Dáil Éireann díospóireacht -
Wednesday, 27 Jan 1988

Vol. 377 No. 1

Financial Resolutions, 1988. - Financial Resolution No. 3: Value-Added Tax.

Minister for Finance (Mr. MacSharry)

I move:

(1) THAT in this Resolution—

"the Principal Act" means the Value-Added Tax Act, 1972 (No. 22 of 1972);

"the Act of 1987" means the Finance Act, 1987 (No. 10 of 1987).

(2) THAT—

(a) the rate of value-added tax on the supply of electricity be increased from zero per cent. to 5 per cent. of the amount in respect of which tax is chargeable in relation to that supply, and

(b) the rate of value-added tax on livestock be reduced from 1.7 per cent. to 1.4 per cent. of the amount or value, as the case may be, in respect of which tax is chargeable in relation to those goods, and

that, accordingly, the Principal Act be amended—

(i) in section 11(1) (inserted by the Finance Act, 1985 (No. 10 of 1985))—

(a) by the insertion in paragraph (a) after “in paragraphs (b)” of “,(bb)”,

(b) by the insertion after paragraph (b) of the following paragraph:

"(bb) 5 per cent. of the amount on which tax is chargeable in relation to the supply of electricity,” and

(c) by the substitution in paragraph (d) of “1.4 per cent.” for “1.7 per cent.” (inserted by the Act of 1987),

and

(ii) in the Second Schedule (inserted by the Finance Act, 1976 (No. 16 of 1976)) by the deletion of paragraph (xx) (a) (inserted by the Finance Act, 1983 (No. 15 of 1983)).

(3) THAT the rate of flat-rate addition to prices of agricultural produce or agricultural services supplied by unregistered farmers be reduced from 1.7 per cent. to 1.4 per cent., and

that, accordingly, section 12A (inserted by the Value-Added Tax (Amendment) Act, 1978 (No. 34 of 1978)) of the Principal Act be amended by the substitution of "1.4 per cent." for "1.7 per cent." (inserted by the Act of 1987).

(4) THAT this Resolution shall have effect as on and from the 1st day of March, 1988.

(5) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act, 1927 (No. 7 of 1927).

This resolution provides for the introduction of a 5 per cent rate of VAT on electricity and the reduction from 1.7 per cent to 1.4 per cent on the flat rate compensation for farmers together with a similar reduction in the VAT rate on livestock. These changes will have effect on and from 1 March 1988.

An Ceann Comhairle

There are three amendments in the name of The Workers' Party, Nos. 1, 2 and 3. Nos. 2 and 3 are consequential. I suggest we take Nos. 1, 2 and 3 together.

Proinsias De Rossa

I move amendment No. 1:

In subsection (2), to delete paragraph (a).

This amendment has the effect of deleting the charge of 5 per cent on ESB bills. I move it for a number of reasons. First, it seems that the ESB are being used and have been used over a long number of years as a kind of——

An Ceann Comhairle

Sorry, Deputy. The noise in the lobby must cease.

Proinsias De Rossa

——lucky dip or a till to which the Government can go at any time to pull in a few million pounds or a few tens of millions of pounds depending on their need at any given time. A special levy was imposed some years ago on the fuel oil they use for generating electricity. A special rates levy was put on them also in relation to their power stations etc. which also brought in money for the Government. It was not brought in for local authorities, it was used directly by Government. Now we have the imposition of VAT on electricity which the Government claim will have no effect on consumer prices. I would like to hear the Minister explain how that will be. How does he propose to ensure that the ESB reduce their prices in order to compensate for the increase arising from the 5 per cent VAT?

If our semi-State companies are going to be treated in this cavalier way by Government, they are not semi-State at all and cannot be classified as independent commercial companies. The ESB provide a very important resource for industry and for virtually every home in the country. They provide a very efficient, modern service, yet they are abused in this way by Government. I am anxious to hear how the Minister proposes to get the ESB to reduce their prices and whether there will be any reference at all to the fact that it may or may not be commercially the correct thing to do at this time.

If the ESB argue, as they may well do, that they are not yet ready to reduce prices, will the Minister come back to this House and propose a reduction in the VAT which he is proposing to take here tonight?

The question of whether this is a tax on consumers will depend ultimately on whether the ESB can reduce their prices. We are being told that the PAYE sector are getting money out of this budget. On a very simple level, so to speak, in terms of the sums one can do arising from the budget, it seems that the PAYE sector are getting reliefs in the region of £7 million. At the same time £10 million is going to be taken in VAT on ESB bills. Something like £14 million is going to be taken in increased petrol prices as a result of the increase in excise duty, and as a result of the imposition of a 6 per cent tax or levy on pension funds they are going to have another £20 million taken out of their pocket. Right along the line the vast majority of the people, the working class who pay most of the tax, are being robbed once more with no attempt to give them real relief at the end of the day. That is why we are proposing this amendment to the resolution before us that the 5 per cent VAT be not placed on electricity bills. We have no confidence whatsoever in this Government either in carrying through on their promise that this will not mean an increase in the price to the consumers, nor that once they have it in place they will not come along in six months or even next year and increase it further and place it on food as would seem to be their intention as well.

Mr. Noonan

(Limerick East): I should like to make a number of observations on this resolution. First, I would like to reiterate a point I made when discussing the previous resolution. It seems that when the external terms of trade are moving in our favour and when costs of production are going down the Government will take specific decisions to prevent this happening and the benefit of an improving cost environment abroad will accrue to the Exchequer rather than to the competitive sector. We were told that the price of electricity was about to come down by 5 or 6 per cent. It is not going to come down now because the Minister is taking that reduction in a new VAT rate of 5 per cent.

I understand that industry will be able to claim back the 5 per cent VAT and I would like the Minister to confirm that this will be so. If that is the case, while industry will not benefit from reductions in the price of heavy fuel oil which is the main cost factor, apart from wages, at least they will not lose significantly. They will remain line-ball but every other user of energy in the EC and, in particular, in the United Kingdom will have their electricity costs reduced further. Another example which shows that the Government are not moving to correct the uncompetitive aspects of the Irish economy, but actually moving in the opposite direction, is that their sectoral policy and decisions like this are paradoxical to say the least, if not directly opposed to each other.

The second point I would like to make concerns the domestic consumers. Domestic consumers could have expected a reduction of 5 per cent or 6 per cent in the price of electricity but they are not going to get it now. If this is taken in the context of the peculiar decision in the budget that the ESB be required to pay £31 million in outstanding loans from the Exchequer back to the Exchequer, this is a very heavy imposition. I would like the Minister to comment on this transfer. Have the ESB got this amount of liquid assets in hand so that they can write off loans which were to be repaid over 15 years at about £2 million per year and which are all up-front now? Is this the same ESB who, in December 1986, threatened to take the Government to the Supreme Court because they were required to pay a levy in lieu of rates and who in 1987 can come up with the full payment on the rates levied and hand over £31 million to the Exchequer? What effect will this hand-over have on the price of electricity? Would the price of electricity have come down further if the Government had not robbed the coffers of the ESB? A point I made already today is that we will not get growth in the economy until we are competitive with other countries and, in particular, with out nearest neighbour. This is another example of the Government deliberately making Irish industry even more uncompetitive than it is already.

The Government are introducing a new rate of VAT. The previous Government reduced the number of VAT rates from five to three and there was a general movement towards a more organised system with fewer rates. We all know that in the background there is the issue of harmonisation of VAT rates in Europe. Now, for some reason or other a new VAT rate is being introduced so that we are going to have rates of zero, five, ten and 25 per cent. Why have the Government introduced this new VAT rate? Is this going to be the vehicle by which other zero-rated items are going to be loaded as we move towards harmonisation?

If there was an omission in today's budget — and God knows there were many — the most glaring omission on the tax side was the paucity of comment on harmonisation of VAT rates which, as a result of last year's decision on the internal market and the Single European Act, will face us in 1992. I am sure the Minister is aware of recent studies in this respect and I am certain his officials will be able to brief him on this. I should like to ask the Minister if he is aware that if a single VAT rate of 13 per cent was introduced on all items, there would be a loss of almost £200 million to the Exchequer but if, on the other hand, a single VAT rate of 15 per cent was levied on all goods and services, £10 million extra would accrue to the Exchequer. Many European countries want, on harmonisation, to have two VAT rates. I wonder if it is the Minister's intention to reintroduce the 5 per cent rate, which he has now introduced, in subsequent budgets and to include the main exemption which, of course, is food products? Pre-VAT expenditure on food products in Ireland in 1986 was £1.967 million. That is an awful lot of money.

We are so near the harmonisation of VAT rates in the EC that the Government, the Minister or the Taoiseach should, during the course of this debate, comment extensively on the issue of harmonisation. It is the Government's intention to go for dual rates? If the Government were to go for a standard VAT rate of 14 per cent, with a reduced rate of 7 per cent, there would still be a loss to the Exchequer of about £314 million. If an 18 per cent standard rate and a reduced rate of 8 per cent were introduced the Irish Exchequer would raise slightly more than it does at present. That is a huge problem but there is an even bigger problem on the excise side. I wonder if the 5 per cent VAT rate on electricity was a 2 o'clock in the morning decision last Thursday to provide the wherewithal to bring the income tax relief to £91 million or is it the thin end of the wedge for a reduced rate of VAT which would extend to the bulk of exempted items and, in particular, all food products? I would like the Minister to answer these questions.

As I said already, as I understand it all industries registered for VAT purposes will be able to claim relief on VAT in respect of their electricity bills. It is arguable that there should be some small cash flow benefit to companies for that reason. Certainly there should be no increase in their yearly cost of electricity. In this context I should like the Minister to comment on a scheme being operated by the ESB at present which allows the prepayment of electricity bills a year in advance to achieve exemptions from both company taxation and the DIRT tax. I am sure the Minister is aware of this scheme and he might use the opportunity during this debate to cast some light on this clever tax avoidance scheme which is now widespread.

An Ceann Comhairle

I hesitate to interrupt the Deputy but he should have regard to the time factor involved and the desire not to over-elaborate at this stage.

Mr. Noonan

(Limerick East): While businesses registered for VAT will be able to claim back the 5 per cent VAT on their electricity bills, is the Minister aware of the other anomaly that arises where large farmers registered for VAT will not be affected by the second proposition to reduce the VAT from 1.7 per cent to 1.4 per cent because once they are registered they can claim it back anyway? The proposal regarding VAT on agricultural products will only affect the vast number of farmers who are not registered for VAT. This affects middle sized farmers and small farmers. It affects anybody with any land and any activity. The smaller one is, the less likely one is to be registered. This is unfair. The larger farmer will be able to claim the VAT paid on the electricity he uses for his milking machines and he will not be affected by the secondary proposition here. The small farmer whether he has or has not an income will have to pay the 5 per cent extra on electricity charges and will be hit again because he is not registered. I know a case can be made that it is equitable and just to tax the farming community in a fair way and in a way which would yield a greater return than at present. The quid pro quo negotiated by the Minister's party when land tax was abolished did not involve a reduction in the rate of VAT rebate. This again is an example of where the leaders of the farming organisations bought a pig in a poke. We had the first tranche of rebate eliminated last year and the second tranche of rebate is eliminated this year. Tricking around with the VAT system and with rebates in the VAT system is not an adequate substitute for a fair taxation system on the farming community and we should not take that approach.

Will the Minister either tonight or in the course of the budget debate answer the questions I have raised especially the questions about VAT and electricity in the context of the harmonisation of rates within the Community?

Mr. McDowell

In relation to the electricity capital repayments the Minister said it had been agreed to repay all outstanding Exchequer advances in the current year. I take it that was an agreement between the Government and the ESB rather than an agreement inside the Government. Like Deputy Noonan I would like to know where this money is. Is it accumulated capital reserve which exists now, or is it money which is to be brought in over the course of the next year on electricity bills still outstanding? If there are capital reserves in the ESB accounts it would be reasonable for the Government to ask for repayment immediately, but if it was a question of foregoing further decreases in electricity prices and tariffs in order to give the £31 million repayment to the Government, then the issues Deputy Noonan raised as to whether or not we are really interested in the capital costs would certainly arise.

I would like some indication as to the capital status of this money at the moment. Is it in existence at the moment or is it proposed to bring it into existence by deferring what would otherwise have been decreases in ESB charges? If the Electricity Supply Board are in the business of maintaining capital at the moment which is surplus to requirements, might it not be wiser to use that in negotiating redundancies as there seems to be a common consensus among those who know something about Electricity Supply Board prices that there is considerable overmanning in the ESB? This would produce a long term benefit to the consumer rather than keeping in existence, for want of redundancy capital, a work force which is surplus to requirements.

(Interruptions.)

Mr. McDowell

In relation to VAT on electricity I assume from the Minister's remark that commercial customers who are able to recover the VAT element in their bills and will be paying less for electricity as a result, that that relates to full deductability?

Mr. MacSharry

It does.

Mr. McDowell

I would be alarmed if I thought there was to be a clawback or partial clawback here.

Mr. MacSharry

There will not be a clawback. May I get in now, as I may not be able to get in later and some Deputies have raised important points?

An Leas-Cheann Comhairle

I was just going to indicate that if Deputy Taylor and Deputy Mac Giolla had specific questions which had not already been put, they might put them now and then I could ask the Minister to intervene.

Mr. MacSharry

I am in your hands.

Mr. McGahon

You might not be able to pay Deputy Mac Giolla's pension if you tax the ESB and he will be very frustrated.

(Interruptions.)

Tomás Mac Giolla

In relation to the capital repayments from the ESB the Minister says that following completion of the Moneypoint power station, the board's borrowing requirements has been reduced and that in addition its cost base has improved because of favourable movements in interest and exchange rates. Further on in relation to VAT the Minister used almost the same argument by saying that the benefit of falling oil prices and interest and favourable exchange movements meant that there was scope for a reduction of 5 per cent. If the Minister says that because of the board's improved position because of a favourable movement in interest and exchange rates they can therefore pay over £31 million, does he still think the favourable exchange rates and movements in interest rates will allow them to reduce the cost of electricity by 5 per cent? The Minister cannot use the same argument for both things. Does the agreement between the ESB and the Government mean that the Minister has asked them to borrow the £31 million to hand over to the Government, because they do not need to borrow money to build any more power stations since Moneypoint has been completed and because their borrowing requirement has been reduced?

Mr. Taylor

The Minister talked about the benefit of falling oil prices, interest rates and favourable exchange rate movements and indicated that, because of those, there is scope for a reduction of 5 per cent in electricity prices. The falling oil prices did not arise today or yesterday and neither did the reduction in interest and exchange rates, so why is it only now on budget day that we come to this 5 per cent reduction in electricity prices? It is typical of the slight of hand approach of this Government to the budget. Let us be clear about it. This is not a situation of maintaining the price of electricity at the same figure. The price of electricity should be 5 per cent less. That is what the economics of the situation warrant, as the Minister concedes. The reality is that electricity prices will be increased by 5 per cent. That is what is happening here. The price of electricity has been increased by 5 per cent to each and every householder, rich and poor. People are dependent on electricity for heating, for warming their children's bottles, for cooking, for their basic needs. Those who cannot now get fuel vouchers because of the Minister's cutbacks are in a very serious situation.

Mr. R. Burke

That is nonsense and the Deputy knows it.

Mr. Taylor

The Government will take £10 million of spending power out of the pockets of working people, and they wonder why the retail returns are going down. It is yet another deflationary twist of the screw on those who cannot afford it. It is a monstrous proposal. The price of electricity should have been reduced by 5 per cent and the Minister has conceded this. We are not talking about luxury matters here, but about basic needs in working class homes. This is an across-the-board increase, irrespective of people's means. Let the Minister not think that anybody is being codded by the hope that electricity will be the same price as last year. That is the message that will come across to the public.

Mr. McCartan

I have two very brief questions to put, if I may.

Mr. MacSharry

Might I have a chance of answering some of the points raised?

An Leas-Cheann Comhairle

Perhaps we could allow the Minister to answer some of the questions.

Mr. MacSharry

I thank the Deputies for their contributions. On a point raised by Deputy Noonan, the harmonisation of VAT in the EC context cannot be separated from the harmonisation in excises. As the Deputy and the House are aware, this matter is beginning to be the subject of discussion. We shall have to negotiate our way through that between now and when full harmonisation is expected, by 1992.

I wish to repeat, as the budgetary statement has made clear, that the imposition of VAT on the price of electricity is being offset by a countervailing price reduction in ESB charges. No matter what Deputy Taylor says, this will mean that there will be no increase in electricity charges. That is the only fact that is relevant.

Mr. Taylor

It is an increase of 5 per cent on what the price should be.

Mr. MacSharry

There will be no increase this night on electricity charges. That is the position. Electricity is the exception to heating and lighting fuels generally, such as turf, gas and central heating oils, which are liable to 10 eper cent VAT. All the EC countries except the United Kingdom have VAT rates which are above 5 per cent and the recent EC proposals for tax harmonisation include the application of a VAT rate between 4 and 9 per cent on electricity. In so far as we are concerned at the moment with the 5 per cent VAT, with the exception of the United Kingdom, this is the lowest rate in the EC. In Denmark there is a rate of 22 per cent. Deputy Taylor has made typical scare statement about the increase in the price of electricity by 5 per cent. That is not the case and we categorically refute it. Others here and in other places have suggested that it is only a step away from VAT on food. That issue does not arise——

Tomás Mac Giolla

It will arise.

Mr. MacSharry

——any more than the issue arises in relation to this resolution about VAT on electricity, the issue on capital repayments. I have dealt with that matter adequately today and other speakers will do so. Through the good offices of my colleague on my left, the Minister for Energy and Communication, I can assure the House that all that we have stated here in relation to the changes that will take place in the ESB are being fully discussed with that Minister. I have no doubt that the information as outlined today will be conveyed to the board, which ultimately will make the decisions.

Mr. Noonan

(Limerick East): Have the board agreed to that tonight?

Mr. MacSharry

No, how could they? The budget is today.

Mr. Noonan

(Limerick East): The Minister has stated that it was agreed. Does that mean agreed with Government?

Mr. MacSharry

I said that I felt that the capital repayment was agreed. The chief executive and the Minister, as I said, have discussed these matters. All I can say is that I have no difficulty whatsoever in standing over everything that was in the budget today.

Mr. McCartan

Where will they get that money?

Mr. MacSharry

I have stated quite clearly, too, that the situation regarding interest payments, exchange rates, changes, a drop in the price of fuel, all these factors, plus the downturn in capital requirements, have led to this situation that I have described today and outlined in the budget. There is the price of 5 per cent reduction in the cost countervailing the 5 per cent VAT, with a negative result for the domestic consumer but a very positive result for the commercial sector. This give them the opportunity to reclaim in full and get the full 5 per cent reduction. The second point is that it enables the ESB to repay loans outstanding to the Exchequer.

Tomás Mac Giolla

Where will they get the money from? Will they borrow it?

Mr. MacSharry

It is all very fine, as the Taoiseach has said in reply to similar impositions of tax: every Deputy for the last year or more has been talking about the things that need to be done, the concessions that need to be made, the PAYE sector, the social welfare sector, the poor, the homeless and so forth. There was some applause here today, a most unusual thing from the Opposition benches, when the Minister for Finance made such concessions, whether it be equal treatment, the drugs refund scheme, the millions for the homeless or whatever. Where do Deputies think that this money will come from?

Tomás Mac Giolla

I keep asking the Minister that.

Mr. MacSharry

Do they think that the money will come out of the sky, just fall in through the roof of Leinster House? It is about time the Deputies caught themselves on.

Mr. R. Burke

Should we cancel the pensions?

Mr. MacSharry

You cannot give out unless you take in. As I said last year and now repeat, the day has gone when we can borrow any more to give concessions. We have to get the money from somewhere.

Mr. Desmond

The Government give it to the private sector every day.

Mr. R. Burke

There are no free lunches around here.

(Interruptions.)

An Leas-Cheann Comhairle

I am putting the question now. There will be no time for answers.

Mr. McCartan

I have one very simple question for the Minister. He uses the expression that there is scope for a reduction in the price of electricity and tells us that he has got the agreement of the board to implement such a reduction. How does he propose to impose the reduction?

Mr. MacSharry

We will stand over what we have said. It is all realisable.

An Leas-Cheann Comhairle

Is Financial Resolution No. 3 agreed?

Mr. McCartan

No.

Question put: "That Financial Resolution No. 3 be agreed to."

The Dáil divided: Tá, 92; Níl, 18.

Tá

• Abbott, Henry.
• Ahern, Bertie.
• Ahern, Dermot.
• Ahern, Michael.
• Andrews, David.
• Aylward, Liam.
• Barnes, Monica.
• Brady, Gerard.
• Brady, Vincent.
• Brennan, Matthew.
• Brennan, Séamus.
• Briscoe, Ben.
• Browne, John.
• Burke, Ray.
• Byrne, Hugh.
• Clohessy, Peadar.
• Colley, Anne.
• Collins, Gerard.
• Conaghan, Hugh.
• Connolly, Ger.
• Coughlan, Mary T.
• Cowen, Brian.
• Cullen, Martin.
• Daly, Brendan.
• Davern, Noel.
• Dempsey, Noel.
• Dennehy, John.
• de Valera, Síle.
• Doherty, Seán.
• Ellis, John.
• Fahey, Frank.
• Fahey, Jackie.
• Fitzgerald, Liam.
• Fitzpatrick, Dermott.
• Flood, Chris.
• Flynn, Pádraig.
• Foley, Denis.
• Gallagher, Denis.
• Gallagher, Pat the Cope.
• Geoghegan-Quinn, Máire.
• Gibbons, Martin Patrick.
• Harney, Mary.
• Haughey, Charles J.
• Hilliard, Colm Michael.
• Hyland, Liam.
• Jacob, Joe.
• Keating, Michael.
• Kirk, Séamus.
• Kitt, Michael P.
• Kitt, Tom.
• Lawlor, Liam.
• Leonard, Jimmy.
• Leyden, Terry.
• Lynch, Michael.
• Lyons, Denis.
• McCarthy, Seán.
• McCoy, John S.
• McCreevy, Charlie.
• McDowell, Michael.
• MacSharry, Ray.
• Molloy, Robert.
• Mooney, Mary.
• Morley, P.J.
• Moynihan, Donal.
• Nolan, M.J.
• Noonan, Michael J. (Limerick West).
• O'Dea, William Gerard.
• O'Donoghue, John.
• O'Hanlon, Rory.
• O'Keeffe, Batt.
• O'Keeffe, Ned.
• O'Kennedy, Michael.
• O'Leary, John.
• O'Malley, Desmond J.
• O'Malley, Pat.
• O'Rourke, Mary.
• Power, Paddy.
• Quill, Máirin.
• Reynolds, Albert.
• Roche, Dick.
• Smith, Michael.
• Stafford, John.
• Swift, Brian.
• Treacy, Noel.
• Tunney, Jim.
• Wallace, Dan.
• Walsh, Joe.
• Walsh, Seán.
• Wilson, John P.
• Woods, Michael.
• Wright, G.V.
• Wyse, Pearse.

Níl

• Bell, Michael.
• Blaney, Neil Terence.
• De Rossa, Proinsias.
• Desmond, Barry.
• Gregory, Tony.
• Higgins, Michael D.
• Howlin, Brendan.
• Kavanagh, Liam.
• Kemmy, Jim.
• McCartan, Pat.
• Mac Giolla, Tomás.
• O'Sullivan, Toddy.
• Pattison, Séamus.
• Quinn, Ruairí.
• Sherlock, Joe.
• Spring, Dick.
• Stagg, Emmet.
• Taylor, Mervyn

Tellers: Tá, Deputies V. Brady and Briscoe; Níl, Deputies De Rossa and McCartan.

Question declared carried.