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Dáil Éireann díospóireacht -
Wednesday, 4 Dec 2002

Vol. 558 No. 5

Financial Resolution No. 10: Value-Added Tax.

I move:

(1) THAT the rate of value-added tax on the supply of certain goods and services at present chargeable at the rate of 12.5 per cent be increased to 13.5 per cent of the amount on which tax is chargeable in relation to the supply of such good 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 (d) "13.5 per cent" for "12.5 per cent" (inserted by the Finance Act, 1992).

(2) THAT this Resolution shall have effect as on and from 1 January 2003.

(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).

This resolution provides for an increase to 13.5% on the supply of all 12.5% rated goods and services with effect from 1 January 2003. This change will apply to all goods and services which are currently rated at 12.5%. The increase will raise €187 million in 2003 and €224.5 million in a full year.

The difference is due to the way in which VAT is collected as the change in the rate will only apply in respect of five two-monthly VAT periods in 2003. There are six VAT periods of two months each in any year but VAT due for the period November-December only falls to be paid in January the following year. The increase in the 12.5% rate will add approximately 0.18% to the CPI.

This increase, along with the changes in excise duties and other changes in the budget, is necessary to raise revenue for improved and more efficient public services. The need to raise revenue arises from changed economic circum stances, which have had an impact on Exchequer revenues generally.

This resolution together with the previous three resolutions will drive inflation mad. Inflation will rise above 5% next year and the implications of that for the next round of national wage negotiations are serious. It will also have a serious effect on business and industry.

Fine Gael ran a campaign over the past number of weeks to bring back the first-time buyer's house grant and I am glad the Government heeded some of our suggestions. However, having done that with one hand, it has slapped a 1% increase on VAT with the other, which represents an average increase of €2,000 on the price of a house. That is a kick in the teeth to many young people who planned to purchase their own homes and it is a serious blow in the context of the current crisis in housing. There are 100,000 people on local authority housing waiting lists and many of them depend on the private rented sector for accommodation. They cannot afford a house and are funding the mortgage repayments of investors.

This is an appalling scenario and I cannot see how Fianna Fáil backbenchers who were so vocal on local radio throughout the country and who were so strong in their criticism of the abolition of the first-time house buyer's grant can agree to this proposal, which will slap €2,000 on the average price of a house.

It is make your mind up time for Government backbenchers before the public see through their double talk. They cannot be the tough defenders of the public in their constituencies and tamely walk through the division lobby in support of a proposal such as this. The proposal is a kick in the teeth for young people and will drive inflation even higher.

No one likes to increase taxes. It is not a nice thing to increase the lower rate of VAT from 12.5% to 13.5%. However, we must look at the need to raise revenue within the economy as it is.

The Government should look at the means.

We are talking about revenue of €224 million in a 12 month period.

That would pay for the Deputy's election promises.

This is against the €530 million of increases in social welfare in today's budget. Revenue from the VAT increase represents approximately 40% of the increase in social welfare payments, such as €10 to old age pensioners and €11 per week to widowed pensioners. This is a reasonable thing to do and a balanced way of looking after the finances in terms of what people can afford.

It is balanced all right. It gives with one hand and takes away with the other.

This is being done to improve equity and fairness.

Deputy Allen has adverted to the increase in house prices. House prices are generally dictated by the amount of the loan allowed by local authorities.

It is nine times income.

In the Dublin area that is €180,000. The price of first-time buyer houses is kept at approximately €200,000.

Builders are making sufficient profits to hold the price to what the market will bear.

Who is the Deputy trying to cod? This is comedy time again.

Some time ago Deputy Rabbitte put forward a hypothesis in relation to another economic matter. I am putting forward my hypothesis. Whether Members accept it or not does not matter. I am putting forward what I believe to be the case.

Deputy Ardagh does not believe it himself. He could not be that stupid.

I believe it very much. I am delighted Deputy Allen accepts that the Government has gone a long way in relation to the first-time house buyer's mortgage relief.

I did not. I described it as a sham.

Deputy Rabbitte calculates the first-time buyer's mortgage relief as being worth €350.

It is one tenth of what the Government has taken from first time buyers.

That is €350 for seven years. That amount would give any first time purchaser the capability of borrowing a further €5,000 from a lending institution. If a bank sees that a person has the capacity to repay an extra €350 per year—

What planet did the Deputy come from?

Deputy Stagg, you are provoking Deputy Ardagh.

Someone might provoke him into some common sense.

—on the basis of €6 per €1,000 per month that works out at a minimum borrowing capability of €5,000. The repayments on that will be financed by the tax relief which is being given. That will make the house buyer better off and more capable of buying a house than if he was getting the once-off first-time house buyer's grant.

While no one likes raising VAT it is necessary to raise revenue in order to improve infrastructure, create a more efficient and effective economy, make possible improvements in social welfare and help to have a fairer and more equitable society. I support this measure.

I would not want to impinge on the time of my colleague and friend, Deputy Ardagh, but it is unusual to debate the financial resolutions back and forth across the House as though they were a Bill. Normally, the Minister presents his case and the Opposition argues against it. I do not want to deny Deputy Ardagh the right to speak but it would have been better if he had not ventured into this argument. He has done quite well in the filibuster throughout the evening but of all the speeches I have heard in a long time Deputy Ardagh's makes no sense at all, and he knows that himself.

He says this measure is being brought in to assist the Exchequer. It is being brought in to assist the Government. It is the Government that is in trouble. When people get an opportunity to look at this budget they will recognise that by a series of stealth taxes and indirect taxes the Government is clawing back from low and middle income earners whatever little advantage they got during five years of being treated as second class citizens to the super-earners in the period of economic boom.

It is an established principle that indirect taxes impact disproportionately on people with the lowest incomes. The greater part of the disposable incomes of people on low incomes goes on the goods and services which have a VAT rating of 12.5%. Heating is an essential item. An increase of 13.5% is proposed on ESB charges. Another 1% has been added to that by the Minister. How will that impact on a person on a very low income? Other forms of heating such as coal, peat and other solid substances that are sold solely as fuel are similarly VAT rated.

Deputy Ardagh knows that the VAT increase will impact on the most vulnerable people. The Minister did not have the courage to address the taxation situation. He hoped he would get away with that by stealth and indirect taxes.

As a result of this budget people are already going to pay more tax because they will pay income tax at the marginal rate sooner than before. The Minister did not index taxation.

Deputy Allen raised the question of housing. If the building materials for a house cost €100,000, an increase of 1% amounts to €1,000. Government backbenchers applauded earlier when the Minister announced an increase of €350 in mortgage interest relief to a married couple. Here at one stroke he adds €1,000 to the cost of building a house.

That is €350 per year for seven years.

That is to completely misunderstand what the first-time buyer's grant is used for. It is used to get the deposit together.

Buyers do not get the cheque until the house is bought.

Deputy Cullen thinks the bulk of the people are as comfortably off as the people who now grace the Government benches. That is not the case. Ordinary people are not in that league. The grant allows them to get the deposit together and this is a further blow.

One can take the example of any service one likes, such as hairdressing, restaurants—

Cinema seats.

—cinemas, entertainment of any kind, newspapers or anything one likes. This is the worst kind of taxation. Deputy Ardagh says he is doing it for the social welfare recipients. Social welfare recipients got €6 – the headline increase in social welfare.

(Interruptions).

The 30 cent is the Minister's.

The figure is €10—

If one takes the real impact after inflation, €5.70 goes on the basic headline rate as a result of inflation, which means the real increase is 30 cent before this happens.

This is a particularly obnoxious increase and I hope sincerely that when people get to grips with how this impacts on ordinary people, they will realise that those on lowest incomes will be hit most severely. It will impact on first-time buyers who were led to believe by the applause earlier that they would get some relief.

They all welcome it.

The Minister is in cloud-cuckoo-land.

They will get minimal relief and this is a further punishment, three times the equivalent—

Nobody is complaining about it.

(Interruptions).

It is absolutely remarkable what being in Government has done to Deputy Cullen. Nobody even complains to him anymore.

There are 14.5 minutes remaining.

Give everyone a minute.

Colleagues want to speak on this. This is a particularly disgraceful, regressive decision that will impact most on those least able to afford it.

Deputy Curran.

I wish to raise a point of order.

I was going to make a couple of brief points. Deputy Rabbitte knows—

I wish to raise a point of order.

What is the point of order?

The House can sit until midnight. I suggest that, because so many people wish to speak on this matter and because the next motion, the last one, is very slight, we could extend the time from half an hour to one hour if there was unanimous agreement.

The Chair is obliged to put the question. The House has decided that there be 30 minutes on this—

The House can unanimously amend that by agreement.

The House can alter it by agreement.

We have done it.

I am proposing that because—

The Chair is obliged to put the question. That is the order that was decided by the House, so the Chair does not have—

The House can amend its decision. In fairness, this is common practice here and there is no pressure—

We are talking about Government time and it would be a matter for the Government to make a proposal to change it.

Let us see what the Government has to say.

Deputy Curran to continue.

(Interruptions).

The House has already made an order on the matter.

The House can agree to change it.

The proposal has to come from Government to change it.

I have no intention of changing the order agreed by the House and the Deputies know that well.

To facilitate as many people on the other side of the House who wish to participate in this debate, I will be brief. One of the first contributions referred to the adverse effect of increasing the rate of VAT in respect of housing from 12.5% to 13.5%. I am not sure I believe it at all, funnily enough, because house prices in the area of Dublin where I live are determined by the old formula of supply and demand. At the moment, whether one likes it or not, the supply is not equal to the demand, certainly around the greater Dublin area. The function of developers building houses is to maximise their profit and I do not see an increase or a decrease based on the 1% change in VAT.

It is interesting to note that long before my entry to the House, the rate of VAT was dropped from 21% to 20%. We did not see a significant change in prices in the shops when that drop took place. The increase is a revenue exercise for the Government because the funding is badly needed for a range of services. If we do not use mechanisms like increasing the rate of VAT or other fund-raising measures we will be left with the issue of borrowing. We have paid that price before, so we are increasing the rate of VAT by 1% to pay for a range of social welfare necessities, such as child benefit. I do not accept the argument made by the Opposition that it will increase house prices.

We could accuse the Government of a total lack of equity in the past five years or of being incompetent in terms of how it spent our money on infrastructure, but its greatest sin was counter-cyclical from an economist's point of view. It took an economy that was booming and pumped it further, thus causing inflation. This tax change will further increase that inflation. We will become uncompetitive and our levels are already way above those that obtain in our competitor nations in Europe in terms of labour and other costs, particularly in Dublin.

We will see massive unemployment if we do not get inflation under control and this Government, being the champion of politically correct, orthodox economic thinking, is further pumping inflation with this measure. This must be borne in mind in light of the other costs that are now coming through, such as increasing electricity and transport prices. The Government's greatest sin will be the creation of unemployment because of the inflation it created. There is no answer to that. Our rate is twice the European average and will be three times that rate, and what will we do then?

Not only is a VAT increase inequitable in that it strikes the poorest more, but this particular VAT increase – I would have to do some research to back this up – tends to apply to the areas with the highest level of labour input. In effect, it is a tax on Irish labour and resources and it will fuel inflation. That is what the Government has done wrong and what it does not realise today with its bluster and filibuster.

What is the increase in the refund on VAT to non-registered farmers? It is always the case that if VAT is increased, the increase is matched. I want an exact figure in that regard.

Anyone who says the VAT increase of 1% will not bring itself to bear on a house to the value of €200,000 is obviously in cloud-cuckoo-land. It will affect tourism and housing and it will affect the aged and the sick who need electricity and telephones.

Deputy Crawford is a model of brevity.

This is where the mask slips. There are fundamental economic principles that the Minister or anybody else cannot deny. Indirect taxes fall disproportionately on the poor. There is not a single text in economics that disproves that. The €224.5 million will be gathered disproportionately by those who work and are on lower incomes. The test of this is to take out the list of commodities governed by the 12.5% regime at present. One will see they that they include, at the most vulnerable end, heating fuels. One does not need to be a rocket scientist to know the fuel allowance is not increasing, yet the VAT increase will be on the fuel one needs for heating.

Then one looks at the average activity of the average worker, prepared and cooked food, and recreation, the cinema for example. The film industry is destroyed completely. The relief on film is now gone. Going to the cinema will be affected by the VAT increase. One will find that every activity in the ordinary day of the average worker, in terms of food, sustenance and work, will be affected. When one retires and becomes a pensioner, one's right to heat will be affected. It is regressive and disgraceful. It is a robbery of €224.5 million and it is a scandal that there are so many exemptions. Let the public see who got exemptions in this budget—

The "horsey" men.

—and who had €224.5 million extracted from them.

I listened to the debate about the housing issue. In respect of the houses in Deputy Ardagh's area, it is not a question of supply and demand. It is the presence of speculators on the supply side who have destroyed the chances of people to have a roof over their heads.

The extremes in this budget cry out and there will be a public outcry in response. On the one hand corporation tax has been reduced from 16% to 12.5% yet a range of measures have been introduced that will severely impact on the daily lives of ordinary people. This measure is one of the most severe but there is no realisation on the part of Government of its real effect.

A range of services will be affected. Many of them have been outlined already and I will not repeat them, but we must not be in any doubt that the lowest paid workers in our society will be victims of this decision because they are the people providing the services in many of the outlets that have been referred to. Many of these people depend on gratuities to supplement their already meagre incomes but those who will avail of the various restaurant and other opportunities will be less inclined to be generous in the future when they are faced with such a punitive additional VAT demand on the services of which they have availed.

This is a most regressive measure and one which this Government has not properly evaluated. It will have a negative effect across the board and it is one of the most outrageous elements in the overall construction of this disgraceful budget.

There is one minute remaining before I call the Minister.

Some time ago the Minister for Tourism blamed the tourism industry for the lack of competitiveness in the industry and said it was the reason people were not coming to Ireland. The industry sought a decrease in VAT to 10%. All of our main competitors – France, Portugal, Italy and Spain – have an average VAT rate of 5% on hotel accommodation, food and so on. We now have a VAT rate of 13.5%. That is a negative statement on our competitiveness in regard to tourism. This increase, coupled with the increase in insurance, which is up 200% in some cases, and an increase of 14% in electricity charges, with an additional 8% next year, will mean that our tourism industry will not be competitive at a time when we are trying to increase our competitiveness.

I call Deputy McCormack and ask him to be brief.

I waited patiently in each of the debates and this is the first time I have been called.

On the 1% VAT increase and its effect on housing, my daughter signed a contract last week to buy an apartment in Dublin. That contract is subject to an increase in VAT and, therefore, her apartment will cost at least €100,000 more now than it cost last week.

A Deputy

What is the sum?

I am only stating the facts. For that she gets €350 over seven years and loses a first-time buyer's grant of €3,800. How can that be justified? How can Deputy O'Flynn and everybody else applaud that measure. The people have been conned and when Joe Duffy gets his hands on Deputy O'Flynn next week, he will know all about it.

To be helpful to the Deputy, if his daughter has the full increase paid before the end of the year it is not subject to VAT.

It is because it is in the contract. I know what I am talking about.

With regard to the discussion about first-time buyers, the tax relief now available for first-time buyers over seven years is €11,200 in the case of a couple. It is important to record that and get rid of the nonsense being spoken about.

That is not the increase.

Those who have already been first-time buyers in the past five years will benefit immeasurably from this because those who might have come out of the system this year will now get an extra two years. That is important. The real benefit is that it puts cash into the pocket of the individual over ten years rather than, as the NESC said, being absorbed by the builders.

If the Minister believes that, he will believe anything.

Let us get real about what we are trying to do. I am targeting first-time buyers. The second point I would make is that more than 55% of first-time buyers are buying second-hand houses, so that issue does not come into play.

There is no change in the flat rate for farmers. The rate is 4.3% and remains the same.

They will be screwed again.

In spite of what some Opposition Deputies said, the effect of this budget on an ESB bill of €100 is 88 cent.

What is the effect on the tourism bill and every other bill?

I know what the Deputy's problem is. He is unable to deal with the fact that the Government, to his amazement, delivered a €10 per week increase to old age pensioners.

That is the shock.

The Minister will take €250 million from them.

The Minister, without interruption.

I am far happier to be part of a Government which looks after those who have contributed in their long lives to the welfare of this country and which seeks to raise small amounts of money from the rest of us to make sure that those who have given the most, benefit.

That is not what regressive taxes do.

Deputy Higgins went on about cinema tickets. We pay more for a can of Coke and a box of popcorn than we do for a cinema ticket.

We do. The cost of a can of Coke and the popcorn is substantially more than the cost of the cinema ticket.

The Minister must be talking about another type of coke.

Allow the Minister to continue.

The bleeding heart argument would want to be toned down a little because that is the reality. I am happy to commend the resolution to the House.

Popcorn and Coke is a good description of it.

Question put: "That Financial Resolution No. 10 be agreed to."

Ahern, Bertie.Ahern, Dermot.Ahern, Michael.Ahern, Noel.Andrews, Barry.Ardagh, Seán.Aylward, Liam.Blaney, Niall.Brady, Johnny.Brady, Martin.Brennan, Séamus.Browne, John.Callanan, Joe.Callely, Ivor.Carty, John.Cassidy, Donie.Collins, Michael.Coughlan, Mary.Cowen, Brian.Cregan, John.Cullen, Martin.Curran, John.Davern, Noel.de Valera, Síle.Dempsey, Noel.Dempsey, Tony.Dennehy, John.Devins, Jimmy.Ellis, John.Fahey, Frank.Finneran, Michael.Fitzpatrick, Dermot.Fleming, Seán.Gallagher, Pat The Cope.Glennon, Jim.Grealish, Noel.Hanafin, Mary.Harney, Mary.Haughey, Seán.Hoctor, Máire.Jacob, Joe.Keaveney, Cecilia.Kelleher, Billy.

Kelly, Peter.Killeen, Tony.Kirk, Seamus.Kitt, Tom.Lenihan, Brian.Lenihan, Conor.McDaid, James.McDowell, Michael.McEllistrim, Thomas.McGuinness, John.Martin, Micheál.Moloney, John.Moynihan, Donal.Moynihan, Michael.Nolan, M. J.Ó Cuív, Éamon.Ó Fearghaíl, Seán.O'Connor, Charlie.O'Dea, Willie.O'Donnell, Liz.O'Donoghue, John.O'Donovan, Denis.O'Flynn, Noel.O'Keeffe, Batt.O'Keeffe, Ned.O'Malley, Fiona.O'Malley, Tim.Parlon, Tom.Power, Peter.Power, Seán.Roche, Dick.Ryan, Eoin.Sexton, Mae.Smith, Brendan.Smith, Michael.Treacy, Noel.Wallace, Dan.Wallace, Mary.Walsh, Joe.Wilkinson, Ollie.Woods, Michael.Wright, G. V.

Níl

Allen, Bernard.Boyle, Dan.Breen, James.Breen, Pat.Broughan, Thomas P.Bruton, Richard.Burton, Joan.Connaughton, Paul.Connolly, Paudge.Costello, Joe.Crawford, Seymour.Cuffe, Ciarán.Deasy, John.Deenihan, Jimmy.Durkan, Bernard J.English, Damien.Enright, Olwyn.Ferris, Martin.

Gilmore, Eamon.Harkin, Marian.Hayes, Tom.Healy, Seamus.Higgins, Joe.Higgins, Michael D.Hogan, Phil.Howlin, Brendan.Kehoe, Paul.Kenny, Enda.Lynch, Kathleen.McCormack, Padraic.McGinley, Dinny.McGrath, Paul.McHugh, Paddy.McManus, Liz.Mitchell, Olivia. Morgan, Arthur.

Níl–continued

Moynihan-Cronin, Breeda.Murphy, Gerard.Neville, Dan.Noonan, Michael.Ó Caoláin, Caoimhghín.Ó Snodaigh, Aengus.O'Dowd, Fergus.O'Shea, Brian.O'Sullivan, Jan.Pattison, Seamus.Penrose, Willie.Perry, John.

Quinn, Ruairi.Rabbitte, Pat.Ring, Michael.Ryan, Eamon.Ryan, Seán.Sargent, Trevor.Sherlock, Joe.Shortall, Róisín.Stagg, Emmet.Timmins, Billy.Upton, Mary.Wall, Jack.

Tellers: Tá, Deputies Hanafin and Kelleher; Níl, Deputies Durkan and Broughan.
Question declared carried.
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