JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE díospóireacht -
Wednesday, 26 Oct 2005

Tax Reliefs and Exemptions: Presentations.

Chairman

We are meeting with representatives of the Construction Industry Federation, the Irish Business and Employers Confederation and the Irish Congress of Trade Unions. We have already held meetings with the Department of Finance, the Office of the Revenue Commissioners, the Irish Taxation Institute, the Arts Council, the Combat Poverty Agency and the CORI Justice Commission. I propose a timetable of approximately 45 minutes for each of the three groups. If necessary, and if members wish, we can take a short coffee break during the course of the meeting. I propose to start with the Construction Industry Federation. We will then move on to the Irish Business and Employers Confederation, after which we will hear from the Irish Congress of Trade Unions.

With the agreement of the committee, I suggest that the sequence of speakers from the committee will be as follows. When we have heard the opening remarks from CIF, I will call members in the following order: Fianna Fáil for a maximum of ten minutes; then Fine Gael; then Labour; and, finally, the Technical Group. When we have heard the presentation from IBEC, I will first call speakers from Fine Gael, Labour and the Technical Group. Following the ICTU presentation, I will call on Labour first, then Fine Gael, and Fianna Fáil. The purpose is to rotate the first speaker so that no one is last on all occasions.

On behalf of the committee I welcome Mr. George Hennessy and Mr. Martin Whelan from the Construction Industry Federation. Before the discussion begins, I remind visitors that while comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected. I remind committee members that they should not comment on, criticise or make charges in respect of people outside this committee or the Houses. We will commence with a short presentation from Mr. Hennessy. As already stated, we have seen the submission the CIF made to the Department of Finance some time ago. The presentation should, therefore, be brief so that we can move to a question and answer session.

Mr. George Hennessy

The federation is happy to be with the committee this afternoon to outline, in summary, what the committee has considered in advance. I want to pass on the apologies of the director general who wished to be here this afternoon but who had a long-standing arrangement that prevented him from doing so. My colleague, Mr. Martin Whelan, was centrally involved in preparing our submission so I will ask him to outline it to the committee.

Mr. Martin Whelan

The CIF contends that tax incentives have an important role to play as a key instrument in the State's ability to achieve public policy objectives in respect of physical, economic, social, cultural and environmental regeneration. We would argue that Ireland's experience provides an example of best practice from the strategic use of early incentives to kick-start economic development to the more recent and highly targeted area-based approaches that have yielded significant benefits throughout our cities, towns and rural areas. We pointed out in our submission that during the 1980s taxation incentives were used to pump-prime the economy against a backdrop of difficult macro economic circumstances. Key inner city locations which had seen almost no residential construction, and little development in other sectors up to that point during the 20th century, began to experience significant investment in house building, office development and industrial estates as a result of tax incentives. Between 1996 and 1998, almost 10,000 residential units were built in Dublin's inner city as a direct result of tax incentives.

Reflecting the requirements at the time, there was clearly an element of urban dentistry or infill development to the regeneration. However, from the 1990s — particularly during the latter part of the decade — incentives became increasingly targeted in recognition of the complexities of the problems associated with urban decline in the city centre. The first official recognition of the wider role that could be played by incentives came in 1996 with the KPMG review of incentives, which argued that a targeted area-based approach and the availability of an appropriate package of incentives was the key to achieving economic, social, cultural, environmental and physical regeneration. The urban renewal scheme 1999 gave effect to this recognition.

The transformation of derelict inner city areas within Dublin during the 1980s and 1990s can be directly attributed to incentives. Visible successes include residential and office developments in the Christ Church and quays areas, the Customs House Docks, including the development at the IFSC, which had been a redundant docks site, the regeneration of Temple Bar and parts of Tallaght and, critically, the ongoing regeneration of the Ballymun, Liberties and Coombe areas. More importantly, the benefits have not been confined to Dublin. Under the 1999 scheme, approximately €500 million has been invested in residential, retail, office and multi-storey car park developments in Limerick city. The historic spine of Cork city has been transformed to the Shandon-Blackpool integrated area plan. The town centre of Longford has also been regenerated. There are other notable achievements throughout our provincial towns in places such as Tullow in County Carlow. Although not perhaps of the scale already mentioned, projects in these towns nonetheless brought about important tax-driven regeneration. Carrick-on-Shannon is home to MBNA, something unimaginable without the availability of incentives to attract people into that area.

The CIF argues that much has been done. However, much more remains to be done. It is important to note this in the context of existing schemes and the future application of incentives. To emphasise this point, I draw members' attention to the fact that almost 35% of all projects under the urban renewal scheme are currently tied up in planning issues. The corresponding figure under the town renewal scheme is just below 53%, the significance of which will be commented upon again later.

Everyone recognises that the Irish economy has moved on decisively. However, everyone will also recognise that not all have benefited equally, either socially or economically. CIF would argue that the past decade of rapid economic development has, if anything, accentuated intra regional and inter regional differences. These issues can be addressed by the State using taxpayers money. CIF would argue that there will clearly be cases where incentivising the market will be the most appropriate approach. The State could, for example, have achieved a low-rise Ballymun without the use of tax incentives but it would not have achieved the type of integrated, sustainable regeneration which is now ongoing as a result of the targeted used of appropriate incentives.

There are clearly lessons to be learned. The 1996 KPMG review highlighted the need for a more focused, community-based approach to the application of incentives and a move to an integrated area plan approach became an exemplar of best practice. These lessons must be borne in mind as we examine existing schemes and the future of incentives. Under the urban and town renewal schemes, almost 50% of designated sites nationally — the figure is higher in some counties — have yet to be developed in spite of the availability of attractive incentives. This is due, in the main, to servicing deficits and other factors outside the control of project promoters. A number of schemes in Wicklow, in particular in Rathdrum, have been held up in this way. This highlights the intractable problems experienced in many of these areas and reinforces the need for incentivised development.

I have already mentioned that a number of schemes are tied up in planning matters. To put this in context, approximately 38% of investment under the urban renewal scheme and 66% of investment under the town renewal scheme is currently tied up in planning matters. Despite the fact that much has been achieved, these projects have yet to yield the results of completed schemes elsewhere. CIF would argue that the July 2006 deadline means many will not be built out and that the benefits will be lost to the State and areas involved.

Two key issues arise in terms of the number of designated areas that have seen no investment and the proportion of projects currently tied up in the planning system. The first relates to the deadline of December 2004 for the receipt of valid planning applications. This means that designated areas where investment has been held up with lose out. The deadline of July 2006 for the completion of projects means many projects currently in the planning system will not be built out. By way of example, approximately €60 million worth of investment for the Shandon-Blackpool IAP project is at risk as a result of this problem.

CIF argues that the current logjams in the system must be addressed. We have argued that the deadline for the completion of qualifying projects should be abolished and that projects that are approved be built out in line with the timescale, usually five years, laid down in their planning permissions. In this way, the planning system and the market — not the arbitrary July 2006 deadline — will be the ultimate arbitrator of the merits or otherwise of projects in the system. This will facilitate the rational delivery of projects on to the market.

What of designated areas that have not seen investment as a result of servicing or other issues? What about other parts of the country that have clearly fallen behind and require incentives. Based on the lessons from the past, a package of appropriate incentives informed by a system of master planning based on local area plans and an even more sophisticated approach than the integrated areas plans should be implemented for these areas.

Looking even further forward, the State has accepted that the long-term sustainability of Ireland — economically, socially and environmentally — is being undermined by the current spatial structure of the country, particularly in terms of regional imbalance. The national spatial strategy, which is State policy, identifies the problems and provides a blueprint to assist regional development so that cities and towns and the people who live in them can achieve their fullest potential. The NSS is clear on what is required, namely, the accelerated development of strategically located gateways and hubs. If they are to play their role, however, gateways and hubs will require critical mass and city-scale infrastructure relating to the areas of education, enterprise, transport and health, the arts, leisure and sports, public spaces and parks and water and waste management. Also required will be populations in excess of 100,000 in the case of gateways and 40,000 in the case of hubs. That will require the construction of 500,000 new homes in the right locations during the next ten years.

CIF believes that incentives can play a key role in the delivery and kick-starting of the process of regional development, particularly in relation to the types of infrastructure, social, cultural and so on, required to allow identified gateways and hubs to achieve their full potential. CIF would argue much has been achieved, that the lessons of the past regarding the need for greater targeting must be learned and that there must be ongoing examination of the effectiveness of schemes. We recommend that the July 2006 deadline be abolished lest the benefits of earmarked investment be lost. We also argue that a master planning approach to areas that have become increasingly marginalised be implemented. The national spatial strategy framework should be used to guide the targeted implementation or application of incentives in places and sectors of the economy where it is appropriate to do so.

Deputy Nolan

I welcome the delegation from the Construction Industry Federation and thank its members for their presentation. We all acknowledge that the construction industry has been one of the driving forces of the economy during the past ten or 15 years. The latest quarterly report from the Central Bank released last week referred to our dependence on the construction industry. The impact on our growth rates, if anything happened, would lead to a slowdown in the construction industry generally. Listening to the witnesses' comments, the main message, apart from the incentives, with which the Construction Industry Federation obviously agrees, seems to be that planning is among the crucial areas. The major concern seems to be that the 2006 deadline for qualifying projects should be extended in the budget. If that does not happen, what impact will it have on the industry?

The witnesses referred to the incentives from 1988 to 1996, which were used to kick-start or pump-prime the economy. We have passed that stage, however, and if 80,000 housing units were constructed last year, with a target of 77,000 or 78,000 this year, does that not show a very viable and healthy industry? To me and many others, this suggests that the industry does not need too many more incentives, particularly when the economy is powering ahead and when the construction industry is in a very healthy state, with a large number of employees. Perhaps now is not the time for new incentives. If we see a slowdown during the next five or six years, perhaps the Government and the Minister for Finance should consider introducing them.

I would be interested to hear the delegation's comments on our overexposure, as some people might refer to it, to the construction industry.

Mr. Hennessy

Perhaps I might respond to those questions. The construction sector is contributing significantly to economic growth, as is consumption expenditure. The industry is responding to the dynamic of the Irish economy and to the pressures thereon to deliver increased infrastructure in the areas of home ownership, business and — in terms of roads, water services and education and health facilities — the public sector. There may be a perception that the urban renewal schemes were created to boost the construction industry. However, we believe that the primary role of the incentives is to achieve certain things in the economy that would not otherwise be achieved.

Urban renewal schemes were introduced in the 1980s, when they were seen as a generalised pump-priming initiative for the economy and the construction sector, which, having experienced several years of reduced annual output, was on its knees at that time. However, as Mr. Whelan outlined, the schemes have been refined. Consultants have produced reports and the incentives have become more targeted. The value of the reliefs for investors has been reduced in many cases. They have a central role in facilitating public policy in promoting the delivery of infrastructure that we will need in the economy in the coming years. Incentives are now being considered in respect of child care facilities and private hospitals.

The Government has several choices: it can increase the level of public investment to provide the infrastructure that we need; look to the private sector to provide it; or examine the role of incentives, whereby public policy targets specific areas to attract private investment without recourse to the level of public investment that might otherwise have been necessary, or without its being necessary at all. Ballymun is a good example. Government policy could have viewed it as a public sector initiative to rebuild the low-rise estates but instead it is achieving a much more comprehensive development in an environment of private and public investment, securing the best of the former available.

Much has been said about the role of incentives. One of the main schemes is that relating to urban renewal. Approximately €1 billion was invested in this scheme from its inception until the middle of 2004. That compares with a construction output of €130 billion in the same period. These schemes' role in overall construction output is quite modest. Their impact on the construction industry is not the reason for our presentation but that on economic development and public policy to create infrastructure in areas and sectors of the economy the Government wishes to target.

Deputy Bruton

I thank the delegation for its presentation, which had a great deal of interesting material.

I have examined urban renewal and all those schemes. There is €7 billion in the urban renewal, town and "living over the shop" schemes and I suppose that one could conservatively throw in another €3 billion for all the others. That means a total of €10 billion. In tax cuts, that would be at least €2 billion. I wonder whether taxpayers have achieved good value for money for the €2 billion we have invested in this, although I agree that there are many excellent examples.

In the presentation, pressure points were mentioned and there was an assumption that, because such points exist, the taxpayer should chip in. However, pressure points arise partly because we have a high-growth economy. As Deputy Nolan has said, the building industry is arguably quite heated in meeting demand as it is. The issue when considering such matters is whether there has been some sort of market failure whereby private money will not go to certain areas. Are there idle resources and are we getting good value for money by bringing into employment people who were not working? Is tax the best tool for such social objectives and do the benefits exceed the costs?

It is frustrating that none of the presentations addressed such matters. As politicians, we are the guardians of the money to which I refer. The CIF has a different agenda. The witnesses said that half the lands targeted for urban renewal have not been touched after seven years. What does that tell us? Should we run harder and longer with tax relief or has the latter not been properly designed? Have people been creaming off funds and using designated areas that perhaps should not have been so designated? Some were highly marginal and investment might have happened in any event. They went for the easy mark.

I do not believe that the delegation has given us a framework to decide to extend the reliefs. I am all in favour of very targeted tax relief if there is a region with high unemployment levels that has fallen far behind. Such areas do exist. In those circumstances, one could see the argument for doing something and tax relief has a role to play in an integrated programme. That is where I see some merit in what is being said. If an integrated programme of regional regeneration were developed and certain key elements were needed, one could, perhaps, justify examining whether the private sector might be able to assist us and introduce tax designation for very specific requirements that have a strong social case.

That is the sort of direction to which I tend regarding building projects, rather than keeping a great many fairly undifferentiated schemes whose benefit is in serious doubt at a time when the building industry is struggling to meet existing demand. It is not, based on the evidence of prices, meeting demand, which has far outstripped it, and it could be argued that the tax relief is to our cost. How would the witnesses react to such a policy, which would start with our identifying regional and sectoral needs? We could drill down and ask what the State and private sector could do and then develop targeted reliefs.

One of the major objections to tax relief relates to the very small number of people who benefit from them and the fact that some extremely wealthy individuals pay very little tax.

What is Mr. Hennessy's reaction to the idea, which has 100% consensus in the Oireachtas, of capping what any individual can get from these schemes? There is currently a cap on non-rental income. However, there is no such cap on rental income. This means that people who have a rent book can put indefinite amounts of money into these schemes. That is already happening because 100 individuals of the top 400 gained more than €100 million in tax relief in two years. How does Mr. Hennessy react to the fact that we must develop political consensus about severely capping these schemes? A cap, where it exists, is approximately €31,700. Should that cap be extended to every scheme and also applied to the non-rental sector? Should we consider cumulative caps or one individual cap of three times that amount, which would mean a limit of approximately €100,000 on an individual? How does Mr. Hennessy react to that type of thinking which seems to be prevalent in the Department of Finance and among members of this committee?

Mr. Hennessy

The Deputy asked a number of questions. As regards the overall strategy, the schemes have been increasingly targeted over the years. Reviews have been carried out and the Department of Finance has commissioned consultants' reports. A review is currently being carried out. Our case is that there is a need for schemes in specific sectors and perhaps in certain regions. I agree that we need a holistic approach to the development of the economy and to balanced regional development. We must also consider the role of the national spatial strategy and what investments we need in certain areas and sectors. Perhaps the Government could consider the resources it has available to invest in these different infrastructures when drawing up its policy in the context of the next national development plan. Equally, as part of that process, public policy must consider the role that targeted incentives can play in contributing to the delivery of public infrastructure.

The construction industry has had the capacity to expand and to increase employment to facilitate delivery of construction at a rate of 5% or 6% per annum. It was only when the economy was growing at 8%, 9% and 10% per annum that the construction industry experienced price pressures. However, those were removed from the equation in 2001. The economy is now growing at a fairly sustainable rate and the construction industry is achieving similar growth rates.

As regards capping the schemes, I favour an approach that would separate the taxation aspects of how people use reliefs, some of which are property related, rather than the BES type approach, which would cap individual investments. We must examine the nature of the schemes and how the reliefs, particularly capital allowances, are used as financing mechanisms. The promoters of individual projects do not have the financial resources and this is a way they can get the finance they need.

Deputy Bruton

Is Mr. Hennessy saying yes or no to caps?

Mr. Hennessy

There should not be caps on schemes of individual investments.

Deputy Bruton

I am not talking about the size of the project but about a cap on an individual participating.

Mr. Hennessy

The issue of whether people on high incomes should pay a tax contribution on an equitable basis is a broader one. However, it does not have to be linked specifically to individual reliefs.

Deputy Bruton

The reason there is concern about high wealth individuals is that if they have rental incomes, they can write their income off against such schemes indefinitely. If they have non-rental incomes, some of it is capped at approximately €31,000 per scheme. The Minister for Finance seemed to suggest at the weekend that he would extend those caps to non-rental income and not allow people to hop from one scheme to another to such an extent that they can build up finance through many schemes, include their pensions and then write off a huge amount of money.

Politicians are aware of the equity issue. What impact does the construction industry think that will have? Will the schemes still go ahead? Do the members of the construction industry regard that as the end of the effectiveness of such schemes and as shoe-horning investment? Is Mr. Hennessy happy to proceed in that way and for the equity argument to be applied to any future tax reliefs? Would he be happy if the equity argument imposed a tight framework and if some type of tax-driven schemes would be considered within that?

Mr. Hennessy

The equity issue will be considered in terms of the tax contribution all groups of taxpayers make. If one is a high earner, one should make a tax contribution.

Deputy Bruton

That will happen. Is Mr. Hennessy saying he does not mind if that happens?

Mr. Hennessy

It is done at the level of a tax contribution in the United States, not at the level of an incentive in terms of a particular scheme.

Deputy Bruton

We can separate two things. Is there any merit in having tax relief for building high-rise car parks? We can look at the costs and benefits of that before deciding. If we decide there is some merit, our equity mandate would require the imposition of a cap on any individual. It looks like that will happen on budget day. Has the CIF any comment, in advance of that happening on budget day, which might shed light on the argument?

Mr. Hennessy

I am not privy to what the Minister will say on budget day.

Deputy Bruton

No, but we all read the newspapers.

Mr. Hennessy

If a person has an investment of €3 million, €4 million or €5 million and a cap of approximately €30,000 is placed on him or her, there will be a direct consequence on the viability of a project with which he or she might be involved. That is why we take the view that the issue of equity in the tax system should be approached in terms of the income and tax contribution of each group of taxpayers. That is a more equitable approach because it ensures that taxpayers make a tax contribution. There would need to be a more disparate spread of investment or pension or other contributions to achieve the same result. We have not seen the report of the consultant or any analysis on the tax issue. It is difficult for us to make a contribution without that information. It seems the scale of investments in many of these schemes would make it difficult to adopt that approach and to achieve the objective of getting the investment. It does not seem to address the core fundamental issue of equity in the tax system.

Chairman

Mr. Hennessy seems to suggest that the issue should not be addressed on the basis of the project but on that of the taxpayer paying an effective rate of tax or a certain amount of tax. He also seems to suggest that some taxpayers could invest large amounts of money but that this would be acceptable once they deal with the equity issue by making a tax contribution rather than having their investment in a particular project capped. That is fair enough.

Deputy Burton

I just want to follow on from Mr. Hennessy's answers to Deputy Bruton. Let us take the example of a group of investors who come together to build a luxury hotel. Groups of high roller investors buy suites in the hotel and put in a couple of million euro each. This is a well known tax avoidance scheme which has been used very successfully. Are the witnesses saying that reducing tax incentives would endanger these schemes? They are favoured mechanisms in the construction industry. Other schemes include holiday homes where people invest half a million euro. There are restrictions on them using their own holiday homes but not on using a colleague's holiday home in the same development. Would the restrictions endanger this kind of tax avoidance?

There are references made in the CIF submission to extra provision, with child care facilities and nursing homes given as examples. I have examined a number of these schemes in detail and they are very much developer-led. Does the CIF have any data on how the scheme may benefit the renter of the child care facilities or the lessor of the nursing homes? The former Minister for Finance, Mr. McCreevy, made the argument in earlier years that extra provision would lead to falling prices for services. However, the cost of services in child care and private nursing homes increased significantly. The rents charged to the operators of such facilities by developers remain as high as ever, with the tax breaks being effectively gobbled up by investors in the construction industry scheme. Every day, the newspapers are full of big players in the Irish construction industry announcing and advertising very significant investments in countries such as Bulgaria, South Africa, Turkey and other countries in eastern Europe and around the world. Much of that is based on capital profits generated by the boom in the building industry. What evidence exists to show that they are lured to invest abroad by the availability of lucrative tax breaks in foreign countries in the way that such tax breaks have been made available to them here? If the CIF argues that tax breaks are the sine qua non of investment in Ireland, why are they so anxious to have diversified investments in countries right around the world where tax breaks do not feature?

Are the witnesses aware of the recent report by the Comptroller and Auditor General drawing attention to the serious level of tax fraud in the construction industry? Are they aware that such fraud is probably worth between €200 million and €400 million per annum? Are they also aware of the fact that foreign companies such as GAMA are now getting exemptions from PRSI? Such exemptions are worth approximately 18% between the employer and the employee. They are also treated differently to PAYE earners for tax purposes. I know that everyone loves a tax break and I share the industry view that tax breaks have stimulated activity when the industry was in a flat period. However, I do not see the argument for continuing all of them. They do not seem to be bringing about price reductions for users of the facilities mentioned the CIF presentation. They seem to be grabbed mainly by the investors and the big players in the industry. Those big players seem to be investing around the world and I wish them well but that does not seem to be driven by tax considerations.

Chairman

There is no one right answer to all of these questions.

Mr. Whelan

In our submission, we said that the lessons from the past are clear. Taxation incentives can be used to achieve broader objectives. We also said that there needs to be ongoing monitoring but that this must be based on facts. We need to analyse the schemes. The fact is that 50% of areas are designated with attractive incentives, yet in many of those town centres there is dereliction and underdevelopment. This suggests that the problems are intractable and the national spatial strategy seeks to bring all parts of the country into play. Our point is that incentives have a key role to play based on proper analyses. Incentives can be used in an appropriate manner to achieve area and sectoral based objectives but against a proper framework.

Our submission was made against a background of a lack of information. The review that is ongoing will be welcome. The kernel of our argument is that incentives have a role to play and we need to have a look at the effectiveness of various schemes. The principle should be recognised that they can be used to achieve objectives against objective criteria.

Deputy Burton

My specific question was whether the construction industry had any evidence that the tax incentives on specialist areas such as nursing homes and child care facilities have resulted in cheaper facilities and helped to drive down prices. The cost of the tax incentives is quite significant and we have to consider cost benefit analysis. The tax expenditure represents a lot of money forgone. It is my impression that most of the benefit seems to be going to the construction industry and the investors. I would expect some, but not all, of it to have done so. The costs of child and nursing home care, to give two specific examples, are rising astronomically and the tax incentives are not benefiting the users of those services.

What about the specialist tax avoidance schemes which are rolled into the tax breaks, such as the example of the luxury hotel? These allow high rollers to put millions into a project and get tax breaks on the back of it. Are the witnesses saying that these projects would be endangered by withdrawing or capping schemes? The very same people are investing every day right around the world but that does not seem to be linked to tax breaks. Is this an issue for the construction industry?

Mr. Hennessy

The tax incentives for child care, health facilities and so on are designed to increase the supply. I am not aware of any schemes which have been developed in such a way as to try to achieve a reduction or to control the price that the users of those facilities charge for their services. We all know that the general cost of child care has been increasing and that it is a major issue. The indication on the part of the Minister for Finance that he will address this in the budget is welcome. The cost of health care in both public and private facilities is increasing enormously. It may well be that the consultants will have a view in their reports to the Minister for Finance on whether there are any mechanisms that can increase the supply of needed facilities and seek to control their cost. However, we do not have any detailed knowledge about what is happening in the market. I return to the point that the schemes were designed to increase the supply.

As regards where people invest, in general we are concerned that a great deal of Irish capital is being invested outside the country. The general question must be asked as to whether that is good for Ireland Inc. Is it preferable that investment is taking place outside the country or would it be better to attract and maintain it in the Irish economy? I am not offering an answer but there is a great need for infrastructural investment in the economy. All commentators share a single view on that issue. Is it fair that the public sector and the Exchequer should fund the totality of such investment? They should invest at a high level and we argue that the level of investment, at just 4% of GNP, is not sufficient. It should be 5.5% of GNP, as the National Economic and Social Council, NESC, suggests.

Major programmes of investment are needed in public transport and across a range of facilities. We have to address the debate at a broad level and look at the available resources that can be brought into play. As Deputy Bruton said, the approach should be based on what Ireland needs in terms of investment in particular sectors of the economy and the regions. The issue of regional imbalance, as well as the national spatial strategy, should be examined. Questions should be asked as regards what resources the State has to invest in these necessary projects and what the private sector might do in its own right because of the market. The in-between area could also be examined to determine where the private sector might deliver quasi-public or public infrastructure. That is the approach we would recommend.

Deputy Burton

Mr. Hennessy agrees, then, that there is no evidence — indeed the evidence is to the contrary — that tax incentives rather than helping to level or reduce the cost of services such as child and nursing home care, benefit no one other than the investor. No value is passed on to the user who pays more money at a higher rate for all these services.

Mr. Hennessy

The scheme, as we understand it, was designed to increase supply. The investors do not control the price at which child care is delivered. Equally, in the context of the review, if there is a way of looking at both the increase in supply of needed infrastructure and how its cost is part of the equation, then that might usefully be done. We do not have the data to comment further on that but it is something the consultants might be asked about if they come before the committee.

Caoimhghín Ó Caoláin

I also welcome both Mr. Hennessy and Mr. Whelan, who are here on behalf of the Construction Industry Federation.

I note a couple of brief points based on the delegation's presentation to the committee. It was stated that "The Irish economy has moved on, and has moved on decisively, but it has not benefited everybody equally, socially or economically, and its benefits have not been evenly spread." That is absolutely correct. If we explore it in any detail, however, I wonder whether we will continue to have the same outlook. Nonetheless, I agree with the statement.

I also thought the example given as regards the perpetuation of some of the property-based tax reliefs was interesting. Under one of its bullet points on the future, the south midlands, Laois and Offaly, are said not to have benefited to the same degree as the north midlands. I am sure the Chairman picked up on this, although I believe the page was missed in the presentation. I have no doubt that this was included not merely for the Chairman's benefit, but perhaps the Minister for Finance, Deputy Cowen, might also be expected to take note.

In any event, the delegates will pleased to hear that I do not agree with a blanket rejection as regards the urban and rural renewal schemes. They certainly need to be better targeted. We need to take out the element that favours the property speculator. That immediately puts us in a very different camp.

There are tax reliefs that are beneficial to the wider economy and these should be retained. They can, as the delegation rightly argues, act as a catalyst for economic activity and recovery and have been shown to have done so in the past. What vexes me considerably, however, given the massive level of subsidisation of the construction industry by the taxpayer through property based tax reliefs, is that there is such a degree of tax evasion. There is the withholding of employees' pensions and sick benefit entitlements, not totally as in the GAMA example, but by native and indigenous employers as well.

The delegation referred to childminding. Within the construction sector, it is very difficult to justify the continual argument for "take, take, take" if, at the same time, there is not a balanced position as regards responsibility to also "give, give, give". I would like to hear the CIF's view on recent revelations regarding how many different players within the industry treat their workforces and, as highlighted in the recently published report of the Comptroller and Auditor General, in respect of the extent of tax evasion.

We might also take on board the Ombudsman's statement as regards the pension and sick pay scheme and the fact that two of the biggest construction firms in the country only recently settled arrears of €850,000 and €500,000, respectively, as regards the fund for pension and sick pay schemes, despite having continuously denied withholding tax, or any liability. It sours the relationship and with something in the order of 230,000 workers currently in the broad construction industry, and only 70,000 covered by its pension fund under the registered agreement, a great many issues must be addressed within the sector. It is important that an earnest effort should be made to clean up the entire sector's act. Then perhaps people might take a more considered view as regards some of the points made by the CIF delegation. Some serious practices need to be urgently addressed.

I will conclude with two quick points. Section 23 relief, make no mistake, has seriously driven up the cost of homes. It has favoured the investor-speculator as against the home occupier. It has favoured the interests of the landlord as against those of the tenant.

My final point relates to car park facilities. To take Beaumont Hospital as an example, the recent submission by the Society of St. Vincent de Paul showed that a different approach to public moneys could have saved €13 million of public funding. The net result of the car park development in Beaumont Hospital was fewer car park spaces, a dissatisfied hospital, impatience among members of the public and dissatisfaction with family visiting facilities. The only people who were happy and laughing all the way to the bank were the builders and property speculators. Serious matters need to be addressed and the notion that GAMA was the only problem is a smokescreen.

Mr. Whelan

The reference to the south midlands was less of a sap to the Minister for Finance and more a reflection of my bias as a fellow Laois man. I have in mind the position of the south midlands vis-à-vis the national spatial strategy, with Portlaoise acting as a transportation hub and Tullamore forming part of the midlands polycentric gateway. As someone who knows the area at first-hand, incentives would be a way to stimulate the delivery of some of the cultural and social infrastructure required for the areas in question to achieve their aim.

On section 23 relief, where the desired outcome is owner occupation and so forth, the incentives should be tailored to meet this aim. This is the reason for adopting a strengthened integrated area plan using a master plan approach in which one identifies exactly what is needed in specific areas before making the incentive fit. For example, one asks whether owner occupation, particular types of leisure facilities and so forth are required. I accept the Deputy's point. One can tailor the relief to fit needs although the master planning element is crucial. We have local area plans in selected parts of the country but issues such as landscaping are also very important. Incentives can be used where the market or State can provide some of these elements. Owner occupation is probably a good example.

Mr. Hennessey

On the pension scheme, it is important to realise that the construction industry is much further ahead in terms of pension provision and sick pay benefits than any other sector of the economy. It was the Construction Industry Federation which established a pension scheme for its members in 1965 and extended it in 1969 to cover all employers in the construction industry. As part of the governance arrangements of the scheme, the federation invited trade union officials to sit as trustees on the scheme in 1975. The scheme has grown significantly in recent years. Although the total number employed in the industry is of the order of 230,000, according to a report done for the Pensions Board recently, the number of direct employees in the sector is 80,000. As was noted, the number of employees in the scheme is now approaching 70,000, which amounts to 80% compliance or pension penetration in the construction industry in terms of direct site based employment.

The issue which has arisen with regard to employment relates to the number of self-employed workers in the industry. The self-employed are precluded from joining the scheme because of Revenue regulations. The Revenue Commissioners operate a tax regime in the construction industry which differs greatly from other sectors of the economy. Basically, they take a belt and braces approach in terms of taxation, under which a company known to them to be paying its taxes and making returns in the normal manner will be given a C2 certificate which allows it to be paid gross by the employer, which may be the State or another contractor. Firms which do not have a C2 certificate will have 35% of their gross income, that is, all payments, deducted and passed to the Revenue Commissioners. It is then a matter for the firm to go to the Revenue Commissioners and deal with its tax affairs. In the majority of cases it will get a rebate because the average rate of taxation is less than 35%.

The report of the Comptroller and Auditor General, which referred to 2003, noted 12 cases of abuse of the system in the construction industry. In two cases of which I am aware the report found systematic abuse in the system and action has been taken in these cases. The Revenue Commissioners must have a system for reviewing the operation of the tax clearance system and tracking and making investigations where appropriate. This is an ongoing part of the operation of the system in the industry.

The construction industry now accounts for between 22% and 24% of the economy. The number of cases in the construction sector with which Revenue is dealing, when compared to its total number of cases, is not disproportionate to the scale of the industry's contribution to the overall economy. In terms of pension schemes, the industry is contributing greatly and addressing issues as they arise.

Deputy C. Murphy

I welcome the delegation and its contribution to this debate. I thought real progress had been made when Frank McDonald of The Irish Times was quoted in the Construction Industry Federation’s submission. I am sure Mr. McDonald would giggle at the thought.

I will focus on several issues, including section 23 reliefs. A recent "Prime Time" programme demonstrated that the section 23 incentives provided in Dundrum had worked against those who wanted to live in the area because investors had shown an interest in the area and this drove up prices. This factor also determines prices in addition to the amount of money people are able and willing to pay.

Like most other members, I remember the bad old days of the 1980s when construction activity was flat and building work was a seasonal occupation. Is it in the interest of the construction industry for the market to overheat, as is currently the case? It is possible that demand will be satisfied and we will return to the days when people did not have constant employment. Given the importance of the construction industry, which as Mr. Hennessey noted accounts for 22% and 24% of economic activity, one must be concerned for construction industry workers and by the prices people are being asked to pay for houses. These prices are inflated by section 23 reliefs.

The national spatial strategy has created expectations with people reading into the strategy something much different from what will be the reality. Incidentally, roughly seven major landowners are holding onto zoned land in Dublin, thereby creating more of a market in Rochfortbridge, Ashbourne, Naas and Newbridge and many other areas than any tax incentive would because the shortage of land influenced where construction took place. I make this point to highlight that the national spatial strategy is not the only determinant of the location of development. I am convinced that failure to impose a constraint on the amount of land in the greater Dublin area has rendered the whole process more or less meaningless.

I make the point in that context.

I received a parliamentary reply to a question I asked about the non-housing elements of the national spatial strategy. I note that the delegation in its submission referred to the physical, social, cultural and economic aspects. There is an expectation there will be development of schools, libraries and all sorts of facilities prior to people coming to live in an area or as they arrive and this will allow for a critical mass to be created. The reply to my question stated that it is best practice in identifying land for development and in deciding on the nature and scale of development envisaged under development plans to give careful consideration to the future availability of, or the capacity to provide, the non-housing elements of such developments, including infrastructural services and sporting infrastructure, the appropriate community facilities, health care, schools, public open spaces, retail and other service provision and public transport. It stated that account should be taken of the extent to which these are available or whether there is a reasonable expectation that they can be delivered in a timely manner to support residential development on land identified for such development. It stated it is also important that in identifying lands for development, planning authorities should take account of national and local investment programmes in so far as these may be relevant to the area concerned. The reply stated that to this end, planning authorities are required, in drafting development plans, to consult with the providers of energy, telecommunications, transport and any other relevant infrastructure and of education, health, policing and other services in order to ascertain any long-term plans for the provision of infrastructure and services in the area of the planning authority.

This reply clearly informs me there is no change in the way things will happen; it will continue to be development led. When considering a strategic look at the spatial framework, it is very difficult to be optimistic. I cannot see how tax incentives will have any bearing whatsoever in that context.

Mr. Whelan

In some ways the Deputy is making the same point as we are. The willy-nilly outward expansion of Dublin into Rochfortbridge, Stradbally and Wexford, for example, is a direct result of the lack of a rational framework to guide development in Ireland. The national spatial strategy acknowledges that if current trends continue, 80% of all population increases over the next 20 years will occur in the greater Dublin area with little or no increases in other parts of the country. However, it is clearly recognised in the document that in order to achieve the aims of the national spatial strategy it is not just a matter of placing houses in the gateways and hubs but people and investment must be attracted into the areas. To take an extreme example, Silicon Valley is the home of research and development in the IT sector as much because of its environment as any other factor. There must be a rational planning process in place in order to achieve the aims of the national spatial strategy.

I accept that perhaps the regional planning guidelines which were meant to give vent to the national spatial strategy, particularly in the greater Dublin area, have not worked. It could be that perhaps the problem is not the greater Dublin area regional planning guidelines but rather the regional planning guidelines in the outer Leinster area, which is another issue. It makes the point that if we continue to go down the road we are on, it is widely recognised that the long-term sustainable development of Ireland and of its people is jeopardised. We must therefore do something. I would say to Deputy Murphy that I am not optimistic, but I have suggested there may well be a use for incentives in order to get some of the infrastructure into these areas. This might in turn act as a pull factor to attract people there. I recognise there is a huge problem and the planning system will need to step up to the mark but I do not know whether it will do so. I suggest that taxation has a role to play in trying to achieve this. It must be part of an overall concerted framework combined with a tightening of the regional planning guidelines and of the inter-relationships between the national, regional and county development plans. This is probably the case in the Deputy's area also. Her points are well made and they back up the CIF point that some lever is required to ensure balanced regional development.

On the question of section 23, the very blunt incentives, for obvious reasons, were implemented in the early 1980s and they led to developments in the more affluent areas such as Dublin 4. The decision was then made to look at the inner city areas. Frank McDonald gave a very good description of the inner city areas of Dublin of the early 1980s. This led to a recognition that these areas could be used to achieve not just physical regeneration. One of the key criticisms of the early incentives was that houses were built in certain parts of the inner city areas but the people living in them were never integrated into the environment and there was no improvement in the broader environment. This was a recommendation for the integrated area approach. If there is an issue around a particular use of section 23 leading to an over-supply of investment with repercussions on the community, I do not see that as being a criticism of taxation incentives but rather a criticism of the particular package made available. It may have suited a particular need at a particular time.

We were invited to the committee to outline a rationale and this is what we are doing. Our rationale is that incentives can be used. The packages and their application must be guided at the local level by some form of local area plan approach, a master plan approach. It is difficult to see any other framework than the national spatial framework. My colleague has referred to the national development plan and this may become a mechanism in the future. If something is not done and if the role of these incentives is not recognised, then the pattern of development and outward spiral of Dublin, particularly within the greater Leinster area, will continue and this has significant economic and social ramifications for everybody.

Chairman

I thank Mr. Hennessy and Mr. Whelan for their attendance.

The committee is now joined by the Irish Business and Employers' Confederation, IBEC, represented by Mr. David Croughan, Mr. Danny McCoy and Mr. Fergal O' Brien. I welcome the delegation to the meeting and thank them for their attendance.

I remind visitors that while comments of members of the committee are protected by parliamentary privilege, those of visitors are not so protected. I remind committee members that they should not comment on, criticise or make charges in respect of people outside this committee or the Houses.

Mr. McCoy will make a short presentation followed by an open discussion with members of the committee, starting with Deputy Bruton.

Mr. Danny McCoy

I thank the Chairman for the invitation. We welcome the opportunity to address the joint committee to discuss the IBEC submission on the evaluation of tax incentives, reliefs and exemptions.

Our recent pre-budget submission for 2006 set out that a re-focus on tax reliefs is both necessary and desirable to support productivity and competitiveness for the Irish economy. We support the intention that such a review should not be piecemeal but rather be supportive of a pro-enterprise, pro-employment business environment in Ireland.

In our submission of March 2005 to the Department of Finance, we pointed to a number of reliefs under review which we consider to have run their course, particularly in terms of the need to keep the tax base as wide as possible. We acknowledged, however, that some will continue to be beneficial to the economy, especially in the context of other strategies the Government pursues. The rationale behind our position is that any intervention that narrows the tax base must clearly be motivated in terms of benefitting Ireland's productive capacity in a sustainable manner by facilitating the transfer of resources towards the more productive sectors of the economy.

Chairman

I thank Mr. McCoy. The committee received IBEC's submission some time ago.

Deputy Bruton

That was certainly brief. I thank the delegation for its submission. IBEC supports the abolition of most property-based reliefs but favours the retention of those relating to private hospitals, nursing homes and child care and third level facilities. The submission refers to regulatory difficulties in respect of these latter schemes. One person's regulation, however, is another person's commitment to ensuring adequate standards. Will Mr. McCoy elaborate on what he perceives as regulatory difficulties in this regard? Against the background of events at Leas Cross nursing home, some would argue that regulators have been asleep in some of these areas. Perhaps he refers to planning difficulties in respect of child care facilities, which I acknowledge exist in some areas.

IBEC argues strongly for an approach which seems to be based on the belief that the Lord never closes one door but He opens another. Taxpayers are thanked for the money they contributed towards the property-based reliefs and are now persuaded of the benefits of similar schemes in the area of research and development. The case for research and development is undisputed. We must build our capacity in this area. There is concern, however, that in ten years' time, we may find that much of the work done under such a scheme is worthless, in much the same way as we look out our back windows and observe that property reliefs have not been particularly well targeted.

ICTU's submission includes some disparaging comments on patent relief, which is out of a similar stable to the research and development relief posited by IBEC. Could such a scheme threaten to water down the strict scientific and technical requirements that research and development projects genuinely involve something innovative and worthwhile? If we make research experts the new artists by giving them some type of special tax status, will we reflect at a later date that we did not properly target this scheme? What does Mr. O'Mahony believe are the elements of research and development that are worthy of support and of most benefit to the economy? There is a willingness among Oireachtas Members to support research and development, both directly and perhaps through tax relief, if we can be convinced that such an approach is sufficiently focussed and tailored. I share some of ICTU's scepticism in regard to patent relief. Exemptions have probably been granted under this scheme in cases where the tax privilege should not have applied.

I note IBEC's warning regarding pension caps. It seems one has €250,000 on the personal side and then companies with an unlimited capacity to top up its senior executives' pension opportunities. Will Mr. O'Mahony explain his organisation's concern about caps? The layman would not consider them overly tight considering that one can write off 30% of €250,000 each year. This is not a severe cap in terms of building up one's pension fund. What is IBEC's general view on caps? There is a belief that they should be par for the course and should be set either as a proportion of income or set absolutely on the schemes or on the accumulation of schemes.

Reliefs provided to the film industry often come up in these discussions. Perhaps this is something to do with our love of the craic. IBEC's position on this scheme, that the cap should be lifted on film relief, is out of kilter with the other comments in its submission, which are very tough on reliefs in general. A delegation from the Revenue Commissioners informed the committee that the taxpayer effectively pays half the entire cost of a film that qualifies for production under this scheme. When the former Minister for Finance, Charlie McCreevy, tried to scrap it, the argument was that this relief was far too generous.

Mr. McCreevy, however, pulled the mat from under people without giving them sufficient notice and the relief was rightly restored. Looking to 2008, when the scheme is up for renewal once more, does IBEC believe we have a sufficiently strong film sector that the taxpayer will not be required to subsidise every film? Can we do something to help generate a long-lasting film industry instead of what is a scheme with high costs to the taxpayer, albeit with positive employment effects? What can be done to make the infant grow up in terms of the old arguments about infant industry with which the delegates are more than familiar?

Mr. McCoy

I thank the Deputy for what was a far better summary of the wide range of issues covered in our submission than I provided in my introduction. The rationale for the proposals we put forward is based on our awareness of Ireland's position as a trading nation competing in an international environment. In terms of research and development, Ireland faces significant competition in trying to attract the best intellectual capital to reside and function here.

The difficulty that exists internationally with trying to subvent research and development is the prospect theory. We simply do not know which are the best commercialisation opportunities. Picking winners has always been dangerous in terms of industry. This is why the rationale for the scheme of tax credits for research and development is broad-based. Rather than trying to identify individual sectors that will be successful, it strives to create an environment in which we can nurture that type of activity. We are very much in a situation where we have a difficulty in terms of those with whom we must compete. We traditionally tend to look to the EU but increasingly we find that research and development projects are going to those areas where the income tax scheme in respect of high net worth individuals is more favourable than that in operation here and where there is a far more aggressive use of patents in terms of the registration of products and so on.

Deputy Bruton observed that reliefs for the film industry have attracted much comment. This industry is a classic case in which Ireland faces direct competition in an area in which it strives to make an imprint on the international economy. Given this country's size, a medium such as film is vitally important in the context of increasing globalisation. In terms of the costs involved for taxpayers versus the benefits to society that this industry brings, the argument for the retention of the relief will remain valid for some time to come. In keeping in mind the classic mantra of moving up the value chain, the type of budgetary films Ireland wishes to attract will require the type of co-financing element that makes them attractive for international players.

Industry has operated in a difficult environment in recent years, particularly in the context of the exchange rate between the euro and the dollar, something that is likely to continue in the long term. This is the rationale underpinning the individual schemes. Members are aware of the difficulty of devising evidence-based policy on the basis of the information that is gathered on tax reliefs and exemptions. It is with some temerity that we suggest the removal of property-based schemes that are directed towards infrastructural development. They have served us well but are no longer needed. The focus now should be on external points of contact where reliefs are used as incentivisation. That was the overarching element in our proposals to the Department of Finance last March.

Deputy Bruton

Can Mr. McCoy comment on the caps or regulatory difficulties in respect of nursing homes?

Mr. McCoy

The Deputy is correct to say that, in the main, regulatory difficulties relating to the roll-out of infrastructure relating to child care facilities and private hospitals occur in the context of planning issues. The slowness with which these have come on stream has been a significant obstacle, as have the local authority charges, which are hitting these industries, although the latter are not directly a regulatory issue.

Deputy Bruton

If we are to give generous tax reliefs to private hospitals or third level institutions, we must explain what we want and target those reliefs selectively. What one person considers a regulation to achieve value for taxpayers' money and high standards may be seen as a headache by someone who is building a hospital. Are we not right to insist on strict requirements in schemes and planning to ensure projects are compatible with what we are trying to deliver?

Mr. McCoy

While that is true in terms of standards, frustrations arise due to the increase in cost bases and delays in completing a process. Costs relating to the provision of infrastructure are high, particularly as non-pay business costs have exploded in the economy in recent years. The incentives to secure projects are being provided in the context of an environment that is rather hostile. While incentives should be used, the difficulty lies in creating evidence-based prescriptions in light of the paucity of information on how reliefs have worked in the past.

Deputy Bruton

What about the caps?

Mr. McCoy

Does the Deputy refer more broadly to pensions?

Deputy Bruton

Mr. McCoy said we should not cap pensions, whereas there is a strong case for doing so according to many others who are making submissions. As Mr. McCoy takes a different view to most contributors, I would like to know his rationale. Similarly, his comments on imposing caps across the board involve an idea which has not widely been promoted.

Mr. McCoy

Pensions are a significant issue in the context of the costs faced by businesses as well as in terms of incentivisation, across the board. Businesses have increasingly come under pressure with regard to defined benefit schemes under the funding standards of the Pensions Board. There is a requirement to have a dissolution standard of 100% immediately. As is the case with planning regulations, this standard imposes a cost. While it is a desirable ideal for someone with a liability to have assets which match perfectly on dissolution, a pension involves a social contract. The costs imposed by the regulatory standard ensures——

Deputy Bruton

Caps do not impose a cost, they merely involve a restriction.

Mr. McCoy

There is also the consequence of the provision where one tries to meet liabilities in a low interest rate environment, which makes annuities very costly. This must all be considered against the backdrop of a public policy which suggests that we have difficulties in coverage and adequacy. If the initial reaction, in the context of pensions, is to opt for a capping scheme as a blanket solution, it is not obvious to us that the incentivisation mechanism pensions require will be addressed. In the context of our budget submission on pensions, the current caps in the release of SSIA schemes constitute another issue. We were talking about the caps being released for one year down through the income distribution.

Moving away from incentivisation for business, one turns to consider how caps would operate on equity grounds to capture high earners in the economy. IBEC is not, in principle, opposed to the use of caps to ensure effective rates for individual are driven to zero. It is important to have the wisdom to know that high earners in the economy are the people with the disposable income which is channelled into many of the schemes to which we have been referring. The first question is whether value for money is being achieved in the schemes. Thereafter, one must ask if they are utilised efficiently and equitably. We are not, in principle, against the introduction of caps on a plethora of the schemes that are the subject of current public discourse.

Deputy Burton

I welcome the deputation from IBEC. I notice that IBEC makes the eminently sensible suggestion that a number of schemes which have outlived their usefulness or failed to deliver much should be concluded. IBEC says certain reliefs should be retained, notably those for private hospitals, nursing homes and child care facilities. Has it considered the alternative, which is to incentivise the provision of care rather than simply bricks and mortar? The child care arrangement of choice for half of the parents of the tens of thousands of children who are minded is a private one with a relative or someone in a neighbourhood. All of us will be familiar with such arrangements, which can be very successful. The Labour Party recently proposed a tax disregard for the first €8,000 to €10,000 of earnings. There is a tax disregard for people who rent out rooms in new homes to help pay for mortgages. Has IBEC considered such proposals?

As I said during the CIF presentation, the previous Minister for Finance, Mr. McCreevy, had two arguments for the introduction of the reliefs in child care and nursing homes. The first related to an increase in supply and the second was to drive down prices. While it can be argued that supply has increased, it is possible given the cost of the tax break that public provision might have provided nearly as much infrastructure. As we have not been able to obtain detailed figures, we are not certain of the cost. Has IBEC considered proposals such as those of the Labour Party to incentivise, for example, the provision of care to older people in a way which underpins arrangements allowing them to stay in their homes for longer rather than to support tax breaks which seem almost exclusively construction driven?

My concerns about tax breaks on houses and apartments under section 23 apply in many constituencies, not least my own. I am concerned that private investors are driving out traditional homeowners, including young couples and those on modest incomes who are trying to buy houses. Local authorities have largely moved away from the provision of social housing, while the number of affordable homes, for which there is strong demand, is quite limited. Why should our tax system provide benefits through unused breaks of the sort Deputy Bruton described? If there are a great many tax breaks available through property-based schemes, logic will dictate that one will acquire more rental investments up to the limit of one's relief. The impact of this process on sustainable community development is of concern. It gives private investors an unfair advantage over the more traditional, in the Irish sense, owner-occupiers who will, depending on location, want to hold on to their houses for between five and 25 years. Those are my two questions.

Mr. McCoy

I will deal first with the issue of child care and the solutions IBEC has considered. For the 2006 budget, IBEC has focussed on the supply of child care places. In the past, however, it put forward suggestions such as subvention and addressing the cost through the use of tax credits, which, by their nature, have been geared towards participation in the workforce. If I understood the Deputy's question to the effect that the relief would come directly to the provider of the child care services——

Deputy Burton

We also have a separate proposal for refundable tax credits because we have taken a slightly different position from IBEC. We believe that full-time care by parents or by one parent is an important choice to retain. I outlined one element of our proposal. We have discussed also the issue of refundable tax credits which means we do not distinguish between people in work and parents who opt for one of them to mind their children at home.

Mr. McCoy

IBEC, conscious of the review being undertaken by the Department of Finance, stressed that whatever the arguments for the provision of funding for child care, the paucity of formal child care facilities be recognised. Deputy Burton put forward an argument for what could be described as the more informal arrangements people make. Where one is trying to increase the supply of child care places from a low base, the incentivisation has increased child care provision. However, it must be seen in the context of the economy which is growing dramatically, not only in terms of output but also population. Demand is increasing. When all the factors are put together, against the backdrop of the regulatory issues, including non-pay business costs, it is not inevitable that costs will come down.

Deputy Burton

Developers do not seem to pass on the benefit of tax breaks to those renting premises. I refer again to my constituency where the rents that private developers can charge for child care facilities are staggeringly high. Is there a way that the ultimate target user will get some benefit from tax breaks which are provided at enormous cost to the Exchequer?

Mr. McCoy

In making the argument for property reliefs, whether it is for child care facilities or primary residences, IBEC argues that the property-based schemes have served us well. However, when we look at incentivisation in terms of the macro economy, we see that it is unbalanced because it is not sustainable that so much of economic activity is driven by property output. While it is a productive sector, it is not a sustainable position for a trading nation to have its growth rates driven by a sector that is sheltered or from a property base.

On a more general macro-economic point, if the measured output related to output in the context of the employment increase looks very low to potentially negative, economists tend to focus on that they call the real side of the economy, namely, real people producing real projects. If, however, the money that flows into these is disproportionate to the underlying productivity, it would give rise to a very serious imbalance for the Irish economy.

Deputy Burton

We accept that.

Mr. McCoy

We are on record as stating that the economy is unbalanced because of it. This is a function not only of property reliefs. The Construction Industry Federation representatives said that reliefs are quite small in terms of the scale of the overall investment. The world has, as the new chairman of the Federal Reserve stated, a glut of savings and exceptionally low interest rates are driving this type of speculative activity. As a consequence, it does make it difficult to have other social aspirations. That is part of the rationale as to why we were suggesting, albeit tentatively and on the basis of limited empirical evidence, that if there are some reliefs that members are seeking to downsize and replace with others, the property one are potentially those which should be discontinued.

Deputy Burton

Will Mr. McCoy comment on the imbalance between investors and the traditional buyers, those who buy a house in which to live.

Mr. McCoy

If the Deputy thinks that is being driven by the nature of what we are discussing today, then its removal will take away some of the incentive. However, the market reality, in terms of the cost of capital, will still remain. If one has other societal objectives, one needs other instrumentation to try to get at it.

Deputy C. Murphy

I also welcome deputation from IBEC. In his opening remarks, Mr. McCoy agreed that the review should not take a piecemeal approach and should have a positive impact on the economy. I presume he subscribes to the view that taxation should be equitable and that this should be one of the principles driving the review of tax reliefs.

If there is to be a review, it would presuppose that further tax incentives will be evaluated properly. While I accept that one cannot always anticipate the level of take-up in respect of a scheme, has IBEC worked on modelling the outcomes in terms of how one would evaluate the tax incentive proposals. It would be useful to see how different organisations would undertake that task.

To develop the point made by Deputy Burton, affordability and availability are two key issues in the provision of child care. Deputy Fleming and I attended a meeting in the Kildare-Offaly border area and the issue of child care was being raised just as much as would be the case in an urban setting.

The take-up of the tax incentive, the primary tool for addressing the issue of availability, has been very patchy. Let me give examples of the outcomes. I have seen planning applications for child care premises to cater for 100 children and more. People must make choices based on what is available. Sometimes what is available is not always what is best. It is important that those who are seeking child care places are not seen as economic entities. In that context, the broader picture of child centred care is vital. I also endorse the options of having a person come to a child's home to mind him or her or of having children cared for in the community. I was a member of the Commission on the Family some years ago and at that stage in excess of 80% of children were cared for by childminders. The figure has since fallen to 50% because many of those who worked as childminders did so to generate incomes for their households and have now entered the workforce.

It would be very useful to see IBEC's ideas on the provision of child care. There is no doubt that if women are to continue to participate in the workforce, this will become an even more important issue. It is important that the response be comprehensive and appropriate. Facilities should not be provided only in selected areas because taxation tends to push people to an area where they can afford to pay. There are many other areas where people would have difficulty and they have just as much of an entitlement to work individuals in more affluent areas.

Mr. McCoy

If I understood that correctly, the Deputy made three points, the first of which relates to the equity considerations raised at the beginning of our submission. As I informed Deputy Bruton, with tax reliefs, the motivation regarding the productive sectors of the economy is incentivisation. One is trying to increase productive capacity or the efficiency of the system. Equity concerns opportunity rather than outcome, since if one is trying to incentivise, one is trying to induce a behavioural response that some people might take up while others might not. Certain individuals may not have the capacity to do so, while others may.

That brings us back to the issue of high earners and whether the system is inequitable because they utilise the relief as they were incentivised to do. Equity regarding tax incentives is one issue. As the Deputy said, the approach should be targeted to induce efficiency. Then, if one has a wider equity concern, it must be addressed by other parts of the taxation system. The Deputy is grappling with the difficulty of achieving efficiency and the desired outcome simultaneously with a single instrument. One may have two targets but only one instrument.

Regarding modelling and how one would assess matters, it comes down to an issue of which I know the committee has heard because it was addressed, at its previous meeting, by the Revenue Commissioners and the Department of Finance. The measure by which we cost incentives in Ireland is revenue forgone. However, that is on the basis that the behaviour of the citizenry would be exactly the same if one removed the reliefs as it would be if they were in place. That is a very heroic assumption, since the entire premise, if the incentives are in any way successful, is that they encourage different behaviour.

Other jurisdictions attempt to take into account not only revenue forgone but also the revenue gained by the introduction or removal. For that, one must move on to a much more elaborate cost benefit analysis of each individual scheme. The other aspect is that one might want to achieve a given outcome and the method for that is an outlay equivalent. What would it cost to take a different approach from tax relief, perhaps by grant-aiding an area, and would one get the same outcome for that outlay equivalent?

There are several approaches, and the Economic and Social Research Institute, of which I know something, recently published a paper by Dr. Tim Callan examining tax expenditure and those methodologies. In the summer edition of the quarterly economic commentary, there is a paper considering the subvention for industrial policy and targeting in that sector. It examines displacement and the dead loss that has occurred through tax interventions. Those are evidence of best practice internationally and could be brought to bear on the issue of tax exemptions and incentives. That has been critically lacking, so that one does not have the information on which to proceed. What is it that we have forgiven? I know that I am preaching to the converted on that one.

The final issue regarding scooping up was the availability and uptake of child care, a situation concerned with choice. The rationale is that individuals be given a choice. The Deputy was right to point out that the availability of a single mechanism might unduly influence people's decisions. That brings us back to equality of opportunity, which suggests that the targeted schemes to encourage participation should be designed in such a way that the individual is left with the choice of how he or she wishes to channel the funds received for child care provision.

Deputy C. Murphy

Perhaps I might ask a supplementary question. Would Mr. McCoy favour supporting parents directly rather than supporting the provider?

Mr. McCoy

On this occasion, we have a stress on the supply side and I am waiting to discover the recommendations. In other budget submissions, however, we have spoken of the subvention of child care through tax credits. There is a wider issue of trying to reach those not in the tax net, which raises the question of a refundable tax credit as a mechanism. We are open to that and are in discussions in the social partnership process, bringing forward proposals through that on the best way to deal with the issue of subvention as opposed to provision. However, we are also still far behind on provision when it comes to having that option.

Deputy Ó Caoláin

I was surprised to find myself agreeing with so much of what the IBEC representatives had to say. I welcome that.

There was an interesting point on incentives under review. The final part of the sentence, dealing with the incentives listed, states that in some instances, they may now be having counterproductive effects on the economy. That is one of the difficulties the committee has experienced. It is speculation and we have been able to establish a cost for the overall impact on the Exchequer only in the recent instance of holiday home developments.

Despite repeated requests to the Minister for Finance, Deputy Cowen, and the Revenue Commissioners, we have not been furnished with the costs of the vast majority of these schemes and have not been able to establish them. Mr. McCoy is quite right to say that we would presume that some of them are certainly having counterproductive effects. The only way in which that can be avoided is to predetermine each on the basis of cost benefit analysis and not only at inception. Is it Mr. McCoy's view that a periodic review including such analysis should be introduced regarding each one? He suggested that there may have been a benefit at one time but that it may no longer be the case. He also suggested that we must continue with a review approach.

Regarding urban, town and rural renewal schemes, I said to the Construction Industry Federation delegation that I am not absolutely of the view that a blanket withdrawal is the correct way to proceed. I certainly recognise a major need to address this area but we can point to specific benefits and improvements that have occurred. I would be afraid of our throwing the baby out with the bath water. Have the witnesses given any thought to alternatives to the urban and village renewal approach, with a better focus on areas of acute deprivation? Urban and rural disadvantage might critically benefit from a streamed approach and that is what I would like to see rather than our saying that it simply has to go, with something new being put in its place. I am not convinced that we should throw it out completely.

I concur with Mr. McCoy on those schemes that should be terminated and also regarding hotel relief. It is important to make the point that schemes already being constructed should not find themselves having to take short cuts to overcome a deadline, with all the inherent dangers.

The areas where we will obviously disagree include the reliefs for retention. Let us, since others have referred to child care facilities, take private hospitals as an example. I note from the opening sentence of the submission that there are reliefs for retention. There are also other reliefs of a similar nature associated with the supply of much-needed facilities. There is an undersupply of much needed facilities in the provision of acute hospital services. How does IBEC justify — as does the current Minister — the utilisation of public money for private hospital development when our public hospital system is in such crisis, with physical deterioration and loss of critical services? I am sure I do not need to remind the delegation that I represent Cavan and Monaghan and bring to its attention again all that has been visited upon my constituency and community in recent years. There is an intention to make available sites on public hospital grounds for private hospital development. I am aware of the arguments the Minister presents. However, does IBEC agree that the first and primary responsibility of those who have been entrusted with the care of public funding is to ensure that public facilities are provided and that we address the situation on the basis of equality of access and need rather than the ability to pay? Those are the fundamental inequalities within the health care system. I am concerned that IBEC has included this as one of those it supports because it fails to uphold that important principle.

Mr. McCoy

I thank the Deputy. I will try to be brief but comprehensive. When one considers the principles we are trying to advocate, we are looking at the use of cost benefit analysis for the justification of each scheme. It is difficult to get one's head around the term "tax expenditures". Nonetheless, schemes are left in place each year on the Revenue side. As regards the other public expenditure items, it is right that we have to go through the democratic process by way of a Vote system, yet reliefs are left in place which can go by their initial position and give rise to neutral benefits or dead weight at best or potentially counterproductive outcomes at worst. The issue is one of arguing for a design that will remove the situation where tax expenditures are not held up to scrutiny on a regular basis and where information on which value judgments can be made is brought forth. The Deputy's point about urban renewal schemes falls under that. If there is a justifiable case for an urban renewal scheme, it should go through the process of having a clearly identifiable target and a full assessment of the true benefit and cost to the Exchequer, however defined. Revenue forgone is, as stated earlier, not the appropriate measure on which to move.

If we had a design and were coming from scratch, the rationale for the use of private schemes would have to be held up to further scrutiny. Private provision in public care facilities is one of the factors which puts pressure on the public purse. The reality of that was to incentivise the separation in terms of private facilities in order to take the pressure off the public provision. That was part of the rationale behind our argument for that scheme.

As regards all the schemes, it is difficult for us to be specific given the absence of true information on which to make these calls. However, looking at the broad situations in which we find ourselves, the reforms which are needed at this point lean towards that view.

Deputy Ó Caoláin

I thank Mr. McCoy for his replies. I welcome his point that the basis of the case for the private hospitals is to end the current two-tier public-private health system. However, we differ on the means by which this issue should be effectively addressed. This is a further example of the private health delivery system piggybacking if not on the public health delivery system then on the facilitation of public moneys which should be spent on the latter. It comes down to the critical point of accommodating equal access for all citizens on the basis of need. This approach will not facilitate that.

Chairman

That concludes the discussion with IBEC. I thank the delegation for attending. The submission was appreciated. We are keen to hear a wide cross-section of views.

We will suspend for a few minutes while the representatives of the Irish Congress of Trade Unions take their seats.

Sitting suspended at 5.16 p.m. and resumed at 5.17 p.m.

Chairman

We are joined by Mr. Paul Sweeney, economic adviser to the Irish Congress of Trade Unions. I understand Mr. Begg had to leave on urgent and important business.

Mr. Paul Sweeney

That is correct. Unfortunately, there has been a factory closure in Cork. We thought we might have been here earlier because he was keen to make a contribution. I will now make the presentation.

Chairman

Before the discussion commences, I remind our visitors that while the comments of members are protected by parliamentary privilege, those of visitors are not so protected. As we indicated in our letter, we will outline the rationale behind the approach of the Irish Congress of Trade Unions. We will commence with an opening remark from Mr. Sweeney.

Mr. Sweeney

I thank the committee for inviting us to come before it and for the opportunity to set out our stall on this important area of tax breaks and expenditures. I will try to outline the rationale behind our submission by making a few brief points.

Tax incentives are tax expenditures in that they cost money. Sometimes if we are lucky, they will generate more money than they cost. However, we suspect — unfortunately, we do not know — that many of the current tax incentives are costing those of us who pay tax a great deal of money. Tax expenditures are difficult to quantify. I cite some work I did many years ago for a paper for a statistical society which highlighted the fact that the cost of tax expenditures in the 1980s grew through the corporate sector from £180 million to £1.422 billion eight years later. That was during the period when the Department of Finance quantified the tax expenditures. Many of those were legitimate expenses, such as the cost of accelerated depreciation. We do not have any difficulty with such expenses. Computers should be written off more quickly than they are at present. Tax expenditures are subsidies which have anti-competitive effects. In other words, expenditure in one area can go against another.

Some of the property-based schemes have led to urban and rural blight. I do not have to highlight this for members because they can see the growing number of slums in Dublin following the development of some of those section 23 properties. They have unintended consequences and the classic example of that is section 84 leasing, which was an effort by Revenue to close a loophole. It created such a scandal that the banks effectively paid no tax whatsoever, even when tax rates were 50%. The losses ran to hundreds of millions of euro. They have boosted construction inflation. They also have diffusion effects, which is a point that is not commonly understood. It means that the more tax breaks that are given, the less effective they become. As legislators, members probably know that when a scheme is set up in one area, everyone in the Cabinet wants one. The sooner it is spread out, the less impact it has and the cost escalates. Such schemes should have a limited time period. We know that they can be very regressive. The high net income people — we used to call them rich people in the old days — make the gains and the rest of us pay. Virtually all of the property-based schemes should be scrapped and we have outlined our reasons for that. Once we see the analysis from the consultants, we might find that one or two of the schemes may be worth keeping.

We heard a debate today about private hospitals and whether they should get tax breaks. My point is that if they are private hospitals, they should be privately funded. If they are tax subsidised, they are not private hospitals. These subsidies represent a loss of revenue that could be invested in public hospitals in a coherent way. As we now subsidise private hospitals for the wealthy, who are on the best health insurance schemes, we are losing money that could be spent elsewhere. There is such a crying need for child care facilities that we do not have a problem there.

Deputy Bruton covered patent royalties and it has been a bit of tax scam in the past. We support the investment in films and in pensions. I would like to make a point on something that was stated earlier by representatives of the CIF, if that is not against the rules. Mr. Hennessy gave figures and cited a report by Mercers, which I have seen. He stated that 75,000 our of 80,000 operatives are in the scheme. I have a figure of 65,000. The report by Mercers states that 77,000 operatives are classified as self-employed and that many of these are not self-employed in the accepted sense of the term. They should, therefore, be in the scheme. Essentially, it is a scam. These people are on the fiddle because they should be classified as employees. We think that there should be a ceiling for pensions but that it is currently too high and should be reduced.

Why do we have taxation? We have it to raise revenue to promote economic goals and to redistribute income. Those objectives conflict with one another and the role of legislators is to decide how to balance them. In a booming economy, which we have had since 1994, with just one small in 2000-01, to incentivise the construction industry is absolutely crazy, especially since that industry is disproportionately large in Ireland compared to other countries. Most of those incentives should be terminated now. They should, in fact, have been terminated years ago. There are economic impacts from these allowances that cost a fortune. Sometimes there are gains in revenue, which occur when the allowances stimulate activity which otherwise would not have occurred. We are naturally in favour of those. We are not so sure that we need to stimulate employment in a booming economy so that we have to bring in people from abroad in vast numbers. The displacement effect then occurs, where Irish workers are thrown out of their jobs so that foreign workers, who are not union members, can be employed at much lower wages. They distort the market. Although it is not for trade unions to talk about the market, it is clear that it is being distorted. The allowances can stimulate undesirable activity while depressing other activity that we might like to see. They are inflationary and there are also equity issues. Finally, there is the issue in taxation of incidence. Who actually pays for these? That is a complex issue, which cannot be analysed until afterwards.

It is our view that with the very low rates of income and corporation tax, there should not be so many tax incentives. The effective rates of tax have fallen and 12.5% of corporation tax is actually a maximum rate. Capital allowances are put against that rate and the effective rate is, therefore, very low. We would like to see a full quantification of each tax break done every year. The beneficiaries should be broadly identified and the losers should be broadly identified. I suspect that the losers are among our members. The positive and negative economic effect should also be quantified with an outline of all the assumptions underlying the analysis. There should also be an attempt at an equity impact. How does it affect fairness in the tax system? That is the rationale behind our submission and I would be happy to answer questions on the details.

Deputy Burton

I welcome Mr. Sweeney and I know that Mr. Begg was here earlier but had to leave. I apologise for the fact that the meeting has taken so long. Having listened to ICTU, IBEC and the CIF, all witnesses have asked for figures, analysis and some idea of cost benefit, incidence and so on. As members of the partnership process, have the organisations ever asked for these figures before? I have been pursuing this issue for three years. It is extraordinary that, in the 2003 budget, the then Minister for Finance indicated to me that he received a letter from a doctor in his constituency suggesting that a tax break for private hospitals could be a good thing. He asked that it be tried out by the Minister. Has ICTU raised this in the context of the global ambitions set by partnership for generating economic activity, employment and sustainable growth?

I want to ask a question on the impact of the property-based incentives for rent relief. Would Mr. Sweeney share my concerns that this is driving us into a situation where investors with such allowances are significantly out-competing younger people wanting to buy a home in which to live? This, in turn, is having very undesirable effects on edge of city areas, such as west Dublin and parts of Meath and Kildare, where many estates now seem to have 30% or 40% of investors. It is very difficult to build sustainable communities when the tenants in the estates to which I refer are being turned over every year or even sooner.

The submission states that these are promoting inflation in the building sector. In that context, I am particularly concerned by the recent report of the Comptroller and Auditor General as regards tax fraud in the building industry. He indicated that in a sample study of whether people were employees or self-employed, at least 20% were in the former category. In the 12 cases of tax fraud taken, referred to by the Construction Industry Federation, one of those concerned 297 companies or individuals and another involved more than 20 construction firms, sub-contractors or people involved in the building industry. That is tax fraud on a very significant scale.

Does ICTU see part of the incentive in the tax fraud area as deriving from the fact that construction — aided by the incentives — is booming? There is a great capacity for a section of the industry to be involved in fraud. I presume this impacts very badly on honest construction employees and employers. I shall be grateful if Mr. Sweeney will address that. I am also interested in the provision as regards areas such as nursing homes and child care. Does ICTU see any way in which some of the incentives, if they were to remain, might result in lower prices? In practice, and the same is true of private health care, even with the massive extra provision, prices continue to increase. Why does public policy not concern itself with the impact of the incentives on the people, namely, the ordinary consumers, who buy the services?

Mr. Sweeney

On the first question as regards costs and whether we have sought costing under social partnership, I am not so sure about this at the moment. We have our difficulties and they are not unrelated to the Deputy's third question involving the new term we, in ICTU, keep hearing about, namely, the "displacement" of workers. I will come to that in a moment.

We met the Minister for Finance yesterday and raised the issue of tax incentives with him. Our pre-budget submission contains a summary of our submission to this committee. We referred the full submission to the Minister and his officials and asked that there be quantification. From my own interest in taxation, having written academic papers on the subject in the past, it is remarkable how little information there is on this. Tax breaks are tax expenditures. They are a cost. When I look at the Beacon Clinic Hospital in Sandyford, a gleaming glass and steel edifice, as well as particular units in a well-known hotel chain, I am reminded that I, as a taxpayer, paid for them. These were almost wholly funded by me, as a taxpayer, unintended I suspect. I also know the tax planner involved from my past experience in the tax area.

It beggars belief that the Department of Finance has not the capacity or the interest the costs for taxpayer. It is an issue about which the Deputy is justifiably concerned. There is a problem of expertise within the public service. There is the gross over-privatisation of public interest services. One cannot actually trust the private sector to do the work, as we have seen with certain consultancy firms that are making an absolute fortune and a mess out of a considerable amount of work. Perhaps the public servants are not being paid enough, if that is not an unusual statement. They might have to be, however, as regards certain areas of expertise.

On the impact of investors in property driving people out, I suspect, with the ten-year tax free incentive towards the cost of an apartment or apartment block, this could be one of the unintended cost impacts. It is unfortunate and that is why they should be scrapped. What replaces them, in terms of the old-fashioned system of State provision, does not have to be the corporation flat or the massive complex. We have come a long way on the social provision of affordable housing and there are many schemes that could be employed.

Inflation in construction is certainly happening. As regards fraud in construction, I read the Comptroller and Auditor General's report. Not only have I read it but every union official in the construction industry has been contacting us in respect of it. It was a major issue at the most recent meeting of ICTU's national executive council because many members had read it and were appalled by it. We wonder why it is happening. We have been asking questions on foot of this. The Revenue has changed, as the committee knows. There are no tax inspectors any more. The grades have been abolished, as the committee is probably aware, and the staff are now generalists. I believe there is deskilling within the Revenue as a result. They are losing their collective intelligence in terms of what is happening.

Ms Burton

I was not aware of that. Perhaps other people were but I was not. I would certainly be happy to hear more about what is meant by a generalist in the tax service.

Chairman

I want to make one observation as regards that point. I have heard Mr. Daly, the Chairman of the Revenue, say in recent times that much of its resources have been devoted to special investigations. He announced just last week that next year would be the turn of the construction industry, from the Revenue viewpoint. The Revenue must know in its heart that it has actually had its eye off the ball in this regard. He has now labelled 2006 the year of the construction industry and is trying to make up ground. I just offer this as an observation. Like Deputy Burton, I was not aware of this, either.

Mr. Sweeney

I am no expert on it. I have just inquired casually among ICTU people. The tax inspectors union, which was part of IMPACT, has lost all its members to the general unions. They are not called tax inspectors any more. This allows them to move around the public service. This committee, which has dealt with the public service, knows whether this is a good initiative. I am not in a position to comment. However, I believe it is not such a good thing. The view is being put to us by building workers' union representatives that the Revenue gets approximately 35% of a fiddle figure but in respect of every location. This is the unfair aspect to unfair competition. There are the genuine decent builders, such as Cramptons, Sisks and others, that are unionised. Then there are the others, the cowboys, who make up the figures they pay and phoenix-like, are gone overnight and set up companies for this purpose. While company regulations are better than they were in the past, there appears to be quite an amount of fiddling. If the Revenue is getting some money it seems to be happy with this. I look forward to the Revenue taking the initiative in this area next year, but I live in hope.

I recall the tax marches in the 1970s. Part of the reason for these was the corruption in the building industry. A special Revenue unit, the construction industry division, CID, was established on O'Connell Street to deal with the problem. The eyes of the Revenue Commissioners are definitely off the ball.

On lower child care prices, as with many similar issues, one must consider the potential for unintended impact. For example, when one provides subsidies to the construction industry for homes for first-time buyers, the builder laughs all the way to the bank. People who mind children are not making a fortune and do a tough and vitally important job, even from a labour replacement and life cycle perspective. If Irish people do not start having more children soon, our pension crisis will be greater.

ICTU's pre-budget submission includes a package of suggestions on child care, including a proposal to increase child benefit. While we accept that the Government has generously done so, it must also examine other ways of assisting in this important area.

Deputy Ó Caoláin

I welcome Mr. Sweeney from the Irish Congress of Trade Unions. I concur with most aspects of the ICTU submission to the review and fully agree with its critique on property based reliefs. I seek clarification on one issue, although I appreciate the points Mr. Sweeney made in the preamble to the discussion. I also commend congress on the excellent work it has done in the area of inequalities within the taxation system. Its effort in this regard is much appreciated. I understand that Mr. Sweeney was present for some of the earlier contributions and will, therefore, know from where some of us are coming.

Chairman

I apologise for interrupting the Deputy but a vote has been called in the Dáil. Will we have an unofficial pairing arrangement or should we suspend?

Deputy Ó Caoláin

I cannot enter a pairing arrangement.

Deputy N. O’Keeffe

We should suspend the meeting and invite the representatives from ICTU to reappear on another day.

Deputy Burton

Members should recall that the joint committee is to examine specific tax breaks available for private hospitals. The remainder of this discussion could fit into our deliberations on that issue.

Deputy Bruton

Given that we invited Mr. Sweeney to make a presentation today, I would be happy to return later.

Chairman

The vote will take 15 minutes. I would prefer to suspend and resume later to complete our deliberations.

Sitting suspended at 5.45 p.m. and resumed at 6.05 p.m.

Chairman

We will continue our discussion with Mr. Paul Sweeney, economic adviser to the Irish Congress of Trade Unions. Deputy Ó Caoláin was in possession.

Deputy Ó Caoláin

I thank Mr. Sweeney for his patience with the long wait and the interruption.

I acknowledged my appreciation of the content of ICTU's presentation to the review. I refer to the urban and rural renewal schemes. I listened carefully to Mr. Sweeney's introductory remarks and I am well taken with the points he made. I could instance situations where there were clear benefits as a result of the employment of the schemes in the past. I can equally identify areas that would greatly benefit from some address, not in the interest of the property speculators but in an effort to address disadvantage in both urban and rural communities that have suffered serious marginalisation and neglect. I would like to see this approach being taken. I asked an earlier delegation whether there is an intention to ameliorate this or whether it is intended to examine an alternative that would be focused in the way I have described.

The ICTU submission states that there may have been a case for a very tightly targeted scheme in some deprived urban areas in the late 1980s. I acknowledge that this dates back a bit. However, circumstances have changed dramatically from so many years ago. The same applies to the rural renewal scheme notation which ICTU has in its submission. It seems to be a very absolutist position. Does ICTU see any potential, any acceptable case for the type of approach I have described? If not, what would ICTU suggest instead to incentivise address of areas of great deprivation?

I am only reflecting what ICTU said in respect of many of the areas because I concur with the brief and succinct note on capital allowances for private hospitals. I made that point in the context of an earlier submission and I am in total agreement and comfort with that view. Any other comment I might make would only be saying "Well done". I just ask for clarification and I thank ICTU for its work.

Mr. Sweeney

The Deputy wishes to know if there are clear benefits from particularly focused schemes, such as urban and rural renewal schemes. The problem is that one cannot focus. John Kay, who writes in The Financial Times, is a very interesting writer on economic and business matters. He wrote the definitive book on taxation. Another economist, whose name I have forgotten, wrote about diffusion. Once a tax break is given it generally becomes scattered and loses its impact. Over time it becomes quite ineffective and very expensive. I would not be as absolutist. We are in quite a good economic boom. ICTU does not accept the lower rates of growth because we want them to be as high as possible if we have pay talks. We hope the good times continue and the overall prospect is quite good. Economic incentives are not really needed in good times. It is method that is more blunderbuss than stiletto, if I can mix my metaphors.

The Deputy is correct in his reference to areas of great deprivation. Even with the boom there are areas, such as parts of Tallaght and other areas in Cork, and it is amazing that they still exist when there is so much prosperity elsewhere. I do not know enough about what should be done but these incentives are not the way. The two reports by the Department of Finance will detail the cost of these incentives and I look forward to their publication. Some of that money could be invested directly into the areas — such as into social housing or into cash grants earmarked as a percentage of the total investment — in one way or another. I am not absolutist but I agree that it is time to terminate these incentives.

I have included in the submission a graph of economic growth which really began in 1994. In my view there should have been a decision made in 1996 to terminate them. Those in Government regard it as very difficult to terminate them because everyone wants one.

Chairman

There is talk of the property reliefs being terminated next summer or whenever but all the Government is doing is stopping new people entering them. The people who are in them by next summer may be obtaining tax relief for the next 12 to 14 years. Some of phraseology we are using in this debate is nonsense because what we really need to do is stop new entrants getting on the gravy train for the next 15 years. That point seems to have been overlooked.

Deputy Ó Caoláin

I must excuse myself as I am due to speak in the House on the Employment Permits Bill.

Deputy Bruton

Will Mr. Sweeney elaborate on the ICTU's view on patent relief? We have heard the plea from IBEC in regard to beefing up tax breaks for research and development. Is there evidence that patent relief has been used in a distorted way to attain royalties in respect of false patents?

Tax reliefs for the provision of private hospitals is an issue currently at the centre of public policy debate. Why does ICTU take a different view of subsidising capital expenditure through tax relief for child care facilities compared to subsidising capital investment in nursing care or operations? The delegation contends in its submission that there is a shortage of supply in child care. This is undoubtedly true but one could equally argue there is a shortage of supply in nursing care and operations, although Professor Drumm, chief executive of the HSE, is not convinced in this regard. The Tánaiste and Minister for Health and Children, Deputy Harney, claims such a relief will allow her to decant private patients from public beds. She claims that 1,000 beds provided by the private sector will allow her to free up 1,000 public beds in the same campus, thus attaining public hospital facilities at a lower price than through the direct investment of public money. Moreover, the provision of a private hospital involves only the payment of a subsidy to the provider.

There is an argument that the taxpayer must inevitably subsidise capital investment, in one way or another. We can all assume we will be obliged to subsidise child care after the next budget. We already subsidise nursing home care, albeit in an unjust and intermittent fashion in that some are afforded such care and others not. We subsidise patients with private insurance who get tax relief to have their private operations. What is the thinking that produces ICTU's diametrically different positions on two different aspects of capital investment? I have misgivings about private hospitals but there are issues about the way public hospitals are managed which are of even more concern.

Like Deputy Ó Caoláin, I believe there still may be cases for targeted tax reliefs in regard to certain regional and local needs. For example, a tax relief designed to facilitate the extension of broadband to an area which has had difficulty accessing it could reasonably be promulgated. There may be some scope for retaining specific tax reliefs as part of a coherent regional strategy.

Mr. Sweeney's comments on the minimum tax are in contrast to the CIF's submission that there should be a minimum tax and that all reliefs should be retained. The ICTU contends, however, that the minimum tax could represent a type of Trojan horse. The chairman of the Revenue Commissioners was clear on that when he came before the committee.

I notice ICTU is in agreement with IBEC in advocating a tax allowance on depreciation. Does this represent a radical change in tax policy in that selected tax allowances which run over a period of eight or 30 years would be related to depreciation? If a computer depreciates in four years, for example, the owner would get a write-off over four years in accordance with accounting depreciation. Is there a growing consensus around shifting to depreciation and abandoning specialised and accelerated reliefs?

Mr. Sweeney

Deputy Bruton's first question related to patents. Without being specific about the beneficiaries, I refer to the constituency of the Deputy who has left. A certain enterprise there was run by two brothers who used patents to supreme advantage to avoid paying income tax. This enterprise was terminated by the Revenue, probably belatedly as happens in so many instances. It represented a significant abuse in that they essentially paid themselves through the patent.

The issue of patents and intellectual property is incredibly complex even for a lawyer. I do not claim any such competence but am slightly wary that the law in this regard is too generous. A major debate on intellectual property is taking place between the United States and Europe. I understand Ireland has taken the side of the United States, essentially the side of multinationals against open sourcing on computers and so on. There has been abuse in this area and it must be examined by those with the relevant expertise.

Deputy Bruton asks whether there is a contradiction in ICTU advocating capital allowances for child care but not hospitals. There is an urgent need for improved child care facilities and we are experiencing a great deal of pressure from members on this issue. IBEC is likewise clamouring for similar improvements. Our pre-budget submission, which we will not release until tomorrow, contains a range of recommendation in the child care area, including extended maternity leave, increased child benefit——

Deputy Bruton

Some people are not members of a union and not employees but happen to be ill. Is this what is at issue? Is there momentum in the child care issue because it affects ICTU's members and IBEC's workers but a different view is taken in regard to a sick person who is neither a union member nor a worker?

Mr. Sweeney

No, that is not the case. It is inevitable that both ICTU and IBEC will focus on the needs of those they represent. However, those who are sick are entitled to free public care in any case. We all have that basic right. Our worry is that there seems to be an ideological drive towards building a so-called private hospital sector which, instead of being entirely private, will be underwritten by tax breaks. This takes from the holistic and coherent approach that should pertain in regard to the health care system.

I cannot resist making a subsidiary point on hospital management. ICTU will shortly publish a major report on the health sector by Professor Dale Tussing, author of a previous major report some 20 years ago, and Maev-Ann Wren. Our general secretary, Mr. David Begg, has seen it but the rest of us have not. In the event of a new social partnership agreement, there may be elements of this report we do not like. Unions may be part of the problem in the health service and it may be necessary for us to reform as we did during the first social partnership agreement. We must all work together to improve the health service. I understand this report, which represents an exciting contribution to the health care debate, condemns the leakage of public money into the private sector through subsidies.

We have concerns regarding the introduction of a minimum tax. There has been some debate on the question of a flat tax but a minimum tax is a different matter. In the United States, the minimum tax became the maximum tax. That is our grave concern. As stated in our submission, the majority of people say that they should not pay more than the minimum, whatever that may be.

There is no tax allowance relating to depreciation. The term used by the Revenue is "wear and tear". I referred to that at the outset because we have heard from people who buy computers and associated equipment, which it takes seven or eight years to write off. My nephew, who is a computer buff, was in my house yesterday looking at my three-year old computer and he described as ancient. If that is the case, why should businesses be penalised? There is an interesting debate on productivity growth between Europe and America, part of the which involves the fact that in the USA computer equipment depreciates at a much faster rate and this encourages greater use, with a consequent increase in productivity. It is an important national policy.

I included the matter in my submission because I had been informed by a number of people that depreciation of computer equipment does not take place quickly enough here. We are very keen that businesses should be allowed to depreciate legitimately to facilitate the purchase of up-to-date plant and machinery which leads to increased productivity. It is important to make that point because we may otherwise sound somewhat too focused on the other points we raised.

Chairman

We will conclude the meeting with thanks to Mr. Sweeney for attending. We apologise for the late hour at which we are adjourning but that is due to the length of the meeting.

Mr. Sweeney

I thank the Chairman.

The joint committee adjourned at 6.25 p.m. until 3 p.m. on Wednesday, 9 November 2005.