Financial Resolution No. 5: Value-Added Tax.

Tánaiste and Minister for Enterprise, Trade and Employment (Ms Harney)

I move Financial Resolution No. 5:

(1) THAT the rate of value-added tax on the supply of certain goods and services at present chargeable at the rate of 20 per cent be increased to 21 per cent of the amount on which tax is chargeable in relation to the supply of such goods and services, and that, accordingly, subsection (1) (inserted by the Finance Act, 1992 (No. 9 of 1992)) of section 11 of the Value-Added Tax Act, 1972 (No. 22 of 1972), be amended by substituting in paragraph (a) "21 per cent" for "20 per cent" (inserted by the Finance Act, 2001 (No. 7 of 2001)).

(2) THAT this Resolution shall have effect as on and from 1 March 2002.

(3) 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).

An increase from 20% to 21% on the supply of all 20% rated goods and services will come into effect from 1 March 2002. The change in the standard rate will apply to all goods and services which are currently rated at 20% which is the standard rate. This includes items subject to excise, such as petrol and tobacco.

VAT is remitted by traders to the State on a two-monthly basis: January-February, March-April, and so on. In any one year there are six VAT periods. Obviously, the most suitable date for making the change is at the beginning of a VAT period.

Because of the changeover to the euro and the difficulties which will result in the January-February period, this increase is not being levelled until 1 March, the beginning of the second two month period. VAT for the last two month period, November-December does not fall to be collected until 2003.

The increase in the rate will yield 194 million in 2002 and 290 million in a full year. The increase in the standard rate will add approximately 0.4% to the consumer price index. This is being done to raise revenue which the Government needed. It is being done at a time when consumption is strong. Clearly it does not affect exports or inter-business or inter-company trading. It will have a minor effect on the consumer price index in 2002.

Mr. G. Mitchell

Of all the resolutions put today this is the most extraordinary one. It shows how the Government strategy is not well thought out. This increase follows on from a reduction of exactly the same amount last year, 1%. This hot and cold approach to economics is extraordinary. It is bad enough that it is happening but I want to make a few points about it. We have only 30 minutes in which to debate this resolution so I will not use up too much time as other Deputies want to contribute.

On 1 January we shall have the introduction of the euro and there will be much confusion about it. There are people now who look back on decimalisation and say it was not as inflationary as people think. I am not sure that stands up to examination. Certainly it will undermine effort to control the bumping up prices because of the euro. People will say there is an increase in VAT. The consumer will not know that the increase in VAT does not apply until 1 March. It will encourage people to bump up prices. When VAT takes effect on 1 March, VAT will be put on the bumped up prices. I predict that the increase in inflation will be much higher than that suggested by the Tánaiste.

At a time of unprecedented surpluses, it is extraordinary that the deficits we are heading into and the need to raise taxes had not been prepared for by some contingency operation. I cannot believe this has happened. Anybody who has any prudent business sense would have had a contingency fund, not only for long distance pension commitments but for the time when there might be a downturn in the economy. I hope this is a temporary downturn. In the past, tax incentives were front loaded in terms of corporation tax and lowering the higher rate of tax which was more beneficial to the wealthy. Everybody will have to pay the extra 1% VAT. People will say 1% will not be felt. The 1% will not be felt by businesses because as far as they are concerned there is an input tax and an output tax. One is deducted from the other and the balance is paid to the Revenue so that it does not cost them anything. The consumer, the man and woman in the street will pay this extra 1% VAT. This is not a tax about which business people will be concerned.

The most extraordinary statement in the Minister's budget speech was that he removed the 1% VAT last year and it was not passed on to the consumer, therefore, he is imposing it again this year. Given that prices were not reduced last year because of the removal of the 1% VAT, he is now imposing another 1%. Instead of going back to the 20% VAT rate perhaps we are talking about a 22% plus VAT rate. This is extraordinary logic.

Mr. Quinn

I would not call it logic. That is going a bit far.

Mr. G. Mitchell

That is what the Minister for Finance said today. Inevitably there will be price increases due to the introduction of the euro, no matter what the Minister claims. Last year he was unable to protect the consumer when he removed the 1% VAT as it was not passed on to the con sumer. The same will happen with the euro. As sure as night follows day, many business people, in the confusion of the conversion rate to the euro, will charge extra to the consumer. The effect of that and the 1% on top of the prices which were not reduced last year, will be that the meagre increases in social welfare and the meagre tax benefits for the less well off will leave them only marginally better off. It is an extraordinary piece of political and economic inconsistency. The Tánaiste said the increase in the standard rate would add approximately 0.4% to the consumer price index. I would be surprised if that was the outturn and if, together with what happens with the euro, this does not add 1% to the inflation rate. The inflation rate has been 4% since Deputy Dukes was Minister for Finance and it has been higher than the EU average for much of the past few years. It is only in recent years that the rate has been lower. We are heading to a position where we will be at the top the inflation league in the European Union. In time this will lead to increased pay demands because people will not be able to measure the true effect of the euro. They will see the VAT increases being passed on, will begin to look at the economy anew and realise they are into a new era where pay increases will be chasing tax increases and we will return to that whole cycle. Between two budgets, it is extraordinary that in one year 1% VAT was removed while it was added on in the following year.

Price increases on cider and tobacco have been announced this evening. I presume the VAT increases will be imposed on the cider and tobacco price increases in March. Given that the full extent of the increase has not been made clear many do not know the full extent of the bad news. The Minister for Finance said the reduction in VAT was not passed on, therefore he simply put it back on again on top of the prices that were not reduced. Where was the Minister with responsibility for consumer affairs? The Tánaiste is the Cabinet Minister with overall responsibility for consumer affairs. She has an active Minister of State with responsibility for consumer affairs who carries out the function on a delegated basis. If it was not passed on why did not the Minister of State and all the machinery of the State go after those who did not pass it on? Why was it not passed on to those on small incomes, those living alone on £101 per week who did not qualify for a medical card, some of whom cannot afford to go out or to light a fire at home. That is the reality of life for some people.

How many Members have to go to the State agencies, which are supposed to have discretion when it comes to issuing medical cards, after those agencies have gone through the investigative process and turned their backs on these people? Members often have to approach the Society of St. Vincent de Paul on their behalf to bail them out. That is the reality of life for many people. Why did the Minister and the Minister of State not go after those who did not remove the VAT last year? It is not good enough to say that when legislation and Resolutions of this kind reducing the VAT rate was not passed on that it has to be imposed again. Everybody will pay twice but the poor will pay disproportionately. For those on a low income this is a considerable strain. On all the proposals before the House, we can all make a case, as I have heard a Deputy do for the cider industry in his constituency as it involves employment. We heard a case made about other matters. A case could have been made that tobacco revenue should not only be increased, but that it should be ring fenced and spent on health and medical cards. However, I cannot see a case for decreasing the VAT rate by 1% VAT in one year while the following year the same Minister increases it by 1%. It indicates the Government does not have a consistent view of where this country is going in terms of the needs of the economy. We will oppose this proposal vigorously.

Mr. Rabbitte

I do not think anything the Minister has done betrays more the "make it up as you go" shape of this budget. How he could possibly reduce the standard rate of VAT from 21% to 20% last year, and reverse engines this year seems impossible to understand. It does not communicate any strategy on his part. He resolved that he was would not have a borrowing requirement. He called in his officials and said:

Look lads, you know my form. Whatever we do, we can't have a borrowing requirement. I want to go out on a high. I didn't anticipate the shambles in which I find myself. Whatever you do, put together figures for me where there is no borrowing requirement.

He has to raid one fund, confiscate another and do this and that to try to balance the books. The Minister for Foreign Affairs may well chuckle.

Mr. Higgins

(Dublin West): Not for too much longer.

Minister for Foreign Affairs (Mr. Cowen)

I will reply.

Mr. Rabbitte

That is what has happened. The Minister watched an unprecedented surplus disappear like snow off a ditch. He gave no explanation as to how it happened. Employment has held up quite well. The Tánaiste will tell us that by and large workers who lost their jobs in many locations in the past year were re-employed. Therefore, why are the receipts down so dramatically?

I understand many won money today on the matter of the duration of the Minister's speech. He made no effort to address the issue of how we have come from where we were a year ago to where we are now. He cannot blame the events of 11 September and the outbreak of foot and mouth disease.

Mr. Quinn

It is the market; it is a mystery.

Mr. Rabbitte

The household survey figures issued last week show the employment figures. This is extremely difficult to understand. The Minister has to produce some plus above the bottom line and he contrived to do so by a number of raids, confiscating part of the reserves of the Central Bank and illegally raiding the social insurance fund. I understand the Taoiseach on television saying it is not illegal, but I believe it is. It is certainly illegal until amending legislation is brought forward and even then there is a question to be raised about the propriety of what is being done. The Tánaiste told us that this measure will bring in £194 million this year and £290 million next year. Compare that to the give-away to employers in respect of PRSI which is in order of £349 million in terms of the reduction from 12% to 10.75%.

The Minister goes around picking targets. There is no rhythm, reason or consistency to it. The Minister for Foreign Affairs is offering and I will give him some of my time as I always enjoy listening to him. Can he, as a former Minister for Health and Children, tell us what is the sense of putting an extra 10p on the price of a packet of cigarettes? Where is the consistency in that? What is the point? If the Minister for Health and Children, Deputy Martin, means what he says, then the 10p increase makes no sense. As Deputy Mitchell said, it would make some sense to impose a proper figure, ringfence it and somehow underpin the health strategy. There is nothing in this on the capital side to underpin the health strategy. It does not make any sense. It does not make any sense to select Deputy Healy's constituency, an indigenous industry in the cider area. Why cider? Why did the Minister for Finance not look to his friends, the publicans, and take a percentage off them? That has not happened since 1994. That is because he is afraid of inflation. That is only reason.

This is all about getting past the next few months. Consider the horrific projections for 2003 and 2004. That betrays the situation. This is a cosmetic manipulation of the figures to get past this budget and get us as far as the next general election. I do not believe that will happen because this does not make any sense.

It is only three years since the same Minister talked to us about the possibility of joining the two VAT rates. Figures of 16% and 17% were idly trotted out and the idea was that the rate would fall to a single figure. He took a percentage point off the rate and brought it down to 20%. The implication was that if rate was going anywhere, it was going down, but now he has decided to put it back up. That does not make any sense except, as the Tánaiste frankly admitted, to get some revenue. That is to get us past this budget.

The people who will feel the pinch most are those on low incomes. They will be disproportionately hit by this measure because more of their disposal income in terms of the total household will be affected by it. The Tánaiste said that it will result in an increase in inflation of 0.4% in the CPI. That does not make any sense. It would have been far more honest if the Minister had told us how the unbelievable riches were frittered away. It looked embarrassing, in terms of the ICC, the TSB and so on, as to what we were going to do with the money.

Mr. Quinn

It disappeared.

Mr. Rabbitte

It has gone. There were unimaginable riches. The Minister had to make the announcement in relation to the ACC this morning to try to plug another hole. He cannot go on finding emergency sales in order to bail him out of what is especially bad management, if one considers this from the point of view of what the Minister does.

Having boasted and lectured about spending – I agree with much of the spending in which he has engaged – from his point of view, he is the great disciple of Milton Friedman and opposed to all spending where it can be avoided. He has done the exact opposite. He has blown the extraordinary riches we had. What is this chopping and changing going to do in terms of an economic strategy or even a fiscal strategy? It is chopping and changing just like he has been chopping and changing in the housing market and look at what he has done to that. Now he thinks he can reverse engines again and try to encourage investors back into the market. Having moved in one direction, he is going 180 degrees in the other direction. This does not make any sense. On something as significant in the cocktail of taxes as VAT, I cannot understand how he can say that in one year he is going in the direction of reducing the rate from 21% to 20% and the next year say he is going in the opposite direction and putting the rate back up.

I ask the Tánaiste what is the answer to the point made by the Minister that he is doing this because the reduction was not being passed on. That is the first I heard about this. There have been many opportunities at Question Time for the Minister to tell the House about it. What are his officials saying? What is the answer? If it was not being passed on, why was something not being done about it? Are any other reductions in taxes not being passed on? This is a new dimension and a very unusual explanation for what he is doing.

This is inconsistent. It is chopping and changing. It will disproportionately affect those on low incomes and bring in less revenue than that which will be given back to IBEC employers in terms of the reduction in employers' PRSI.

Dáil Éireann díospóireacht - Wednesday, 5 Dec 2001

Financial Resolution No. 5: Value-Added Tax.

A Deputy

Dáil Éireann díospóireacht -
Wednesday, 5 Dec 2001