In discussing this Finance Bill it would be instructive to set our deliberations against the background of economic events over the last few years. It is in this way that the economic policy informing the Bill can best be appraised and the continuity of the Government's efforts to sustain economic growth and employment appreciated.
The world economy has just come through its most difficult period since the 1930s. During the past few years it has been hit by an unprecedented combination of inflation and recession, and throughout the Western world Governments have been fighting on many economic battle-fronts. Strategies had been developed to deal with one or more of the problems facing us, but it has proved immensely difficult to contend with the alliance of enemies which has confronted all of us since 1973.
Some would have us believe that these problems were peculiar to Ireland, but this is far from the truth. The recession in economic activity hit everybody, unemployment rose to postwar peaks throughout Europe, inflation accelerated worldwide, reaching crisis proportions in several economies, and the international monetary system was shaken to its foundations.
The primary aim of the Government's economic policies during this traumatic period has been to ensure that the Irish economy would achieve a reasonable rate of growth, and directly associated with this, provide the highest level of employment which was possible in these most difficult circumstances.
The chief weapon we have used to fight this battle was fiscal policy. Since the onset of the recent recession the Government pursued a policy of deficit financing in order to mitigate the deflationary impact of external developments on domestic growth and employment. Without such a policy domestic demand would have fallen well below the level actually achieved. This would have meant a drastic reduction in general living standards accompanied by wholesale unemployment with all the human misery which this would have implied. Our decision to seek to avoid such consequences by an active fiscal policy has been amply justified by events.
By these means we successfully prosecuted the battle for a reasonable rate of growth despite the depressed external climate. In 1975, the year of deepest gloom, national output was higher than in 1973—a distinction which eluded the mighty German and American economies, not to mention the European Community as a whole. In 1976, we were able to join the general movement out of recession, achieving a growth rate of over 3 per cent, which meant that Ireland had come through the crisis period with a better performance than the rest of the Community.
Those who wish to denigrate our achievements in the field of economic policy point to the current high level of unemployment as evidence of our alleged failure to manage the economy well. Yet, while comparing us to other countries on other counts, they conveniently neglect to do so in this instance. This is a universal problem —witness the massive rise in unemployment everywhere in the past three years. Indeed, the leaders of the major industrial economies meeting recently in London stated that their "most urgent task" was to reduce unemployment.
The fact, however, is that the unemployment rate here rose by less than in other countries, some of whom were able to export their unemployed whereas we, on the other hand, have ceased to do so. In fact, substantial progress has been made on the employment front. Industrial employment in December last was over 5,000 higher than a year earlier while unemployment is currently showing year-on-year declines for the first time in three years.
In tackling inflation we had to contend with unprecedented external inflationery forces which were exacerbated by the upheavals in the currency markets. These forces inevitably communicated themselves to us through our external trade. Yet we acted strongly on the domestic influences— on the incomes and fiscal fronts. Our constant discussions with the social partners have borne fruit in income moderation and we have made judicious use of consumer subsidies and reductions in taxation to slow the rate of price increase. These policies have produced concrete results in the significant reduction in price rises last year and in the encouraging trend which has emerged more recently.
On the budgetary front criticism has been voiced about the fact that the State's current account is still in the red. I make no apology for this because it resulted directly from our efforts to bolster growth and employment, a policy which I have already said has helped us weather the economic storm better than most. Indeed, it is relevant to ask here if the Exchequer would be in a better shape to-day if more cautious financial policies had been followed. Quite frankly, given the depressive effects which that would have had on economic activity generally, I doubt it.
This year we faced in many respects the same choice in formulating economic policy. We could have decided to concentrate on sharply reducing the budget deficit but this could have snuffed out the nascent buoyancy of the economy. Alternatively, we could have gone all out for expansion— based on profligate borrowing. This might have yielded a spectacular growth rate in the short-run but would have done irreparable damage to our medium-term prospects for increasing output and employment.
Neither of these two extreme courses, nor anything like them, would have been in keeping with the balanced approach which the Government have had to economic affairs since we assumed office. In earlier years we stepped in, in an endeavour to take up the slack when it appeared, and this year we deemed it necessary to reduce our direct involvement when the revival in economic activity at which our policies were directed began to emerge. But in the latter case we saw it as essential to do so in such a way that it reinforced the recovery and not stunted it. I think I can safely claim that the measures contained in the present Bill will do just that.
The tax concessions, both personal and corporate, will heighten the incentive to individual and collective effort. Together with the moderate wage agreement which they helped to secure and the job-creation measures which the budget provided for, they will contribute greately to increased output and employment. When combined with the higher public capital programme they will spark off the growth in investment which is essential to self-sustained expansion. Above all, however, they will help us recapture and renew our confidence in our own ability to generate the dynamic of economic progress, the confidence which was so rudely shattered by the recent slump.
Last year we shook ourselves out of the slough of despond into which we had been plunged. We managed to raise our national output very creditably, to cut the rate of inflation substantially and to turn the rising tide of unemployment. This year, with the spur of the measures enshrined in this Bill, we shall do even better.
I shall now deal briefly with some of the principal provisions in the Bill. As Senators are already in possession of an explanatory memorandum, it is scarcely necessary for me on this stage of the Bill to go into great detail.
Section 1 is concerned with the amount of the tax allowance given to a taxpayer in respect of a dependent relative. Heretofore it was usually necessary to provide every year that this allowance would not be reduced because of increases in the relative's non-contributory old age pension. Section 1 is designed to obviate such repetition by a general provision to the same effect.
Section 3 provides for an amendment of a purely technical nature to take account of the enactment of the Corporation Tax Act, 1976. In the absence of the provision made here solicitors would cease to enjoy the protection afforded to them by section 59 (3) of the Finance Act, 1974, which limited the information which could be required of them.
Section 4 provides for a deferment of two months of the date for payment of certain Schedule D tax. This change will be of help to individual traders and will also give more time for settlement of liabilities before they have to be paid.
Sections 5 and 6 contain the principal changes in the personal tax structure announced in the budget. These changes comprise substantial reductions in the rates of tax, together with changes in the bands of income to which the tax rates apply, and also significant increases in personal allowances. The new structure will benefit every individual taxpayer in the country. In addition, however, as foreshadowed in the budget, a special relief is proposed in section 7 of the Bill to improve still further the financial situation of some 10,000 of the least well-off pensioners. In fact the provision goes beyond what I announced at budget time. Section 7 accordingly provides that persons aged 65 years or over whose incomes are less than certain limits will not be liable to tax. These limits are £1,000 for single or widowed persons and £1,800 for married persons. The effect of these exemption limits is that a person entitled to age allowance will be free of tax if his only income is a social welfare pension or income of the same amount from a source other than social welfare. Moreover, as most social welfare pensions are less than the limits mentioned, many pensioners will be able to have some amount of other income without having to pay tax.
Pensioners with incomes slightly greater than the limits will qualify for "marginal relief" under the section. This will reduce the tax payable to one half of the excess of total income over the relevant exemption limit.
Senators will be aware of the changes in the farming taxation measures which I announced in the Dáil.
These modifications of the scheme announced in the budget concern the dates for payment of tax, the deduction for wages and the method of assessing the tax liability of traders and professional people who own farm land. The revised scheme is in keeping with the Government's aim of collecting a fair share of tax from farm profits without inhibiting the developing of farming. The dates for payment of tax will be 1st September and 1st January—as for other Schedule D taxpayers. This means that tax on farming profits will be paid in respect of the income tax year in two instalments, instead of in one as earlier proposed.
A deduction from notional income will be given, with a view to stimulating employment, in respect of wages paid to employees registered for PAYE and social welfare purposes. There has been some criticism of the small range of deductions allowed under the notional system. If further deductions were to be allowed the multiplier would have to be increased above its present level, which is only about three-quarters of what a full multiplier would be. The allowance of further deductions would also have the effect of complicating the system and giving scope for evasion. In any case, those farmers who are not satisfied with the notional assessment may appeal on the basis of accounts.
The farming profits of landholders who have another trade or profession will be assessed to tax in the same way as their trading or professional income, that is, on the basis of accounts related to the preceding year.
Only half of the proposed tax on farming profits will now be collectible in the calendar year 1977. The yield in 1977 is expected to be about £15 million to £16 million. The balance will be payable in the income tax year 1977-78. The ultimate revenue yield, less the £4 million cost of the labour concession, will be comparable to that originally envisaged.
Section 9 lowers the rateable valuation threshold for liability to income tax on farming profits from £100 to £75.
Section 10 removes the rateable valuation threshold of £50 which, since 1974, applied to landowners who also carry on a trade or profession. Landholders who carry on a trade or profession on a self-employed basis will now be liable for income tax on their farming profits, regardless of the rateable valuation of the land. An employee who owns land will not be affected by this section, which applies only to the self-employed.
Section 11 provides for marginal relief for farmers with rateable valuations between £75 and £84. A farmer who has a rateable valuation of £75 will pay only 1/10th of his full liability, with £76 RV 2/10ths and so on up to 10/10ths at £84 RV. About 3,000 farmers will benefit from marginal relief, out of 6,500 farmers becoming liable for the first time.
Section 12 provides that farmers— other than those who carry on another trade or profession—are to be charged to tax on the basis of a notional income calculated by applying a multiplier of 65 to each £1 of rateable valuation. Senators should note the fact that, allowing for the deductions from notional income, the full-value multiplier based on 1976 incomes would be about 88 and, based on 1977 incomes, would be in the region of 110. Deductions will be allowed from notional income in respect of rates on land and wages paid to employees who are registered for PAYE and social welfare purposes. The normal personal reliefs, including that for interest payments up to £2,000 will also apply. Taxpayers who opt for actual accounts will, of course, be entitled in due course to the deductions for higher interest payments and other business expenses if incurred. Section 12 also provides for appeals against the notional assessment. A farmer who appeals may present accounts related either to the preceding year or to the current year.
Section 13 outlines the procedure for appeals against the notional assessment. On 1st September, 1977, the amount payable will be one-half of the tax on farm profits as notionally assessed. If a taxpayer appeals against the notional assessment he may, in relation to the second instalment of tax payable on 1st January, 1978, specify the amount of tax he thinks should be payable on the basis of accounts and, pending determination of the appeal, pay only that amount. If the amount of tax paid in the two instalments is lower than the tax assessed but is 80 per cent or more of the amount determined on appeal, no interest charge will arise. If, on appeal, the taxpayer in question is shown to have paid too much tax, the excess will be refunded promptly with interest.
Section 14 provides for free depreciation of capital expenditure incurred on or after 6th April, 1977, on the construction of fences, roadways, holding yards or drains or on land reclamation. This provision applies where a farmer's income is determined on the basis of accounts.
Chapter III and IV deal with corporation tax.
The development of a favourable tax environment in which corporate enterprise can grow and prosper is the essence of the Government's corporate tax strategy. This year's budget not only continues for further periods generous existing industrial tax incentives but, notwithstanding the severe constraints on Exchequer resources, also adds substantial new reliefs in order to stimulate corporate growth in new ways. By such fiscal measures the Government are actively encouraging business activity towards the achievement of the overall national objectives of rapid and sustained economic growth.
Accordingly the Finance Bill provides that stock relief and accelerated capital allowances will be continued for a further period and, as well, provides for other modifications deemed desirable in order to boost corporate growth. Thus, the present Bill provides, in Chapter III of Part I, for a cut of 5 percentage points in all of the existing corporation tax rates and also raises the entry points at which small companies become liable at higher rates up to the top rate of corporation tax. This incidentally is the first reduction in the main rate of company taxation since its level was fixed at 50 per cent over a decade ago. In the case of small companies, the new top rate of 45 per cent entry point is a large increase in the level which was raised substantially as recently as last year on the introduction of corporation tax. These concessions are of general application and should have valuable stimulatory effects on enterprise. I have been gratified at the response which they have received from the business sector.
The Government gave special consideration to the motive potential of manufacturing industry which caters mainly for the home market. The desire to encourage early and major growth in this area is demonstrated by the provision, in Chapter IV of Part I of the Bill, of a special 25 per cent corporation tax rate for the three years 1977 to 1979 for manufacturing companies which meet specific growth targets by way of increased output and employment. In view of the growing volume of home market demand across wide ranges of manufactured goods and the high degree of import penetration in recent years with serious consequences for employment here, it is the Government's hope that a more favourable tax environment for home manufacturers will encourage them to go for growth, thereby increasing their output and employment. These are very worth-while opportunities. Export activity of course already benefits from major tax concessions.
The special 25 per cent corporation tax rate is a prize which can be obtained by any manufacturing company which makes the necessary efforts to win it. All qualifying companies will get the benefit of this special rate in respect of all of their income. The minimum targets which have been set for 1977—a 5 per cent increase in volume of sales and a 3 per cent increase in employment, both over 1976 levels—are modest ones in present circumstances and so we are confident that manufacturers will do their utmost to exceed them by bringing forward expansion plans for implementation this year so as to get the benefit of the 25 per cent corporation tax rate. As I have already indicated in the other House, no manufacturer who does so will be disadvantaged when the targets for 1978 and 1979 fall to be settled in due course.
Having given the most careful thought to representations on the matter, I proposed the relaxation of the "own manufacturing" requirement from the 95 per cent originally envisaged—and provided in the Bill as published—down to 90 per cent of trading income. This change was agreed to by Dáil Eireann and seems to be as far as one should reasonably go. Thus as the Bill now stands, a qualifying company must not have non-trading income of more than 5 per cent of its total income and must have income from own manufacture of at least 85½ per cent of its total income, leaving 9½ per cent of the total income instead of 5 per cent as originally intended for other trading income such as income from distribution, and so on.
While it is only reasonable to expect firms to have to go to some trouble to support their claims for the special new incentive, I can assure the House that the Revenue Commissioners will administer the incentive in a very reasonable manner.
The spin-off benefits of successful claims for the incentive will be farreaching both in the short term and in the longer term. By expanding their home market base as quickly as possible, the manufacturers concerned will of course also be able to press ahead more securely with developing export activity, thereby generating new funds for further expansion of home employment and investment. All other sectors of the economy will benefit as a result of success on this front.
Chapter V contains certain capital gains tax provisions which will reduce the liability to this tax of certain unit trusts and unit-holders. The concessions are aimed at avoiding any element of double taxation of such trusts.
The effect of sections 33 and 35 is to reduce from 26 per cent to 13 per cent the capital gains tax rate charged on gains made by a registered unit trust and to provide similarly for gains made by a unit-holder of that trust. Total tax will therefore be at the normal rate of 26 per cent. Section 34 exempts units held by an assurance company in a unit trust from capital gains tax, the tax being chargeable only on the gains made by the trust involved.
The grant of stock relief for a further year is provided for in section 43 and Part V of the First Schedule. This relief will not now be recoverable from beneficiaries except in cases where stock values decrease or where a trade ceases to be liable to Irish tax. Furthermore, in order to prevent abuse of the relief which is essentially of a simple nature it is necessary to provide certain safeguards. These safeguards include a measure to prevent the creation of artificial repayment claims through the interaction of various reliefs and they also counter claims to relief in respect of increased stock levels which have already been relieved.
Section 45 provides for the reduction of the rebate payable to brewers in respect of the use of Irish-processed cereals in beer manufacture, while section 46 provides that the rate of drawback on exported beer shall correspond to the level of the current rate of excise duty on beer, with effect from 1st September, 1977.
These adjustments arise out of our EEC Treaty obligations. With a view to offsetting as far as feasible the ensuing cost to domestic industry, the present scales of duty on brewers' licences which are related to annual outputs are being replaced by a flat rate of duty of £50 a year in accordance with the provisions of section 44. This new rate of duty is also being applied to distillers' licences.
Section 47 provides for the refund of the stamp duty paid on certain office building contracts if the office building is completed by 31st December, 1978, and will, it is hoped, help to promote activity and employment in this important branch of the construction industry.
Section 48 exempts from stamp duty transfers of property from Sir Alfred and Lady Beit to the Alfred Beit Foundation. Sir Alfred and Lady Beit deserve the thanks of the nation for the munificence in transferring to the foundation a gift of Russborough House, 250 acres of surrounding land and the proceeds of the sale of a further 340 acres of land. Indeed it is understood that Sir Alfred may provide further funds in order to get the foundation under way. In addition, the bulk of the contents of the house will be made available to the foundation on loan. The contents cover an art collection which is world-renowned and is regarded as one of the most valuable in private hands anywhere in the world.
Section 50 extends exemption from wealth tax to certain private non-trading companies which are holding companies for individuals who control trading companies. This provision is designed to exempt genuine commercial arrangements from the impact of wealth tax.
Section 51 will permit the grant of unilateral relief from double wealth taxation where double wealth taxation arrangements have not yet been concluded with other states.
Finally, I might refer to some provisions which relate to a number of taxes. Section 36 ensures that a child adopted under the Adoption Acts will be regarded as a "child" for all the purposes of tax legislation. Section 53 provides that visits to the State by an individual who donates property to the State and leaves the State to become resident elsewhere will be disregarded for tax purposes if the visits are to advise on the management of the property donated.
I commend the Bill to the House.