hesitation in repeating that at this point I have no reason to be other than confident that the outturn will be as projected.

Since the beginning of the year we have seen some encouraging economic developments. The end-March live register figures showed a significant improvement over the trend in the previous few months. Interest rates have also fallen significantly. These trends should have a positive impact on the budget figures in the months ahead.

I would like now to outline the main provisions incorporated in the Bill. Several of these provisions are purely of a technical nature and, rather than deal with each item individually, I will concentrate on the more significant among them.

Provision is made in the early sections for the increased income tax exemption limits, for the restructured rate bands and for the revised personal allowances which I announced in my Budget Statement on 30 January. Taken together these changes will reduce tax liability right through the income scale for both single and married taxpayers. The elimination of the previous top rate of 65 per cent should reduce the disincentive effects of high marginal rates of tax. These amendments are consistent with the policy outlined in the national plan in which we undertook that the overall income tax burden on taxpayers will not increase over the period of the plan. The net cost of the adjustments actually exceeds the estimated net cost of indexation of the previous tax bands in line with inflation.

Section 4, in addition to providing for the single-parent allowance increase announced in the budget, also removes an anomaly which previously deprived a single parent of the benefits of this allowance if a child had an income in his or her own right of over £180 per annum. The fact that in some instances this resulted in harsh treatment was brought to the attention of the Revenue Commissioners by the Ombudsman. Hitherto the single parent allowance has been available only to parents who qualified for the £100 child tax allowance. The section removes this direct connection and, while setting out similar basic eligibility requirements, provides for a much more generous limit on the child's own income than that applied to eligibility by the child tax allowance.

In section 6, the rules are being clarified to ensure that tax is payable under PAYE in respect of all salaries and wages except where it would be impracticable to do so. This clarification is necessary in response to increasing pressures from professional people that, where they operate a private practice and also hold a public appointment, they have a right to be taxed on a Schedule D basis on all their income.

Two sections will specifically benefit older people in our society. Section 7 reduces the age qualification for entitlement to rent relief on private tenancies and increases the upper limit on such relief. Section 8 allows double levels of relief on deposit interest for taxpayers aged 65 or over and will encourage them to put their savings into financial institutions, thereby helping to reduce the risk to old people from attacks on their home and persons.

Section 10 provides that the first £2,000 of income from the leasing of agricultural land will be exempt from income tax liability, where the period of the lease is seven years or more and the lessor is 55 years of age or over or is incapacitated. The £2,000 ceiling will apply separately to each spouse where both spouses engage in leasing. This new relief offers a considerable incentive to leasing of farms which will, in turn, bring about improved utilisation of land.

The venture capital scheme implemented under the provisions of last year's Finance Act is now beginning to make an impact. One of the constraints still to be overcome before the scheme comes fully into operation is the restriction on advertising imposed on designated funds by the requirements of existing unit trust legislation. The Minister for Industry, Trade, Commerce and Tourism is introducing legislation to remove this restriction. Section 13 of the Bill makes a concession to allow companies which face start-up delays, because of a substantial research and development commitment connected with their business, to commence trading within three years and still qualify for the benefits of the scheme. I announced when the Bill was published that two further amendments to the scheme would be introduced on Committee Stage. One will provide that close relatives, who are now excluded, may avail of the benefits of the scheme. The second will provide that there will be no statutory ceiling on fees which may be charged by fund managers to investors. The promoters of a fund will be expected, however, to publish their charges in the prospectus. In addition, the scheme will be broadened by allowing companies with "51 per cent" subsidiaries, or with certain foreign subsidiaries, to qualify for benefit under the scheme.

There has been a certain amount of comment about the alleged lack of success of the venture capital scheme. The comments have often been linked with proposals to amend the scheme, some of which would considerably extend the scope for tax avoidance or reduce the effectiveness of the scheme in channelling investment funds into productive activity. The position is that it is much too early to make an informed assessment of the progress of the scheme. Claims for relief became allowable only on 1 January this year. The fact that two designated funds were successfully launched, despite the existing constraints of the unit trust legislation, is indicative of the scheme's potential. One of the amendments most frequently proposed, for example, is that tax relief should become available once moneys are placed in a designated fund. In my view, this would simply have the effect of delaying investment in productive activity, since there would be no pressure on the funds to select suitable projects. It would be impossible to avoid this without adding an administrative complexity to the scheme.

In section 14, a restriction is imposed on the tax exemption of stallion fees. In future, this exemption will be confined to income earned from stallions at stud within the State. It will continue to apply also, however, where a breeder resident here acquires a share in a foreign-based stallion for the purpose of obtaining new breeding lines.

At present, tax relief is allowed in certain circumstances where a person carrying on a trade or profession makes a donation to an Irish university for research in or the teaching of approved subjects. In response to a number of requests, this concession is being extended to other third level institutions which provide training for jobs in trade and industry.

The composite tax rate arrangements for the building societies are incorporated in section 18. For this tax year the composite rate will be 28 per cent and the ceiling for accounts to which the composite rate applies will be fixed at £25,000 instead of £15,000. This section also makes permanent the new instalment dates for payment of tax by the societies.

As announced in the national plan, Building on Reality, and in the Budget Statement, provision is being made in section 20 to extend the tax incentive which is available to lessors of residential accommodation to encourage the refurbishment of buildings now or previously in multiple residential occupation. Up to now, incentives have applied only in respect of the construction of a new building or the conversion of a building into two or more dwellings. A further new incentive in section 21 permits a wider interpretation of conversion to include structural repair work generally. In addition, relief will apply where a building, which is not a dwelling, is converted into a single dwelling. Expenditure on these new categories of work in the two years commencing on 1 April 1985 will be allowed for tax purposes against future rental income receivable by the lessor of residential units to which the expenditure relates subject to the requirements as regards size and standards which already apply in relation to apartments. This is a generous extension of the present incentives and it should be very welcome to the building industry.

Section 22 provides for the payment of corporation tax by all companies in a single instalment six months from the end of their accounting periods. At present, all companies pay a first instalment of tax six months after the end of an accounting period but the due date for payment of the second instalment varies as between companies from one day to almost nine months after the due date for the first instalment. It is important in the interests of equity to have a uniform payment date. Provision is made to ease the transition to the new system by limiting the advancement of the due date for the second instalment to three months in any one year.

As announced in the budget, section 24 of the Bill extends to 31 December 1985 the transitional arrangements under which advance corporation tax — ACT — in respect of distributions made by companies is payable at 50 per cent of the full rate. My purpose in doing this is to reduce the difficulties which the introduction of ACT creates for some companies still enjoying the benefits of capital allowances in respect of investment which was decided upon on the basis of projections of returns from that investment which did not take account of liability for ACT. The effect will be that Irish companies will have had the benefit of the reduced rate for a period of almost three years.

I turn now to indirect taxation. Part II of the Bill which concerns customs and excise deals for the most part with changes already announced in the budget. Some additional measures of a minor nature are included; these deal with management of the table waters duty and betting duty, the time limit on taking proceedings for excise duty cases in the District Court and the penalty for having unlicensed gaming machines on a registered premises.

I would draw special attention to section 32 which provides that horsepower will be replaced by engine cubic capacity, expressed in cubic centimetres, as the road tax chargeable unit. This change is being made in order to bring our law into conformity with EC requirements. It will not result in any change in the amount of tax payable in respect of any motor vehicle.

Part III of the Bill gives effect to the rationalisation of the VAT system introduced by the budget. The system now comprises, under section 42 of the Bill, just three main rates, namely, zero, 10 and 23 per cent. This new system will have a number of important positive effects. The abolition of the 35 per cent rate provides a significant stimulus across a wide range of economic activity. A number of individual sectors — especially the tourism and newspaper industries — will benefit from special reductions in taxation. The changes will bring about a considerable reduction in the cash flow burden of the VAT at import system, both by reducing the overall impact of that system and by spreading the burden over a wider range of importers. Finally, the reduction in the complexity of the rate structure should have a big impact on the administrative and compliance costs of the tax for traders and facilitate better administration of the system.

Given the need to maintain Exchequer revenue from VAT, these advantages cannot be gained without some costs. However, it should be noted that the effect of the increases in the VAT rates on most footwear, clothing and fuel on domestic productive activity in the areas concerned will be limited because of the relatively high proportions of such goods which are imported. The increased rate on construction activity must be seen against the background of the continuing support for this important sector in the Public Capital Programme, the doubling to £2,000 of the housing grant for first time house buyers and the deferment to 1 May of the increased VAT rate for new private housing, as provided for in section 53.

Section 54 of the Bill imposes the levy on the banks which was announced in the budget. The base period is being extended from three to 12 months to give a more representative base and to counteract any tendency to manipulate deposit holdings so as to reduce and individual bank's liability in respect of the levy. Deposits held in foreign currencies will be excluded from the base in order to make the holding of such deposits in domestic branches more attractive.

The budget proposal to exempt from capital acquisitions tax inheritances taken between spouses is confirmed in section 58. There is evidence that the imposition of a tax on the surviving spouse in such circumstances creates some hardship. The rationale of an inheritance tax is that it should be a tax on property moving between generations and thus it is not appropriate that it should apply on inheritance when a spouse is the beneficiary.

Section 59 provides for the exemption of the proceeds of insurance policies from capital acquisitions tax where these policies have been executed solely for the purpose of meeting the tax liability. This is intended as a protection for people who may face a large inheritance tax liability and who may be obliged to dispose of assets, which are not liquid, to meet this liability. The exemption is confined to policies which are issued exclusively for payment of capital acquisitions tax. I do not envisage that this will involve any significant tax loss: on the contrary, it should have the beneficial effect of a speedier collection of capital acquisitions tax in some instances.

Sections 60 and 61 provide for reliefs where a double capital tax arises on the same events. Section 63 provides relief from discretionary trust tax in cases where a property, which is the subject of a discretionary trust, ultimately comes into the possession of the State. Because of an unusual combination of circumstances, it is possible that an unreasonable double charge to capital acquisitions tax may arise and it is only fair that there should be relief in such a situation. There is no merit in imposing a charge on a property that is to come into State ownership.

In section 66, statutory provision is made in respect of the requirement announced in the national plan that contributions be made by Bord Telecom to the Exchequer over the next three years. The section also provides that full compensation will be given to Bord Telecom over a period in respect of these payments.

The section in the Bill that has received most attention since publication is section 67. This provides that tax free Government securities may be issued to wholly owned subsidiaries of foreign companies which are carrying on a trade here. The intention behind this is to reduce outflows of profits and to retain a source of funding for the Exchequer that would otherwise be lost. The securities may be denominated in Irish or in foreign currency. The latest information on repatriations of profits and dividends relates to the year 1983, when the figure amounted to £660 million. I have no estimate as to what impact a new investment facility on special terms may have on this outflow. There have been indications, however, of significant interest in a facility of this nature and it is only sensible that we should make special arrangements to tap whatever resources might be available.

These arrangements will complement existing Government policy in this area which is to encourage reinvestment in Ireland of the profits of Irish subsidiaries of foreign-owned firms by creating an attractive investment environment here. I cannot specify at this point what the precise terms of a security issued under this section might be. The purpose of the section is simply to provide the enabling authority for the issue of securities of this nature, and the precise details of such securities will be determined at a later date.

I am continuing with a detailed examination of the scope of this measure and of some technical aspects. It is possible that I may introduce some amendments to this section at the Committee Stage of the Bill. As I have said, the purpose of the section is to encourage the retention of profits here and for this reason the new facility must be available to foreign-owned enterprises generally which are engaged in bona fide trading activities here.

The Bill incorporates substantial changes in our taxation system. There has been general agreement on the need for rationalisation of the system, which has grown increasingly complex, and this thinking is reflected in the Bill. A simpler tax system is not alone more efficient but it tends to have beneficial economic effects. It is also compatible with the aim of achieving greater tax equity and a fairer distribution of taxation. As we cut down on the multiplicity of rates and exercise tighter control on exemptions and reliefs, we establish a better basis for the achievement of a fairer system. One of the central points repeatedly made by the Commission on Taxation in their reports to date is that we must simplify our tax structure. I entirely agree with this and the changes in income tax and VAT which are incorporated in the Finance Bill are a big step forward towards a much more rationial system of taxation.

Within the constraints imposed upon me by the requirements of the budget, I will be trying to push this trend further over the next few years and I am confident that there is room for further significant progress. I commend the Finance Bill to the House.

Mr. O'Kennedy

The content and style of the Minister's speech today might be appropriate if the economy were on a secure basis with some central direction, and if we did not have the level of economic depression which apparently is visible to all except the Minister and also a general depression in morale and a leakage in investment and employment opportunities which have become all too common and characteristic in the past two years.

The Minister said:

Consequently, in lowering the budget deficit to meet the target in the plan, the emphasis must be on reducing public expenditure rather than increasing taxation. We are committed to adjusting income tax bands and allowances so that the overall tax burden on income tax payers will not increase.

Any Minister who is capable of presenting that as a statement of the present position and the policies of the Government over the past two years is capable of misrepresenting anything. An Opposition spokesman has a very thin line to follow. Unfortunately there is widespread depression. Our role is to be sharply critical of Government failure. The Government's failure is so obvious in every direction that one is slightly reluctant to further undermine morale by giving more evidence of that failure in any public debate.

Everyone but the Minister, who seems to live in splendid isolation, recognises that unemployment is still a horrible reality. Emigration is rampant as any Deputy in this House can tell. Parents are concerned about their children's future. Wives are concerned about their husbands' employment opportunities. Despite that awful reality, in a very calm and apparently self-satisfied manner the Minister said:

Since the beginning of the year we have seen some encouraging economic developments. The end-March live register figures showed a significant improvement over the trend in the previous few months.

If it is to be claimed as an achievement that we will not witness a continuing spiral of growth in unemployment from 234,000 to 250,000 or 300,000, then this Government have set themselves a very limited and miserable target, indeed. There must be a point at which the ceiling has been reached, with some slight reduction in unemployment. How can any Minister, particularly on the basis of seasonal adjustments, speak of evidence of significant improvement? That suggests that the Government, and the Minister in particular, either lack experience of commercial reality or have isolated themselves from attempting to cope with that awful reality and are living in a totally detached world, presenting as achievements what the facts clearly demonstrate as disasters.

I shall give some examples of that crushing reality which faces us all and I should have thought that even at this stage they would have activated the Minister. That is the only reference to unemployment in this very calm, detached statement from the Minister. He said that this debate offers the opportunity for discussion on overall strategies for the economy, and the public finances in particular, because if reflects the policies of the budget and the rest of us are now invited, which invitation we propose to accept, to comment on these overall strategies. However, the Minister primarily responsible confines himself to what could have been adequately done by means of an explanatory memorandum from the civil servants of his Department. A memo which could have been introduced here and put on a tape recorder would have done the job as effectively as the Minister has done today.

Mr. Dukes

That goes also for the Deputy's speech which is the same as last year's.

Mr. O'Kennedy

I was all too correct last year, I regret to say. I shall give the Minister facts and figures from last year's debate and what has ensued in the meantime, to prove just how right I was. I do not want to have the opportunity of coming back next year and saying the same thing. It is time that the man who occupies the position of Minister for Finance, with particular responsibility for setting a direction for national economic renewal, found some degree of stimulation, inspiration or capacity to present a challenge to the people outside this House who will eventually determine whether we are to pull ourselves out of this terrible depression. The Government's role is no more and no less than to create a climate in which those who have the energy, capacity and ability to do something will be encouraged to do it. This Government have taken the other role. They have ensured, by confining themselves to regulating and controlling tax revenue and tinkering at the edges with the little things presented today——

Mr. Dukes

It is not tinkering at the edges, quite the contrary. It is not the kind of tinkering that the Deputy was proposing a few months ago.

Mr. O'Kennedy

We shall deal with that later. Those who will at some time — I do not know how long the delay will be — have the means of renewing this economy again — the business people, farmers, workers, young people, will be given a clear signal, which certainly is not evident from this introduction this afternoon.

I imagine that the representative presence of the Labour Party which has been a characteristic of any economic debate in this House since I came in as Opposition spokesman will remain as representative as it is at this point.

Mr. Molony

It is a fairly similar representation to that of the Deputy's own party here.

Mr. O'Kennedy

There will be enough of my party here by the time Deputy Molony has heard from all of us. I invite any one member of the Labour Party to come in during the course of this debate and tell us clearly and directly that he or she welcomes the provisions of this Bill in respect of income tax, PRSI and levies, welcomes and supports what this Bill is doing to cope with unemployment and welcomes the adjustments in relation to capital acquisitions tax and the other little tinkering adjustments that the Minister is introducing with regard to the inheritance tax. Through the Leas-Cheann Comhairle, I am asking any one member of the Labour Party to say that the Minister of the Government with which he or she is involved represents his or her view, that the Bill the Minister is asking us to accept is the Bill that he or she is supporting as the answer to the problems that are so obvious to us all and is consistent with the policies that the Labour Party sometimes present themselves as representing. We did not have one Labour Party member present last year, or the previous year, but perhaps this year one will say that this Bill has his or her full-blooded support, or will have the honesty to say that this is exactly opposed to all that the Labour Party ever stood for and that the Labour Party representatives propose to demonstrate their opposition by the manner in which they respond to it.

Let us turn to what is in the Bill in relation to income tax. This year the biggest single increase will be again in the whole tax revenue area, in income tax, in which the PAYE sector will now contribute £1,860 million — £178 million more than last year. They are being asked to believe — a smaller number of them, incidentally, still fortunate enough to be at work — that this Bill is a move towards tax equity and relieving the burden on the PAYE sector. Let me put it further in context, that when an increase or burden can be presented by a Minister as a lightening of burden, then facts fly out the window. One can then say anything in the face of those facts, make bland statements like the Minister's this afternoon.

Let me place some facts on the record. Since this Minister took office, income tax has increased from £1,459 million at the end of 1982 to £2,191 million this year, an increase projected in the budget table in front of me here of about 40 per cent in less than three years. We are being told by this Minister that that represents a major step towards tax reform and towards lightening the load on the PAYE sector. If that can be said in the face of those facts, let the public recognise that whatever this Government say is very different from what they do. Those who get the message of the Government's point of view across are not here in the House to could the issue and when they are not, the facts speak for themselves. Those facts totally repudiate what the Minister says in introducing this legislation. In the course of the statement which he issued when this Bill was published he said:

The provisions incorporated in the Bill are a big step forward towards a demonstrably fairer and more efficient system of taxation.

Let us look at that big step forward and see precisely how big it is, how demonstrably fairer and more efficient the system will be as a consequence. When the Minister came into office, total tax revenue was just over £4,000 million. As a consequence of this Bill, total tax revenue will now be £5,704 million, that is, an increase in just over two years of £1,700 million or almost a 42 per cent increase in the total taxation levied since the Minister came to office. Even allowing for inflation, the total level of taxation here has reached crisis proportions and this Bill is adding to that burden. Yet, this Minister can tell us it is evidence of the policies of the Government to move towards greater equity in tax. I could quote not one but 20 examples from the address of the Minister last year and the previous year where he said precisely the same thing as he said today but at the end of the day the achievements of this Government are very different.

It is not surprising that we have the highest direct and indirect taxes in Europe, and that is a matter of record for some time. It is not surprising those high tax levels are undermining every positive element in the economy, from the incentive to work of the employee to the incentive to invest of the entrepreneur. People when asked questions on this subject give the same response. Deputy Molony will be aware of an example of what I am saying that obtains in our constituency and this is representative of what is happening elsewhere. I will take the example of a meat processing industry in my constituency and in that of Deputy Molony. I have figures — and I will give them on Committee Stage — to demonstrate to the Minister that as a consequence of going on a three day week in a meat processing industry workers receive only £2 less in take home pay than they would if they worked a five day week with considerable overtime. The workers have approached me and have asked me what this means. I may as well say that the industry is in Roscrea, although it could have been in Thurles or Nenagh. When workers reach the point where they receive only an extra £2 for working a five day week plus overtime than for working a three day week, it is obvious that something is drastically wrong.

Mr. Molony

It was worse before the Government passed the Social Welfare Bill.

Mr. O'Kennedy

In view of the figures I have given it is not surprising that in the returns for the first quarter of this year there has been a significant decrease in income tax. This shows the effects of the high levels of taxation and the reactions of those who are on marginal rates or of business people who find that the game is not worth the candle. The Minister must accept that a reducing pool of employed people have to meet an increasing taxation bill and, consequently, the burden must increase, not lessen. That is the dilemma of the Minister and, more important, of the economy. I have pointed out that there has been an increase of over 40 per cent in the total taxation levied since this Minister came to office. We have to remember that until he came to office we did not have an income levy, special levies and so on. All of these are new but they are deductions from the take-home pay, as the Commission on Taxation have pointed out, and they should be included in the general approach to income tax reform which this Bill does not deal with.

It is obvious that the Government have a problem. They had a problem when they started in office and it is much worse now. Although it seems hardly fair to quote it now, the Minister has told us we are making progress towards reducing the current budget deficit. We are told we will have nice adjustments so that at the end of the plan the deficit will be about 5 per cent. We have been told this by the same Minister who said he would eliminate the deficit over four years but the result has been an increase. Words can mean what this Minister tells us they mean. Therefore, if he tells us today we will have a nice, gradual, phased and sensitive reduction in the budget deficit to about 5 per cent——

Mr. Dukes

I could not have put it better myself.

Mr. O'Kennedy

——I think we can take that to mean a nice, sensitive, gradual increase of about 10 per cent at the end of the plan, if the words uttered by this Minister in the past few years are any guide. If we were seeing some correction in the fiscal aggregates of the economy, if we were seeing some balance introduced or some progress being made on the books, we could be reasonably happy and say that at least they are getting the book records right. However, it must be stated that the book records are anything but right. We are getting the worst of all worlds. Even with the huge increase in taxation, the current budget deficit will increase from £1,039 million last year to £1,234 million this year. Last year it was 7.2 per cent of GNP and this year it will be 7.9 per cent of GNP.

Today I had written questions to the Minister asking him how he was going to ensure he achieved the savings mentioned after the budget of £30 million in pay and £28.6 million in general savings. All I got from him was the bland assertion that the Government are monitoring the trends to ensure that the savings will be achieved. One can reasonably ask if that is a real answer to the question. There is a committee under the chairmanship of a most unlikely person, namely, the Minister for Defence, whom I thought had a rather different responsibility in Government than that of monitoring and controlling Government expenditure. The Government have said they are monitoring, observing and regulating and we are supposed to accept that the aims and achievements have been realised. I ask the Minister, when he is replying to this debate, to give us a list identifying where they are incorporated in the revised Estimates which I have not seen in detail yet. Otherwise it will be very difficult for anyone to track down and to test the reality of the proposed savings that have been mentioned.

That was the budget deficit. Let us examine now another area where we are supposed to be making progress, an area in which this Government gave firm commitments before entering office, an area they said they would regulate and control. I am talking about the Exchequer borrowing requirement. As part of Government policy, of which this Bill is an instrument, this year our borrowing requirement will increase from £1,825 million in 1984, 12½ per cent of gross national product, to £2,019 million, or 13 per cent of gross national product. That is some progress in correcting the fiscal area of the economy.

I want to relate all of these problems to the income tax question. We have reached the stage now at which Central Fund charges and public sector pay generally equal, wait for it — and this is some progress — 83 per cent of total tax revenue. The figure in 1984 was 80.5 per cent. Therefore between 1984 and the current year we are making further progress by swallowing up an extra 2½p, bringing the figure to 83 pence in the £ of all tax collected to meet debt service charges and public sector pay. Yet the Minister tells us they are making progress on their targets. If those are their targets they are welcome to them because nobody else would regard that as progress.

The one area in which we have seen an adjustment effected by this Government has been on the capital expenditure side as distinct from the current expenditure side. There has been a significant adjustment there because that must bear the burden of the fiscal rectitude policies of this Government. There are many places in which such adjustments can be made — for example, stopping certain capital programmes. In money terms they have fallen back this year by 3.4 per cent over 1984, which in real terms will amount to approximately a 10 per cent reduction. I might give one example of where this Government and Minister have achieved a significant reduction on the capital side, but at great cost to the whole social fabric of this nation, to the whole penal and legal reform systems. I refer to their determination to cancel the prison development programme under way when they assumed office. Instead we have had the ad hoc reactions of the past couple of weeks. When £12 million had already been spent on site development, professional fees and so on this Government of fiscal rectitude came into office and cancelled that enlightened programme.

I know no Minister for Finance wants to have to spend money unless it is proven to be necessary, not just by way of penal reform in the harsh sense of the word but rather by way of an enlightened penal programme. When that proposal was put to me as Minister for Finance, like the present Minister I would not have been an enthusiast any more than he about spending money in any such direction. But because the need was proven to me in 1980 I went along with the proposal and that programme had been developed in detail by the time this Minister assumed office. His first act was to axe it, with the present consequences. Our courts are a laughing stock, our Garda are frustrated, our prison officers watch fellows knocking on the door, going home again, and we open Spike Island. That is the type of fiscal rectitude being meted out by this Government, cutting back on capital programmes in every area where current expenditure is growing with no attempt whatever to gain any degree of control.

Let us examine another general economic area in which we were to make progress, that is if one were to believe the statements of this Government before assuming office and almost daily and monthly since assuming office that, according to them, they are tackling our foreign debt and the level of our foreign borrowing. Their major commitment is to reduce the level of State indebtedness. They have a fine way of reducing it. It would appear now that at year end the national debt will be as close to £21 billion as makes no difference. That is seen to be under way already from the latest figures issued by the Minister. That figure increased from £12.8 billion since they came into office to approximately £21 billion at the end of the current year. That is some progress. I suppose that is something that will also be presented as constituting a sensitive, balanced approach to the economy, a correction of the mistakes of their predecessors, a level of discipline and control which they contend has been long overdue.

I asked the Minister a question on 27 February last in the House seeking the figures for the total national debt and also the foreign debt component of that figure, when he gave the figures I have just quoted. In view of those figures I asked the Minister then if he would make a statement in view of that huge increase, which is a matter of major national concern. But he blandly stated that he had no further statement to make on the matter. Any Minister capable of dismissing that kind of disastrous growth in our national debt, of saying simply that he had no further statement to make on the matter, should begin to reflect a little on whether he should begin to take some action. While he may have no further statement to make lots of other people are making statements about it which, unfortunately, are undermining confidence in our economy. To that extent at least the Minister should feel obliged to make a statement on the matter——

Mr. Dukes

Our credit rating has improved again this year.

Mr. O'Kennedy

——certainly a statement of a different order from the one presented to us today as if we were sailing in calm waters, with everything being firmly directed under the calm, cool hand, there being no need for any panic. We find the reality to be very different. Our foreign debt at the end of 1984 was £8 billion and the total State foreign debt at the year end was £10 billion. We are making no progress towards reducing either our national or foreign debt, which foreign debt has almost doubled since this Minister assumed office.

These are the kinds of facts one is almost reluctant to place on the table again but they must be in an endeavour somehow to rouse the Minister or the Government to the reality of which everybody else is aware but themselves. Did not somebody last Sunday appear to express the reality in a different way? Former Deputy Richie Ryan spoke publicly last Sunday and the publicity surrounding his statement was significant. One wonders whether the ploy was: Oh, very much in tune with Government, now that we see the message coming through that the public have lost confidence in this Government the one message to be got across now is that things are so bad that the one thing one cannot look to is a change of Government. Let us all wallow in our misery.

Mr. Molony

That is quite true.

Mr. O'Kennedy

Let us all sink in our depression, let us all turn our backs on any prospect and acknowledge, as did the former Minister for Finance, that things have reached the point at which no change of Government will bring about any reversal of the trend.

Mr. Molony

That is true.

Mr. O'Kennedy

Let us all remain where we are, with the calm, cool hands of the present Minister on the tiller, doing nothing, simply calming the waters, getting nowhere — no hope, no direction, no purpose. Let us not look for a change of crew. Mind you, it is a new exercise in democracy. I do not think any member of the Government would have had the gall to say it but I am not too sure that members of the Government were unaware of the fact that their colleague in the European Parliament was going to say it and that perhaps the handlers said: "We had better switch the message. Let us now tell the people—"

Mr. Dukes

Is that all the Deputy has to say about the Finance Bill? This is awful.

Mr. O'Kennedy

That is what he had to say and he is a colleague of the Minister in his party.

(Interruptions.)

Mr. Dukes

Is that all you have to say about the Finance Bill?

(Interruptions.)

An Leas Cheann Comhairle

Deputy O'Kennedy without interruption, please.

Mr. O'Kennedy

By the time I have finished I will have gone into much more detail on what this Bill contains and what it does not contain than the Minister did in his bland statement. The Minister said we were enabled here to discuss the overall trends of the economy and the progress being made towards achieving Government targets.

Another major factor affecting all sectors is interest rates. The Minister, in an effort to meet the borrowing target to fund his deficit last year and to bridge the gap between what he raised in taxation and what was required for public expenditure, took a rigid decision, despite our arguments against it and our belief that a Minister should not put himself into a straitjacket, to raise £1 billion domestically for the Government programme. We all know the consequences. At a time when international interest rates were coming down and when all the signs were favourable for falling interest rates, our interest rates were rising as a consequence of this blind decision which seems to have been taken so that we could assert that we would limit foreign borrowing and raise the money domestically. The Government soaked up all the funds in the domestic money market. They brought unnecessary artificial pressures to bear on the banking sector so that last December our interest rates went up by 2 per cent when every development sector in this economy was already struggling under the burden of interest rates. If the Minister had listened to the people he would have known that the consequences of that decision would be damaging to the economy.

Mr. Dukes

Having avoided for the previous six months the increase in interest rates that everybody had last year.

Mr. O'Kennedy

I hope the Minister is content, because nobody else is content.

Mr. Dukes

You need not worry about how I feel, it is your speech.

Mr. O'Kennedy

I wish the Minister would contact the real world, it is time he did so.

Mr. Dukes

It is a long time since Deputy O'Kennedy contacted it.

Mr. O'Kennedy

We now find that, when all the trends internationally are still downwards and when we should have a greater reduction in interest rates, instead of coming back to where we were last December, the best that can be achieved for the hard-pressed borrower, investor or house owner is a 1¼ per cent reduction. How can we expect to generate tax revenue from sectors that are so depressed that they are not investing? This should be part of an overall strategy. But the Minister does not see it that way with the consequence that we are still way above the level of interest rates which obtained before last December, when interest rates should have been coming down, and it is affecting every productive sector. Market conditions are such that if we hope for any renewal in the economy we must have a further major reduction in interest rates. Otherwise this game in which we are engaged, in tinkering and adjusting, will be seen by people as being even more irrelevant than it is.

I noticed that the Minister in his speech did not seem to be aware of the impact of the 5 per cent increase in VAT on the construction industry. Did nobody tell him? Did the Minister not meet the crowds of builders who came to this city some time ago, has he not met them in his constituency and has he not been told day in day out of the disastrous effects of the 5 per cent increase?

Mr. Dukes

At the same time I proposed a different structure of VAT. The Deputy belongs to the party who gave us VAT. You have not a clue about what we are supposed to be doing.

Mr. O'Kennedy

In relation to the 5 per cent increase in VAT the Minister said in his speech that as a concession to allow for transitional difficulties the VAT change in respect of new private house building would not take effect until 1 May. That is some concession — they are cut out there cheering for you.

In relation to what direction a Bill of this kind might take, taxation does not always have to be a penal disincentive. It can sometimes be an instrument of Government policy to meet the most challenging needs of the economy. The youngest boy in a class would tell us that unemployment is our biggest problem. For what should we look in a Finance Bill or a budget which might somehow encourage some incentive in that direction? The Commission on Taxation pointed out, as did the Government's "wise men" in their plan for a plan, that our current tax system discriminates against employment costs in favour of capital costs. That is all too obvious to everybody except, apparently, the Minister. Labour intensive activities are being crucified as a consequence of the increases in the PRSI, levies and taxation generally. Later I will give examples to illustrate. On the other hand those who chose to invest in capital equipment as distinct from the labour intensive industry got lots of tax breaks to encourage them to do more. One would imagine that we had full employment although we are trying to export labour as distinct from trying to encourage employment creation.

The Bill — I mentioned this last year and the year before — does not do anything to adjust that imbalance. The Commission on Taxation said that our taxation system should at least be neutral as between employment costs and capital investment, but it is quite the other way. I should like to give an example in relation to the level of corporation tax, the company's tax contribution which is devoted to pay-roll costs. In 1964 — I accept that I am going back some but it is important that we should consider the matter — one quarter of contributions from companies to tax revenue derived from pay-roll costs. In 1984 three-quarters of company's contribution to tax revenue derived from pay-roll costs. Surely that is telling us something that must be corrected. In 1964 things were fairly buoyant and we did not discourage employment through all the various levies such as PRSI and the other contributions heaped upon employers. The Minister did not make any reference to that today or last year; I do not suppose he will ever make reference to it. Apparently, he cannot begin to address the glaring anomaly that has been pointed out by his own advisers, by the Commission on Taxation and, most of all, by those in the field, between the system of taxation that penalises employment and encourages investment instead in capital equipment. Sometimes that equipment is not necessarily very productive. It can be anything from wallpaper to partitions or equipment in some of the big accountancy firms in Dublin.

The Government have introduced all types of schemes, what they call social incentive schemes, but those of us who meet the children who are being given the advantage of those schemes know the reality: they amount to tinkering, they do not mean anything. An industrialist I met recently told me bluntly that he has not time to be helped by those in the State service who apparently are paid to help him. He was talking about the agencies in the Department of Labour where there has been the biggest single growth of any sector under the Government. At a time when we are cutting back in productive areas such as agriculture, education and in other aspects of productive activity such as the construction industry, the Government, who tell us they are controlling public expenditure, have "cut back" on the administration of the Department of Labour to such an extent that there has been an increase of more than 44 per cent over last year's figure. The cost now represents £160 million. That money has been provided for the agencies of the Department of Labour and our children are being sent here and there for training and interviews daily. At the same time the Government have provided for our most important productive sector, agriculture, a total of £250 million, which in real terms represents a cut-back. What Government can claim that this amounts to maximising our resources, using our potential to advantage?

Mr. Dukes

Because we are using other people's money for agriculture. The Deputy is forgetting the Common Agricultural Policy. I have never heard such a tissue of fabrication. It is terrible.

Mr. O'Kennedy

That is about the only response the Minister ever makes. I wish we could get something better than that from him.

Mr. Dukes

At least the Deputy could present something like all the facts.

Mr. O'Kennedy

I have given the facts.

Mr. Dukes

The Deputy has not. The Deputy has left out the biggest source of finance for agriculture, the Common Agricultural Policy.

Mr. O'Kennedy

I am referring to such things as the farm development programme which is included in the Book of Estimates. That publication also tells the story about the allocation for agencies of the Department of Labour, £160 million, or an increase of 44 per cent over the previous year. Is that control of current expenditure? That allocation is being made at a time when we are cutting back on education, agriculture and anything productive. The Minister does not seem to want to accept those facts which are contained in the Book of Estimates.

In terms of PRSI the Minister has increased it to 12.2 per cent or 2 per cent more than last year. Is that the best way to encourage employers to employ extra people? That, as the Commission on Taxation pointed out, should be included in terms of overall taxation. As far as workers and employers are concerned everything in the form of a deduction from profits or take home pay represents taxation. It is time we faced up to that.

Mr. Dukes

Is the Deputy proposing that?

Mr. O'Kennedy

I have been saying that for some considerable time. In case the Minister has forgotten, I should like to remind him that I set up the Commission on Taxation in 1980. They carried out a very professional, comprehensive and practical job. The Minister told us that he made some moves towards meeting the recommendations of the commission. Is the Minister telling the House that his moves towards adopting the recommendations of the commission amount to dropping some of the provisions he introduced? I am referring to the levels of VAT. The Minister inherited three levels of VAT and he increased that number to six. The Minister increased the level of top income tax to 65 per cent and this year he reduced it to 60 per cent. Does he regard that as progress towards adopting the recommendations of the commission?

The Minister has gone a lot further in every direction than what I have outlined, and he is aware of it. The point I have been making in regard to discrimination against employment creation were referred to in the commission's report. I should like to deal with the impact of the income tax changes on employees. They know that the great promise that they would be paying less tax this year than last year somehow is not reflected in their take home pay. When people call to my clinics and question me about this I cannot explain to them how one reconciles the two things. In the case of single people the tax levels were reduced from 65 per cent to 60 per cent. Last year a single person reached the maximum level at £10,686 but this year, due to the concessions of the Minister, he reaches the same level at £600 less, £10,086.

Mr. Dukes

What has been happening to the income in between?

Mr. O'Kennedy

It has been taken up with all the levels of indirect taxation that the Minister has increased.

Mr. Dukes

Is the Deputy referring to income tax?

Mr. O'Kennedy

I am referring to the fact that a single person will reach the 60 per cent level at a figure which is £600 less than last year's figure.

Mr. Dukes

What is happening to the income below that?

Mr. O'Kennedy

The Minister should explain that because I cannot explain it to people who call to my clinics.

Mr. Dukes

It is very simple; there are but three rates.

Mr. O'Kennedy

The constituent who called to me may have been conscious of the fact that by raising the employee's health contribution ceiling the highest marginal tax rate now operates at 68.5 per cent compared to 70 per cent. Is the Minister telling us that that represents significant progress towards equity and tax reduction for the PAYE sector? I accept that the lower end of the scale is very important but there is a big problem in regard to skilled workers. We cannot have semi-skilled workers unless there are skilled personnel. We will not have further employment for semi-skilled or non-skilled workers unless we have the skilled worker or the specialist directing and pioneering the way. If he is not there to open up new avenues or create new opportunities the semi-skilled or the unskilled worker has no hope of employment.

We will be debating this in further detail this evening and tomorrow. The Minister should take a look at some of the countries which are doing somewhat better than we are. He will find that in countries such as Japan, Switzerland and even Norway a huge proportion of those going into first-time employment have third level qualifications. The proportion is as high as 45 per cent in Japan. We wonder why they can generate added value through new technology and generate employment in spin-off industries. It is because they invest in the real wealth — education. They have the capacity to add value but we do not. We tinker and make adjustments here and there and wonder why we have an unemployment problem.

In relation to PRSI I would make a formal plea to the Minister not to discriminate against labour-intensive industries or enterprises in favour of capital-intensive enterprises. Secondly I would ask him to introduce a selective reduction of employers' PRSI contributions for new permanent employment. There should be some grade of reduction for new employees and it should not be beyond the wit or imagination of the Minister and his advisers to devise it. At a time when we want to encourage people to generate sustainable employment as distinct from short-term schemes and passing notions of one form or another, the Minister must see that the burden of PRSI contributions is a barrier. I made that appeal last year as well. Neither of these measures would have any major effect on tax revenue; in time they would generate considerable revenue through buoyancy.

Ours is by definition an open economy dependent on our capacity to exploit export markets. Within the past couple of weeks an official report from within the Government service pointed out that our marketing strategy and capacity is deplorably weak. It confirms what most of us already know. It has emerged from a number of studies that the level of our penetration in EC countries is on a par with that of Malta. That says a lot. If one looks on the shelves of supermarkets all over Europe one will see the products of Irish Distillers and Bailey's Irish Cream and, I hope Ballygowan. There will be no others. I do not blame Córas Tráchtála since there have been cutbacks and we cannot just rely on a semi-State organisation.

The report pointed out that the weakness in many of our exporting companies was clearly their lack of awareness of market trends abroad and their lack of capacity to exploit those trends and feed back the information to the production line at home. The only way to become familiar with the trends in any market is to live in that market. One has to know the market, its habits, style and consumer trends. One must know how people dress, how they play, how they eat — everything about them. Nonetheless the Government refuse to give any incentive to marketing personnel who will spend perhaps 100 days of 300 working days abroad. They are to be taxed on exactly the same basis as if they were working exclusively at home. That is ignoring the need to send people out into the market place and to encourage them with the incentive of tax adjustment. People at home would accept that marketing personnel should be encouraged to research markets abroad and feed back information to their own companies or to a conglomeration of companies.

We must accept that as an island we have a linguistic and geographical disadvantage as compared with the French, the Dutch, Germans, Danes and Belgians in supplying the European market. We do not even begin to offer incentives by way of tax adjustments for marketing personnel abroad. Two weeks ago the official Government report stated that our marketing performance was deplorably weak. In the course of the debate on the Finance Bill in both 1983 and 1984 I appealed to the Minister to offer those adjustments, which would cost little or nothing to the Revenue but the impact of which on our economy would be enormous. The Minister did not listen and clearly has not asked what can be done to boost our marketing personnel and give them an incentive to get out into the market. Such an incentive is not offered this year and will not be offered next year if this Minister is still in office. That is the third element which could have been introduced into this Finance Bill to make it in some way sensitive to the needs of the economy.

Where is the incentive to encourage and promote product development? We are told that the IDA are to concentrate on it. It is time they did so, although I do not see much evidence of any results to date. Where is the incentive in our tax system? Companies get more tax breaks in respect of investment in physical assets, such as buildings which are lying idle, than in respect of research and development or marketing programmes. We must wake up to the reality and try to incorporate some of those matters in this finance legislation.

I now refer to the special venture capital scheme which was introduced last year. The Minister has indicated that he proposes on Committee Stage to bring in amendments to the Bill to extend the scheme to relatives, to extend the start-up period for qualification and to raise the ceiling to encourage fund managers to get these schemes under way. I will have to point out on Committee Stage that each of these proposals was made last year by me on Committee Stage of last year's Finance Bill. They are all on the record of the Dáil. The Minister fobbed me off each time with some response such as that it would give rise to tax evasion or open the flood gates or that it was not feasible, reasonable or necessary. I was calmly put down on those specific proposals. Twelve months later the Minister tells us blandly that this is to be extended without giving any explanation for the failure of last year's scheme. Such extension does not meet the potential. We asked specifically that relatives be not excluded. Deputy Molony must recall this. So far as I remember, he supported that proposal at the time. However, the Minister did not accept those proposals. We gave the reasons for extending the start-up period. An investor should not be penalised if, after investing in a fund, the enterprise concerned is not proceeded with. However, we were wasting our time last year in putting forward that case just as we were wasting our time in proposing that there be a limit on the earnings of the fund managers.

The record shows that in the past 12 months that scheme which was so widely discussed and in which many of us placed much hope succeeded only in launching two funds. Is that not a total condemnation of the inadequacy of what was introduced by the Minister last year? Perhaps that failure has had some effect in so far as the Minister's action this year is concerned but he is not going far enough in this proposal. We asked especially last year that the service sector be not excluded from the benefit of the new scheme. Is there any rule which provides that a job in the service sector is not as sustainable or as important as a job in the manufacturing sector? Has the evidence not been the other way for some time? If there is growth in any sector, that growth is in the service sector.

The same applies elsewhere. Internationally growth in employment is in the service sector, whether in tourism or in other area or even in the construction industry. In America, for instance, growth in employment has been exclusively in the service sector. In that country numbers employed in manufacturing industry are more or less the same as they were 20 years ago. There has been at least a 2 per cent growth per annum there. The same position obtains in Japan and in Switzerland and in any other country whose example and success we would like to emulate.

However, despite all our appeals last year, the Government's proposals were far too restrictive and complex. Some 22 pages in last year's Act related to this scheme. It was so complex that no one but the most sophisticated accountant would have had either the time or the ability to determine who would qualify for inclusion in the scheme. We are trying to encourage ordinary investors, employees or anyone else who has a little to invest to participate in the scheme. We warned the Minister last year that the very purpose of the introduction of the scheme would be defeated by the restrictiveness and complexity of it. Unfortunately, we were proved right. Any legislation that is the subject of the amount of time and discussion involved in this case must be worth dealing with properly.

The relatively minor amendments being made now to the venture capital scheme will not meet the potential. I do not understand why the amendments have not been incorporated in the Bill. It is ridiculous that when a Bill is published, all the relevant proposals are not published also. I have no wish to criticise unfairly any official of the Minister's Department or any of the advisers in the Revenue Commissioners but one must ask if all their time is being spent in sealing possible loopholes and by ensuring that when the scheme comes into operation it will be accompanied by another lengthy complex document. We must not have amendments that are so complex and restrictive as to be incapable of being understood. Could we not have learned from the mistakes of the British in relation to similar legislation? Could we not have adopted most of that part of their similar legislation that has been successful?

Mr. Dukes

They found they had to restrict their legislation.

Mr. O'Kennedy

That is what we said last year. Are the people in Merrion Square intending to spend all their time treating the people outside as pawns and ensuring that there is not even a tiny loophole in the scheme? If so, we will be encased in the same sort of negative game that has apparently occupied the mind of the Minister in the past two years. That is not the business of a Minister for Finance. If he has an idea he should bring it forward instead of trying to kill it before it is even presented.

All businesses but small businesses particularly are crying out for a signal for the creation of a business climate that will encourage investment, employment creation and business development. The Minister should clarify whether he wishes that sort of environment to be created because in the event of such a climate not being created, there will continue an outflow of funds from the country, an outflow of the kind witnessed this year particularly. I know of many people who have deliberately invested their funds outside Ireland. Isle of Man Investors have held a conference here to encourage investment from Ireland and they have had major success. The result for us has been a disaster.

The investing of Irish money abroad is one of the major problems in our economy. It is part of the black hole to which I will refer later and with which the Minister is not dealing in this Bill. Another aspect of revenue yield is the yield from excise duty. The Government, some commentators and perhaps some members of the public, too, laughed at us when we talked of the levels of excise duty introduced by this Government bringing about lower tax revenue from higher tax levels. It was clear to anyone who was in contact with the commercial sector, the drinks industry generally, the electrical or any other trades affected by the high levels of excise duty and VAT that this was happening. Let me claim some credit for getting this across to the Minister, because for the last two years during the course of these debates and in public statements which I have been making for a considerable time I stressed the fact that the levels of excise duty and VAT were not only killing enterprise but were driving revenue out of the country. If we say it, apparently it is not accepted as responsible or informed comment; but now it is proved true. We repeated it so of ten that eventually the Minister reacted and the facts speak for themselves.

I propose to give figures to show how the level of duty on beer has affected the revenue yield from that drink. The excise duty increased to 29.5p on 12 March 1982; it increased to 33p per pint on 13 March 1982; it increased to 38.1p on 8 January 1983, to 34p on 21 February and eventually to 36p on 26 January 1984. We warned the Minister about the effects which these increases would have but he did not listen. Incidentally, the figures I gave came from the Minister in reply to a question which I put down on 27 February 1985.

In 1982 the excise yield from beer was £227 million; in 1983, when the price had increased considerably, the yield was £232 million, an increase of £5 million, which clearly is a reduction in real terms allowing for inflation. In 1984 it was still less than £239 million. In other words, in those three years there had been an increase of only £13 million because of the level of increase. In percentage terms it is not much more than a 5 per cent increase in money terms over the two year period, which in real terms was a dramatic decline, as anybody at any level in the trade — the publican, supplier or the brewing industry — could have told the Minister. If he was not prepared to accept their word he could have consulted the customs officers who would have told him the same thing. He could even have made a visit, as I did, to Carrickarnon to see for himself that every motorist coming across the Border was bringing back packets and packets of beer, among other things. They were taking every opportunity to avoid the level of tax here. I hope the fact that we are not increasing it this year will benefit the trade. Despite the level of general fall-off in consumption, we will not see the same level of depression in the excise duty from beer at the end of this year as has been the case in other years despite the general depression and the lack of consumer spending capacity. There is a point of diminishing returns for higher tax levels. The hole we spoke of was very black, as is obvious from submissions I received from customs officers and others over the past 12 months.

I now wish to refer to excise duty on petrol, and the fall here is even more dramatic. It is unbelievable that the Minister did not face up to this reality. Early in 1983 the excise duty content per gallon was 85.7p. On 31 March it went to 98.4p; on 1 April it increased to 103.2p, and in 1984 it went up to 108. 1p — an increase from 86.7p per gallon to 108.1p per gallon from early January 1983 to January 1984. What did we get for these increases in terms of excise yield? The excise yield in 1983 was £275 million, which, incidentally, had increased from £244 million in the previous year — the kind of jump one would expect. In 1984 the yield was £282 million, a total increase of £7 million, which in percentage terms is a little over 2 per cent and a drop in real terms. There is a huge drop in revenue yield for an increase from 85.7 pence to 108 pence, an increase of 23p per gallon. We pointed this out to the Minister last year and that the levels of excise duty would have the opposite effect, especially in Border regions. When a motorist crosses the Border to fill the petrol tank, he or she will naturally spend money on other articles, even on things that might be cheaper this side of the Border. We argued all this last year, but the Minister ignored us and I was told I was being facetious and irresponsible. I was told that it was typical of Fianna Fáil to make the popular proposals, but in this instance the proposal was based on the interest of increasing revenue.

I promised the Minister that I would deal with the Finance Bill in detail. I assume he will acknowledge that the comments I am making now, and will continue to make, are on the detail of the Bill after my general introduction which I felt free to make in terms of the depressed state of the economy at present. There was another effect of the high levels of income tax and VAT. Deputy Leonard is very concerned about this, as are his Border colleagues. Apart from the impact it had on the traders and on the economy of those regions generally, it was promoting the black economy in a very special way and undermining the whole basis of bona fide trading throughout the country.

We will have enough problems in the course of this debate without going into the problems of the Minister for Justice and without my taking on the role and responsibility of the spokesman for Justice of our party. Suffice it to say that many of the problems that that Minister must cope with, as must also particularly the Garda Síochána and prison staffs, derive from the general breakdown of the normal system and control in these areas. If people can cock a snook at customs officials and can engage in free smuggling, as they did — a Cheann Comhairle, I regret that the Minister is not able to wait to listen to my contribution. He might have expected that it would not be brief. I am glad that the Minister with responsibility for sport is deputising for him. I do not say that in any way in criticism of the Minister with responsibility for sport. It is rather a precedent that the Minister for Finance cannot wait to listen to the points being made on the Bill by the spokesman for Finance, particularly when the Minister's introduction was so pitifully inadequate, terse and smug.

In any event, I am sure the Minister will have heard from the customs staff. I have had many representations from them during the last year complaining about the impossibility of doing their job having regard to the flood of cross-Border activity and the cutback in the services. For the record of the House I will refer to the statement which they made in March 1985 in relation to Government directed cutbacks in the customs and excise service. They go in great detail into the impossibility of discharging their responsibility. I have had that and many other statements from them and they have also submitted statements to the Minister, but they underline their case by reference to the fact that the flood of stuff across the Border and the growth of smuggling due to the high level of VAT and excise duty made it quite impossible for them to discharge their responsibility. Smugglers and habitual lawbreakers were the only ones who were gaining and that too was undermining the whole social and legal order at a time when it is all too obvious that that is a major problem indeed.

Let me welcome — if that is the word — the adjustments, belated though they are, on VAT. If one should welcome the fact that the Minister who imposed the levels of VAT and increased the levels to 6 per cent, belatedly but nonetheless effectively reduces those levels back to 3 per cent, then we welcome it. Táimíd anbhuíoch. We are really very happy. We feel that it is marvellous, and he claims that that is progress towards the adoption of the report of the Commission on Taxation. If that is a measure of his approach towards that reports, that is quite cynical. He did this originally against the advice of the Commission on Taxation. Now he claims that by belatedly coming back to where he was before he started he is moving in line with the commission's recommendations. They deserve a better response than that. The only single area where the Minister can claim that he is in any way paying any attention to that commission's report is the fact that he has repented of his own mistake even 12 months later.

I regret that the Minister is not here for this but he will be hearing a great deal about it from this side of the House. I hope that he will be able to listen to most of this debate, if not from me then from my colleagues, because we have a fair amount to say. I am hitting only the main areas. I regret that he is not here to listen to my comments in relation to the impact of VAT on the building industry. Today our newspapers report confirmation from an independent Rome-based economic expert group that our construction industry is in a very depressed condition. It is the most depressed of all the construction industries of Europe. I have not been able to read those experts' report in detail but I hope to do so. I do not know if those experts are aware of the significance in our country of that industry. Most of the raw components — about 90 per cent — are home produced and of course the labour input is domestic; and for a country that is trying to generate employment that is the significance for our economy of the building industry.

Now we are advised that, no matter how depressing 1984 was for that industry, unfortunately the next year will be worse. That is from an independent group of economic experts. We will find a 5.5 per cent decline in investment and activity in the building industry here. That must signal to many who are still surviving in the construction industry a message that must test their very sanity, whether they are small builders or fairly well established construction companies. It is now predicted confidently that that industry in 1985 will have a decline of 5.5 per cent over the level of activity of 1984, which was the year of the lowest levels of activity we have experienced. Those experts go further — this is quite significant — and attribute the decline directly to the extra 5 per cent VAT imposition in the Minister's budget which is now being incorporated in this Finance Bill. All the Minister can say to the construction industry is the reference I have made: that he has made a concession to them by not charging VAT in respect of new private houses until 1 May. That is an offence to them at this stage. To people who are finding it next to impossible to survive in business it is an offence to present that as a concession. It is an offence in the face of the unemployment growth in that industry.

Let me mention to the Minister in this connection, in case he is not aware of it, that I am sure these people talk to Government as well as to Opposition spokesmen. Last year I mentioned that a major construction company had advised me personally, for the sake of making me aware, that 85 per cent of their investment would be outside Ireland last year, and sure as heaven it was. It was closer to 90 per cent. In the last 12 months I have had those who were big enough to go abroad confirming the same and the smaller ones who cannot do that are telling every Deputy in this House every day that the only option for them is to shed labour or go into liquidation. It is happening all over the place and the Minister has chosen to ignore it. I do not understand why. We will not have a construction industry capable of meeting even our most minimal demands in a year or two if this trend continues.

On another matter I mentioned last year, having regard to the decline in the private house building sector, let me appeal again to the Government to drop that nonsense tax, the income related property tax, which was one of the prices of this unique Government getting together a few years ago. If a tax has any meaning it is to yield revenue. But a tax that two years in succession yielded gross revenue of something over £1 million, probably at a net loss, having regard to the sheer physical burden on the already overburdened Revenue staff and the annoyance for people who are filling up these awful forms is a nonsense. If it were bringing in revenue — we told the Government that it would not — it would mean something. If we get a gross revenue of £1 million, then it is very clear that it is a nonsense. I hope the Minister with responsibility for sport will convey this to his colleague, the Minister for Finance.

Mr. Creed

I assure the Deputy that any of his remarks will be conveyed to the Minister.

Mr. O'Kennedy

I am sure they will. I must take it as a measure of the importance which the Government attach to this debate that the Minister with responsibility for sport is here to listen to it. I do not say that in any way as intending offences to the Minister of State, for whom I have a very high regard. He does his job within the limits available to him.

Deputy Molony is a solicitor and he will bear our what I am about to say. The enhanced activity in the private house building sector would more than make up in stamp duty for the miserable pittance coming in under this nonsense tax. All over this city and our towns there have been for sale signs up for a very long time because no one is prepared to buy. I thought the Government were familiar with Dublin 4, but do they ever look at all the for sale signs in that area? They should give the people a sign that it is all right to move to a bigger or better house, and that it is all right to improve one's house provided one pays stamp duty because one will have to pay tax in other directions in any event. The Government would get much more by way of tax revenue if they did not have this nonsense tax, which was the price of this Coalition. I appeal to them to get rid of that tax and, among other things, to give a boost to the private house building sector. The construction industry have been spearheading the call for the abolition of this nonsense tax.

The effect of the VAT increase on the construction industry will be to increase the VAT take by £75 million, based on the output figures for 1984-85. This is like squeezing a duck's neck until it chokes. I am talking about private housing, agriculture, industrial and commercial development and the effects of this tax on them will be about £40.5 million, and £30 million will be taken from public work done by the private sector, mainly local authority housing, schools, hospitals, roads, sanitary services and public buildings, thereby reducing the capital programme in these areas by £30 million. We must recognise that fact.

The output from new private housing in 1984 is estimated to have been £633 million and the VAT increase from 5 per cent to 10 per cent will result in an increase of £30 million. There is no point telling us that the extra £1,000 new house grant will go anywhere towards meeting that extra cost because it does no such thing, and people on the ground know this grant will have no impact on the already depressed private house-building sector. The reduction in VAT on materials used in house construction has no effect on house prices because building companies registered for VAT have their VAT refunded. I am sure this point has been made to the Minister more than once. There is not even a cash flow advantage to these people accuring from these VAT reductions as the refunding of the VAT charged is normally effected within the credit period which operates in the building industry. There is no incentive for the bona fide building sector in the refund to which the Minister referred.

Now, new houses will be taxed at 10 per cent. We want to encourage the private housing sector to take the burden off the public housing sector. Secondhand houses will be taxed at between 4 per cent and 6 per cent, depending on the value of the house— 4 per cent on houses up to £50,000 and 6 per cent thereafter. This shows there is a clear bias towards secondhand houses. This will give a further impetus to the black economy because non-registered builders will obtain their materials at the reduced cost resulting from the reduction in the VAT rates, while at the same time obtaining a 10 per cent advantage by not paying the 10 per cent VAT at point of sale. This will give rise to further activity in the Office of the Revenue Commissioners to try to seal of the loopholes which are the direct consequence of the imposition of this extra 5 per cent tax. If house purchasers cannot afford to pay the increase and builders cannot afford to absorb it, inevitably this will lead to a reduction in throughput and a major reduction in the employment sector and tax receipts from employers and from the ever-diminishing pool of those employed.

In the last few years we have seen a major decline in the level of private house building. Are the Government seriously telling us that they propose to balance that decline with an increase in public house building, which is heavily funded by the taxpayers? Will that be their way of reducing and controlling current expenditure? Statistics published by the Department of the Environment show that the level of house completions has fallen dramatically from 23,167 in 1981 to 18,000 in 1984, a drop of over 5,000 in three years. That decline has been primarily, and understandably, concentrated in urban areas. The level of private house completions declined from 10,763 in 1981 to 6,550 last year. My colleagues will deal in greater detail with the impact this is having on employment in the construction industry. Having regard to the major problem of unemployment, I cannot understand how a Government would impose such a crushing burden on one of our most productive sectors as far as employment is concerned, a sector which uses many native products and will not affect our imports bill.

I want to turn now to the announcement that the black hole has been officially acknowledged. Last year and the previous year the Minister accused me of trying to misrepresent reality. He accused me of being irresponsible and said that that kind of talk would damage the economy and confidence in the economy and that it was shameful for an Opposition spokesman to repeat these misrepresentations. There is a pathetic attempt in this Bill to seal off the black hole. First, if the problem is that the multinationals, through their pricing policies, exaggerate their profits here, then this kind of adjustment will not in any way meet that problem. Secondly, and this is a bigger problem, we have seen many of these multinationals in recent times, funded by the taxpayers, set up here but depart in a short time to richer pastures.

There is one rule about multinationals; their investment, by definition, is mobile. They move to wherever the profits will accrue. If there is a second rule it is that their executives will move to wherever the tax climate is reasonably benign, and the third rule, which has been demonstrated here all too clearly, is that their executives will get to hell out of the place if the tax climate is hostile. The level of taxation on income here is so far ahead of anything in other European countries, with the exception of Denmark, that any executive who would opt for domicile in Ireland would want to have a very sentimental attachment to shamrockery and the green isle of Ireland.

We are satisfied that some of the decisions that were taken with such traumatic effect by multinationals in recent times would have been avoided if the hostile tax climate was not such as to discourage the personnel who were based here from settling here. Can we imagine the reports they sent back to their head offices when they found their pay decimated by our high levels of taxation? Can we imagine the tendency there would be to recommend a move to Spain or Portugal? Given our levels of taxation there is no possibility of encouraging specialist personnel to base themselves permanently here. I am talking about personnel who would be engaged in research and development, product development and marketing. We have become almost the lego centre of the high technology industry. We are putting the pieces together in most cases. It has been demonstrated that if multinationals get a better deal elsewhere they leave as quickly as they came. They take their profits and the taxpayer pays the price. To cope with that problem the Minister introduced this typical technician approach of trying to encourage multinationals to invest in tax-free Government securities. They are experts in the profit-making business and they do not have to confine themselves to tax-free Government securities.

This proposal may have some limited effect but the limitations on it are similar to those which were placed on the venture capital scheme. To qualify the subsidiary must be a company which is resident in the State and not resident elsewhere. What happens if there is a resident subsidiary somewhere else? Secondly, it must carry on its trade in the State and the entire issue of share capital must be beneficially held by a foreign company resident in a treaty country and not under the control of Irish persons. There may be some amendments to the Bill but, as it is drafted, it would not appear to be available to foreign companies operating here through a branch office, nor does it appear to be available to Irish resident subsidiaries which have an executive share scheme in existence or Irish resident subsidiaries availing of preference share financing or joint venture companies where any of the participants are resident in Ireland or in a non-treaty country; nor would it appear to be available to Irish resident subsidiaries which are held through tax haven holding companies. I notice we have a change of Minister — we are getting into the agricultural sector but at least we are coming nearer to the economy. Companies carrying on a banking or insurance business are specifically included.

Who has the Minister in mind as potential investors in these Government securities? The real multinational animal can spread his net as wide as he likes and catch such fish as are swimming in the best pools. The limitations I mentioned will put this beyond the scope of many Irish companies. It may have some effect and I would be glad to think it would but we will go into it in greater detail on Committee Stage. However, at this stage, the verdict on it has to be the same as that on the venture capital scheme. If the idea was worthwhile it has been so surrounded by complications that I do not believe that those the Minister wants to attract into it will have any special interest in it.

What we have been talking about relates to the economy, the impact of Government policies or the lack of them, the level of taxation, adjustments to encourage employment, the diminished yield from high levels of tax, the hostile tax climate, the major burden on productive sectors such as the building sector and the ineffective attempts to encourage investment through the scheme introduced last year and the attempt to block off the leak from the black hole this year. That is all covered within the scope of the Bill.

The indiscriminate cutbacks across the board in the public service are not doing anything to make our already overloaded tax system work. The public and those working in the Office of the Revenue Commissioners are conscious of that. It is frustrating for the staff who are trying to cope but who cannot cope. They are late in sending out forms, in repaying rebates to people who are unemployed, in repaying VAT and perhaps they are late in issuing assessments and demands. When a system is in place there should be enough staff provided to make it work. This system is a basic element in our economic structure and should be allowed to operate. Customs officers are screaming about the impossibility of doing their job at the airports, ports and cross-Border points. Tax officials who cannot get out the forms have been screaming as well.

There is talk about the low of revenue from farmers. There are two reasons for that. One is the low level of economic activity in agriculture. Farmers recognise that they should be able to contribute more than £30 million. That figure is nugatory in comparison with what the yield should be. When the yield was beginning to pick up and farmers were becoming accustomed to the income tax forms, the Government introduced the land tax and there were more rows and dissension between town and country. It is time we had an end to that.

I know that level of tax from the farming community is not acceptable. They know that. The Government have failed to give agriculture its proper economic priority. They are killing agriculture instead of promoting it. The second point is: are the farmers to be blamed if the assessment forms were not sent out, if the system is so overburdened that they were not sent out? Who ever responded before they were requested? That was the reality last year. If the Minister wants the system to work, he must provide adequate personnel. County registrars will tell you that, even when the judgments have issued, they cannot execute them because they have not got the staff.

The Government introduced legislation making complex additions to the tax system in the past few years and at the end of the day we have not got personnel to implement them. I can make no sense of what the Government are doing on the question of tax. I said jocosely some time ago that I dissociated myself from my colleagues who accused the Government of having Thatcherite policies. The Government do not engage in Thatcherite policies. As I understand the Thatcherite policy, it was to reduce current public expenditure and to reduce the level of taxation. That is how they coped with their deficit. While proclaiming their determination to cope with the problems of the deficits, borrowings and fiscal aggregates, this Government decided deliberately to heap on the highest levels of taxation which any Government in any European economy ever contemplated. That is where we are now, and that is why this economy is in the condition it is in. That is why our money is flying out and that is why our people are flying out. That is why our system cannot cope. I find no sense in anything the Government are doing. I do not think anyone else does either. If there are people on the opposite benches who do, and particularly in the Labour Party, I should love to hear from them.

Mr. Molony

One decision I have come to in the past couple of hours is that I will be brief. Listening to my constituency colleague for the past two hours I had considerable difficulty in understanding-what precisely he was proposing as the Fianna Fáil spokesman on Finance. The only thing I could pick out of the various views he offered us on so many different subjects over the past two hours was that Fianna Fáil are in favour of increasing employment and reducing taxation. How this Utopia was to be reached, we have no knowledge. How the deficits he referred to were to be tackled, we have no knowledge. I can only remind him of the reality of where this awful spiral we are on started. It seems extraordinary that he could have forgotten the fact that he was a Minister in the Government that caused the debacle we live with today.

Mr. O'Kennedy

That is incorrect. The Deputy should check the record.

Mr. Molony

The record speaks for itself. If it were permitted on an occasion like this I should love to have a direct debate with Deputy O'Kennedy. I could take notice from his speech today which would indicate to me the approach Fianna Fáil suggest the Government should adopt, or that they would adopt if they were in power. Fianna Fáil published the document The Way Forward at the end of several years in office. For the greater part of that time Deputy O'Kennedy was Minister for Finance.

I want to put it on record that I am sorry Deputy O'Kennedy is leaving the House. We listened to nonsense from him criticising the Minister for Finance for leaving the House having listened to Deputy O'Kennedy for an hour and a half. That is typical of the Fianna Fáil approach to economic matters. Deputy O'Kennedy knows well that he never sat through a full finance debate when he was Minister for Finance. He knows that is standard procedure. He also knows that, until the rules of this House are changed and contributions of two hours in Second Stage debates are ended, that will continue. I do not believe the Minister for Finance would have gained anything or that anybody would have gained anything by spending two hours here listening to what Deputy O'Kennedy was saying.

I am sorry Deputy O'Kennedy is not here because Fianna Fáil must be brought back to their last cogent statement. I appeal to Members of the House to look at this document The Way Forward. It is mind-boggling stuff coming from the party who are making some of the proposals they are making. I said I will be brief and I will also be selective. Fianna Fáil said:

Public services cannot be provided on the basis of what is desirable. They must be based on what can be paid for by taxation.

We listened to Deputy O'Kennedy suggesting that this and that tax should be reduced and that the awful burden of taxation should be lifted. Nobody is quicker than I to agree that the burden of taxation is intolerable. Did we have one suggestion from him in the past two hours about what services he would abolish in order to facilitate a reduction in taxation?

He complained about the lack of public servants in Departments and about the embargo introduced by this Government. In The Way Forward Fianna Fáil said:

We must decide that the numbers employed in the public service, their pay bill and public expenditure generally cannot continue to grow on the basis of ever-greater taxation and borrowing in an economy at our present level of output.

I will say no more than that about their last cogent statement on the economy. If we want to find a cogent statement after that we need only go to the Official Report and pick out specific points made by Fianna Fáil from time to time and identify them. I found it difficult to identify anything cogent in what Deputy O'Kennedy said this afternoon.

I want to mention public service pay. I could not agree more with what Fianna Fáil said in The Way Forward in this regard. I would love to see everybody with a good deal more money after they have paid their tax than they have at present. I recognise that people in the PAYE sector, farmers, housewives and others are crippled and scourged by the restraints on their resources. When the Government published their views on public service pay in the national plan, Fianna Fáil took the extraordinary step of going to meet the Irish Congress of Trade Unions. They agreed to congress's proposals on public pay at that time. Had the Government taken Fianna Fáil's advice, the additional cost would have been £322 million. That is the extra amount Deputy O'Kennedy was suggesting we should spend on public service pay in this year alone.

Specific motions were brought into the House by Fianna Fáil. A couple of companies went into liquidation because of their financial positions and I mention the Verolme operation in Cork, Irish Shipping and Clover Meats as three examples. Had we taken Fianna Fáil's advice on that, it would have cost us an additional £2 million. Other tax concessions sought by Fianna Fáil were abolition of agricultural land tax and water rates, which items were proposed by Fianna Fáil when in office themselves and the introduction of which was promised when they got back into Government. They are running far from that now. They made proposals for greater resources towards eradicating bovine TB and wanted to introduce mortgage subsidies. The House will recall that they were going to increase by about £200 million the public capital programme. Deputy O'Kennedy said that they were going to eliminate the current budget deficit by 1987. The total cost of all of this would have amounted to about an additional £700 million or £800 million. The figures are on the record and the Deputies can add them up.

In order to facilitate that sort of spending, if they do not believe in borrowing money for current expenditure, as mentioned by Deputy O'Kennedy, in order to finance the Fianna Fáil Party's proposals, over the past 12 to 18 months taxation across the board would have had to be increased by 22 per cent. These proposals are on the record of the House and in public statements. Why did Deputy O'Kennedy not look at the reality today, as he was so fond of telling this side of the House to do? Why did he not tell us how they proposed to raise taxes by 22 per cent? Why was he not realistic and sensible in his approach to this debate, instead of giving us two hours of utter hogwash, in which he painted himself and his party as pure Holy Marys whose only interest was to reduce the burden of taxation and increase employment? They must imagine that Santa Claus would deliver the goods.

We have very definite fundamental and economic problems, some of which have been addressed very successfully by this Government, but some of which have not, in my view, been addressed with sufficient enthusiasm. I shall return to those later. I am anxious to refer to some specific points in the Finance Bill which are important. Deputy O'Kennedy referred to the black hole in the economy but that is not something which happened last year. He seems completely unaware of the fact that the black hole was always there and that what happened was that our system of maintaining returns, of statistical control, in effect was inadequate. It had not accounted for or allowed for this. For as long as Deputy O'Kennedy has been a Member of this House and during every year in which he was a member of the Government, the money has been going out through the black hole. He suggests that somehow he discovered the black hole last year and that this Government were responsible for its creation, but that is arrant nonsense that would not be attributed to a two year old. I express the hope that the proposal by the Minister for Finance in the Finance Bill will help to solve that problem, but I am not convinced of that. I find it hard to believe that an international company with all sorts of investment programmes would be happy to leave money lying around in Government securities here. Perhaps I am wrong. There are certain tax advantages in doing so, but I should imagine that companies with spare cash like that would be more interested in using it to carry out development work and increase their activities.

Ultimately, the only way in which we can encourage foreign companies to invest in this country and keep their profits here is by having an economic climate which is attractive to them. That is what we must strive to attain, but it is not going to be easy to do. I hope that the proposals in this Finance Bill will assist in some way, but it would be naive to believe that they would solve the problem that quickly. This is a problem which goes to the core of our present economic situation and it can only be addressed if we adhere to targets which we set to bring public finances under control, to increase the cost competitiveness of Irish industry and so ensure that those who are going to invest here in industry, the service sector or whatever will have the opportunity of making money. That is the one way of getting foreign companies who make profits in existing companies to reinvest and keep their money here.

I welcome the VAT and income tax changes in the budget, confirmed by the Finance Bill. It has been, without question, an extraordinarily difficult time for business over the past few years. The increase in VAT rate has made it very difficult for companies to survive. From contacts which I have and indicators since the budget, there is increased business activity. I hope it continues to the extent that the loss of revenue will not be significant and that, as Deputy O'Kennedy has said, the law of diminishing returns will pay up. It is not certain yet that that will happen, but we can hope that it will.

There is another welcome aspect to the changes in income tax and VAT. That is that those systems are being simplified. We constantly underestimate the administrative and bureaucratic burden which we throw on business, particularly small businesses, by our awful taxation system. The number of rates of VAT alone caused headaches to business people, particularly those operating in a small way. When one considers VAT, PRSI, income tax controls, stamp duties which must be paid, records which must be kept, VAT at point of entry and reclaiming VAT elsewhere, it must be extraordinarily expensive, not only on the business sector trying to maintain that system but also on the Revenue Commissioners. We must go further in attempts to simplify our tax system. The Commission on Taxation have made recommendations which I believe the Government will follow through in the course of the next two or three budgets and Finance Bills. I urge the Government to do that. Even if it is not possible continually to reduce the level of taxation, it is critically important, in order to help businesses, that the administrative burden of managing the present system of taxation be relieved.

I welcome also the provisions in the Finance Bill relating to the inheritance tax. I never saw any justification for charging inheritance tax for inheritances between spouses. I cannot believe that there is justification for charging tax on any significant basis on transfers of property between husband and wife, whether in the lifetime of one spouse or, as in the case of relief in this Bill, on death. Obviously, with our present economic difficulties it is not possible to do everything, but I urge the Minister, if possible next year, to abolish any form of gift tax on any transactions between husband and wife. I put in this caution that where transfers of property between husband and wife are being used to avoid or evade other legitimate taxes, transfers between them should not be so facilitated; but from a social point of view taxation on property transfers between husband and wife should come to an end.

I also specifically welcome the proposal in the Finance Bill to allow people to insure against large inheritance tax bills which can arise. I was astonished to read — I think in last Sunday's Tribune— a very strong criticism of this proposal. A suggestion was made there that the rich were getting away with it again. It seems that any capital tax can only have two main purposes — first, to raise revenue and, secondly, to redistribute wealth. In their own right these are laudable. I wonder how anybody could complain if somebody insures against a tax liability and will be able to pay that liability off through a policy of insurance. All this Bill does is ensure that the yield from the insurance policy will not be caught by inheritance tax. The payment on premia by the policy-holder throughout the years will not in any way be relieved of income tax. It will be a very expensive payment for people. Effectively what it amounts to is payment of a heavy capital tax by instalments throughout a person's life and I can see absolutely nothing wrong with that. The same wealth will be redistributed. As the Minister pointed out, it will mean that inheritance tax will be paid more quickly. It will also mean that businesses— we are talking of operations of a moderate size— may not have to be broken up because of a liability to pay inheritance tax. A business worth £500,000 might yield very little profit today, depending on how it is structured and its area of activity. A lot of money can be tied up in a small amount of machinery. There is a considerable liability for inheritance tax arising in respect of a business valued at £500,000. It would be quite impossible for the inheritor of such assets to discharge any inheritance tax bill without selling or disposing of part of the equipment or diluting his shareholding in the company. It might make it impossible for the company to continue or to yield a reasonable income for a family. The proposal of the Minister is sensible and reasonable. It will ensure that wealth will be redistributed and it will also give an opportunity particularly to those who run small to medium sized businesses to ensure that after their death the undertaking concerned can remain in operation.

I am amazed at the attitude of many who still have the view that there are many people here with massive wealth. I am sure there are some but they are very few. When one considers the changes that have taken place in the fortunes of businesses in the past number of years, one can easily accept that what might have appeared a considerable amount of money a few years ago appears like little money today and what was on paper quite substantial wealth is now anything but substantial wealth.

We have to make a decision here as to whether we recognise the country for what it is. After all, we are a capitalist society. In so far as we have an engine of activity to generate wealth and output which we need so badly to pay our bills, we must rely on the business and industrial sector. If we are constantly complaining that these people want profits or have wealth of some kind, it is time we reviewed the kind of country we want. If we want a different kind of country, one that is entirely socialist or communist or anything else, that is fine and let us have it. However, if we want the type of society we have and if we want to encourage growth in economic terms, we will have to come to terms with how we do that.

There are a number of more minor proposals in the Finance Bill that are to be welcomed particularly. I welcome the tax relief proposed for income from certain farm leases where people of 55 years or more give a lease of their farms for at least seven years. The Government have been positive on the question of land lease to break the land structure system away from the inadequate use of land. Such a purpose can only be achieved by the type of policy being pursued by the Government and I compliment them on that. I wish also to compliment them on the increased rent allowance for tenancies for older persons. It is good social legislation, as is the increase in tax-free interest in banks for elderly persons. I welcome what the Government have done in that regard.

One matter is absent from the Finance Bill which I thought might have been included. Perhaps the Minister will consider the point I am about to make and see if he can introduce an amendment if that is appropriate on Committee Stage. I am especially concerned about the cost incurred by people who are financing their children attending colleges of higher education, particularly third level education. I know it is a burden on any parent in any part of the country to send a child to college now, particularly those who are just outside the means test limit and who cannot benefit from a higher education grant but I wish to point out a difficulty that exists for people who do not live in Dublin, Cork or Galway or in towns that have a third level educational establishment.

People in Dublin and in the areas I have mentioned frequently forget that the greatest cost in sending a person from the country to a third level educational institution is the cost of maintaining them in the place where that institution is situated. The fees remain the same but the burden on a family from, say, Tipperary of sending a child to Cork or Dublin is infinitely greater than the burden on a family living in Donnybrook, Ranelagh, Dundrum or on the north side of Dublin who send a child to college in Dublin. The student can live at home and the cost of maintaining him or her in third level education is nothing like what it is for people in rural Ireland.

One measure existed that was of some benefit, namely, the income convenant that parents could enter into with their children over a certain age. If a parent had a child over 21 years who was attending an educational establishment, it was and is still possible for the parent to covenant with that child to pay, say, £1,000 per year. This gave a tax benefit to the parent for that expenditure. Since the Bill dealing with the age of majority was passed, the age of majority has been reduced from 21 years to 18 years and I should have thought it would have been appropriate in this Finance Bill to extend the facility of convenanting money from a parent to a child of 18 years. This would be of considerable assistance to people, particularly those in rural areas who have to face a heavy cost. People with incomes from £10,000 to £12,000 may find themselves outside the scope of the higher education grant scheme. I ask the Minister's advisers who are present to take note of that point. If I am wrong in what I am saying or if I misunderstand the position, perhaps the Minister will tell me. However, if there is a lacuna there that has been caused as a result of the Bill dealing with the age of majority, I ask that the matter be dealt with.

The budget and the Finance Bill will contribute to a more positive economic climate and this is essential. Already there is evidence of an increased incentive to work and there is a stimulus to business. Perhaps the VAT changes are the biggest contributor in this regard. Nevertheless, there are still some deep-seated fundamental problems in our economy that are not being addressed sufficiently.

Current Government spending is slightly increased this year and effectively this means, albeit by only a small amount, that we are still somewhat less in control of the financial situation this year than we were 12 months ago. This strategy was set out in the national plan but I urge the Government to ensure that in the next two years of the national plan the targets in that plan be adhered to rigidly. It is only if we control current expenditure that we will solve our economic problems that exist to such a frightening extent.

I wish to refer also to the question of the public wage bill. It is very easy for me to sit on the back benches and criticise the Government for not sticking to the cash limits they set out for themselves in their national plan. I want to stress that I believe this to be a key problem in our economy at present, one we do not keep to the forefront sufficiently often. I do not begrudge anybody in the public service the best in terms in wages and benefits to themselves. But it is the value of money that matters at the end of the day and not the nominal amount one is given. Unless this problem is tackled we shall merely ensure that whatever nominal amount we give to public servants, people in private industry, or the people who are unemployed will be worth a lot less than it is now. It is acknowledged that, relatively speaking, our public servants are better paid than public servants in many other countries. In terms of our economic welfare at present certainly they are not badly paid. I would urge that the Government adhere to the limits they set out in their national plan. It comprises a very large part of current Government expenditure. It is critical that we ensure that we maintain the controls we set out in that national plan.

I was amused, listening to a radio programme the other morning, the "Morning Ireland" programme, when a former Minister for Finance, now a Member of the European Parliament, Richie Ryan was interviewed. It is an interesting programme sometimes. I must say also that probably we are very lucky to have those chaps on that programme every morning because they know a lot about everything and very frequently bring in people to get a comment on what is their own view on something rather than allow a person express a comprehensive view. It was put to Richie Ryan the other morning that the proposal he had made a few days earlier — that we had to get current expenditure under control — was impossible, that one could not reduce the current budget deficit, that one could not reduce current expenditure by Government. I was astonished. It occurred to me suddenly that perhaps this view was more prevalent in this House and country than should be the case. The fact is that at present this Government absorb 50 per cent of the gross national product for their own spending.

There are two issues involved here. Some people would argue — particularly those on the left politically — that high public expenditure is a good thing. I do not agree with that. But what is lost in all of this is the fact that much of our public spending is not perhaps good in itself, that we are not getting a return on it, that it is not effective, that some of our public expenditure programmes are not efficient. We are still an under-developed economy. Given the type of private enterprise economy we have, the Government must resist absorbing the sort of money they do absorb. If we are to proceed economically at all, more resources must be made available to the private sector.

The elimination of the current budget deficit by 1987 has now been deferred, a decision which I am sure was not taken lightly by the Government. Obviously it poses difficult economic and social problems. One thing I have not seen a great deal of in the past couple of years is the desire that appeared there a few years ago, specifically when Deputy John Bruton was Minister for Finance, that we needed to examine much more closely the public expenditure programmes we had. Many people get annoyed and become upset when they hear health boards having to close a ward because of cutbacks. I heard one story published by a health board official that because of cutbacks patients who had been getting three sausages with the tea would get only two. This type of policy playing is utterly irresponsible. A proper examination of the whole administrative structure of our health boards that absorb so much money has not been carried out. In any discussions that take place in public at health board level about cutbacks the emphasis is on the service finally delivered to the patient because it carries a high public profile and because pressure is better applied that way on a Department of Health if one can cause hassle and problems.

When the Minister for Health took a firm stand with health boards — on which I compliment him — it was interesting to note that they were able to manage cutbacks that did not affect the service ultimately delivered to patients. I believe that if there was a proper examination carried out of the activities of all health boards — I do not confine these remarks to health boards, they apply across the board — there are many areas where savings could be effected, where programmes are seen to be inefficient or ineffective and where greater controls should be introduced.

I mentioned health boards because they occurred to me as I spoke as something which I have thought and worried about before. There are many expenditure programmes, some of which have been highlighted by the Committee on Public Expenditure of this House, which show the folly of some of our expenditure, for instance, Department of Justice spending of £13 million on prisons never built, the Minister for Health having indicated that in the Cork area alone there were 600 or 700 surplus hospital beds. I am not talking of hospital beds only but of accommodation as well that is not needed at all. I wonder how that arose. There were instances I raised in this House before of the Institute for Industrial Research and Standards and the IDA changing offices and that sort of thing, going wildly in excess of their authorised budgets.

There are other areas in which our programmes do not appear to be very effective in what they do. For example, I recall a report in respect of higher education grants, specifically in regard to people who attend our universities. We introduced higher education grants to benefit people of all backgrounds so that they could attend college. We introduced free education in secondary schools to achieve that same sort of purpose but, when the analaysis was done at the end of the day, it emerged that the only people who enjoy third level education, specifically in our universities, are people from middle income backgrounds or upwards of middle income backgrounds. Therefore the truth is that despite all the money we have spent we have failed to deliver to those people in most need. Has there been any examination carried out since that report was published of the operation of our higher education grants scheme?

The bovine disease eradication scheme is a scandal referred to dozens of times and I shall not go into it again. Something is now being done about it but for years millions of pounds were being spent by the Department of Agriculture virtually to none or little effect. Probably one could go through every single Department, every single public expenditure programme, and one would discover that many of them are trundling along without any examination to see how cost effective they are, or how effective they are in achieving the purpose for which money was passed by this House in the first instance.

The problem is not just how much the Government spent but how badly some of that money is spent. I might refer to the fact that in other countries they have managed to deal with this problem quite well. I do not want to create the impression — lest anybody might take it from what I am saying — that there is no control. There is a control over public expenditure here but it is reserved almost exclusively to a legal control, the Comptroller and Auditor General being charged under the Constitution with ensuring that moneys passed by this House for a purpose are spent on that purpose. The net effect of that control is that we can spend money stupidly if we want to as long as we are honest about it and it is done legally. But we can be stupid or insane in spending as long as we stick to the strict letter of the Vote passed by this House.

In the United Kingdom nationalised industries are obliged to publish regularly performance indicators which enable the Government, economists and other interested parties to compare the performance of that industry with other industries or similar ones abroad to establish how they are going. That is something that would certainly be of great value in our State-sponsored sector. I would urge that we consider the introduction of such obligations on semi-State bodies. There was a House of Commons paper published, I think, in 1981, on the efficiency and effectiveness of the civil service which contained some excellent ideas as to how one could streamline the operation of one's civil service and have identified areas of waste that existed. Have we undertaken any such examination here? In 1981, when Deputy John Bruton was Minister for Finance I recall an excellent document published entitled "A Better Way to Plan the Nation's Finance". There was one proposal in that document adopted, that was the establishment of the Committee on Public Expenditure of this House. That committee may well have brushed the wrong way some members, executives or boards of semi-State bodies. That is part of the normal tension that takes place in this sort of examination. But we cannot expect that committee to achieve all of the purposes set out in that document.

That document contained other suggestions to which I want to refer. For example, I want to ask the Minister for Finance whether consideration has been given to these suggestions. One was the establishment of a Public Expenditure Commissioner. The concept of the Public Expenditure Commission was explained in the report. The commissioner would have the role of reviewing public expenditure programmes as to their effectiveness and perhaps recommending the elimination of wasteful or obsolete programmes of activities. One of the advantages of having such a commissioner was that he would have the freedom of operating independently of this House and of the Minister and he could establish, away from a political environment, where programmes were perhaps failing to achieve what they should and where savings could be made, or where perhaps more money could be spent in a more effective way.

There was also a proposal to introduce new controls for deficit budgeting, not that it would be impossible for a Government to indulge in deficit borrowing, because it is clear that for the foreseeable future Governments will have to rely on deficit budgeting, but to ensure that there is control over it and that it cannot be done easily and so that there will be greater restraint on Governments engaging in deficit budgeting when balancing their budgets. The point was made in that document that what Governments are doing when they are engaging in deficit budgeting is spending money that has to be earned by future generations or by the generation who will be in this House in a decade or so. I do not know if these matters have been followed up but this document should be reread by every Member of the House. It would be of advantage to us all to do so and to bear it in mind when we make contributions to debates like this and in participating in our ordinary political activities.

During my years here I have grown more conservative economically. When I look at the economic difficulties I am forced to face the simple fact that if we are to overcome our difficulties we must ensure that Government and industry are side by side in tackling the problems. When I say that they should be side by side I am not talking about the Government throwing out benefits to industry or distributing handouts. Unfortunately our attitude to political economic life has descended close to the gutter in that type of approach. Over the last eight or ten years since I have become involved in politics I have noticed a lack of understanding in industry of Government problems and a lack of understanding in Government of industrial problems. A lot could be done to overcome that. I was in touch with the Minister for the Public Service some time ago about a specific company who were asking for an exchange of a senior member of their staff with a member of the Department of Industry. I gather that that exchange has since taken place. Programmes like that, involving the exchange of personnel, can be extremely valuable in the long term. They will certainly improve the level of trust and understanding between Government and business.

If we are to push on further the economic well-being of our country we will have to ensure that there is greater economic activity in business. To do that the Government will have to tackle the cost of essential services. I welcome the proposed reduction in ESB charges to certain industries. That sort of approach is of assistance. The Government have been outstandingly successful in relative terms in dealing with the problem of inflation. If the Government can push that further to deal specifically with the very high cost of essential services facing key industries a great deal more can be achieved than we imagine at the moment. I urge the Government to go in that direction.

I am convinced that something has to be done to address the problem of over-centralisation. This issue is frequently thrown around here on a political basis. But considering all the problems in Dublin it is quite clear that very——

An Leas-Cheann Comhairle

I would remind the Deputy that he is going away from the Bill.

Mr. Molony

I am talking about centralisation. There is over-centralisation. This is not going away from the Bill, it has very much to do with the grave economic problems we have. It must be addressed. The reason it came to mind was because of a lecture given by Professor Joe Lee, which was published in The Irish Times on 17 April last, on the question of centralisation and community. I will quote one paragraph which relates to our economic development since the foundation of the State. We sit here year in and year out and throw balls across to each other and blame each other for all sorts of things. This is a very telling statement and one which should cause us great concern. The professor said:

We cannot avoid the conclusion that we have incomparably the worst record since 1921 of any economy in northern Europe, except the British. Our recent performance appears even more dismal if we concede validity to the ‘catch up' hypothesis according to which more backward economies have the possibility of growing more rapidly by learning the lessons, and benefiting from the achievement of, more successful ones. We are now perched, through our own efforts, at the wrong end of virtually every relevant league table. The absolute gap between average northern European incomes and our own is as wide as the absolute gap between our own and African averages. The first pre-requisite for improvement must be to recognise the dimensions of the problem, and to admit just how deeply disappointing has been our economic performance, not just in the recent splurge of collective inanity, but for far longer. Even the growth of the 1960s, however impressive by our own previous performance, still fell below northern European averages. Having recognised reality, we must then proceed to search for explanations, not for excuses.

It is interesting to anybody who reads the debates on Finance Bills or budgets which took place in this House over the past two or three decades to see the way different people were blamed for different things and parties were blamed for different things, but at the end of the day the great majority of people in this House have the same economic outlook. The degree of difference between them is very little compared with many other countries. Perhaps we need to look further back and to look more closely at the basic institutions, the way this House works, the way the Government works, the way the Department works and so on. It is not something that I will pursue now but it should give us food for thought if we considered it for a while instead of engaging in criticising the last person who was in this seat.

Dr. O'Connell

It appears that I am always honoured to have Minister Birmingham in the House when I speak. I am very disappointed at the lack of imagination of the Minister for Finance. I thought he would have introduced some imaginative provisions in the Bill bearing in mind the failure of his budget. I had hoped he would bring forward some new proposals. It appears that the Minister is living in cloud cuckoo land and is out of touch with reality, because he stated that there are signs of confidence in the country. There is no such thing and the Minister is deluding himself and attempting to delude the public into believing that there is confidence in our economy. Confidence is lacking. The reverse is the position despite the superb efforts of the national handlers again and again to present an optimistic picture of our economy. We hear phrases like "poised for recovery" from Ministers almost daily. The partners in Government are deluding themselves into believing that they can gain the support of their followers as a result of their continued participation in Coalition.

The Minister told us that fundamental changes in the taxation system were introduced in the budget. Perhaps I am a little simplistic or not quite au fait with the position but this bureacrat from Brussels feels he can speak over our heads and convince us that fundamental changes have taken place. I fail to see where those changes have taken place. In my view the media were lacking in not exposing the sham of the budget. The media were easily misled. In fact, they were totally biased in favour of the Coalition in the picture presented in comments and reports. That surprised me. It appears that the media is overawed by the Government. I cannot understand how they were so easily misled into making some of the comments I read.

The VAT changes were no more than an admission by the Government that they made a mistake in the first place when they decided to increase the rate to 35 per cent. That punitive tax had the effect of sending traffic across the Border to the detriment of Irish industry. The decision to increase the rate to 35 per cent was a grave mistake, but instead of admitting that mistake the Government tried to present the reduction in that rate as a fundamental change in the taxation structure. The 65 per cent income tax rate was a disincentive to all. It was introduced by the Government and when they realised it was wrong they changed it, but they did not admit that they had made the mistake in the first place. Where is the fundamental change? We have had an admission that the tax levels introduced by the Government were wrong. Those levels were punitive and a disincentive to investment.

We have been told that as a result of the provisions in the budget there will be an improvement in take home pay. I have not heard anything more ludicrous. Everybody is aware that there has not been any significant increase in take home pay. The Government are trying to delude the public aided and abetted, intentionally or not, by the media. We are presented with a rosy picture daily and people are told that an improvement in take home pay was an inevitable consequence of the progressive character of the income tax code. Any totally objective person will say that that is farcical. It is tantamount to misleading the public. There has not been any overall increase in take home pay and no incentive to work. The Government are engaged in a book keeping exercise. They are preoccupied with fiscal rectitude to the exclusion of all other aspects of the economy. I am puzzled why the Labour Party are suffering this humiliation by participating in Government. Whether they admit it or not their participation in Government will prove detrimental to them in the local elections. I am sorry to see that happen because it is a great party. It is tragic that we should see people, ostensibly in the interest of their party, participating in Government and accepting responsibility for the punitive measures that have been applied in recent years. Members of the Labour Party are willing partners in the hairshirt measures that are making life harsh for our people. The hardships resulting from the budget are growing daily. There is public depression, dismay and a lack of enthusiasm. There is a general malaise among the population. People are concerned that the Government are not making any effort to ease the burden on taxpayers.

The Government's preoccupation with fiscal rectitude will be disastrous for the economy and could seriously endanger the stability of our democratic system. We must face up to that great danger. Where is the growing confidence that the Government speak of? What evidence is there for such an optimistic prediction? I do not see it. Many people have said to me that if there were any opportunities abroad they would leave the country. That is a dismal picture to paint and I am sorry to have to say that.

The Minister told us that there will be no increase in taxation. There should not be any increase because, if there is, this institution will be in danger. However, I am afraid that in the weeks leading up to the local elections the Government will try to delude the public further with optimistic economic forecasts. I am aware of the superb PR work being done by the Government handlers. I see evidence of that work daily. It is dangerous to have national handlers acting as they are. We are having government by national handlers.

In the course of his speech the Minister said:

...should it happen that a significant overrun begins to emerge during the course of the year then the Government will take whatever steps are required to keep the budget in line with targets.

That is the key phrase in the Ministers speech because there is a definite indication in it that the Government will introduce a second budget this year. The Minister will be able to say later in the year that in his speech on April 23 he said that there would be a second budget. That statement leaves the Government the option of bringing in a second budget after the local elections and I believe that is likely to happen.

I cannot see any evidence of an improvement in the state of the economy. We are paying £6 million daily in social welfare payments. That is serious and if it continues any longer I can see the Fine Gael Government, with the Labour rump, being forced to reduce the social welfare benefits. Shades of the Cumann na Gaedheal Government which took the shilling off the pension in the twenties. They have brought in punitive tax measures.

Debate adjourned.