Wexford): Reflecting our employment needs, the need for competitiveness in the economy is the primary theme running through the Programme for a Partnership Government, and also the main focus of the budget, which is the first major step in the implementation of the programme.
The budget was framed on the principle that the overriding national priority is jobs. It was a pro-jobs, pro-business budget. At its very core were measures to generate and sustain employment by improving the longer-term growth potential of the economy and by promoting local enterprise and wealth creation. The second key element of our budget strategy was to send an unequivocal message to the markets that we will not relax our strict financial discipline, thereby creating the conditions for lower interest rates and stability in the exchange rate markets.
Since the publication of the book of Estimates on 17 February, interbank rates have fallen sharply. The key one month rate has fallen from 15.25 to 11 per cent, a reduction of over four percentage points. This reduction and a fall of almost two percentage points in official interest rates over the same period has allowed for reductions, in two stages, of up to two percentage points in retail interest and mortgage rates. Only one of the four major banks has so far announced the second stage reduction and I urge other banks and the building societies to follow this lead as soon as possible. There is no justification whatsoever in delaying the passing on of reduced interest rates to our already hard pressed mortgage holders by the financial institutions. The economy needs lower interest rates and any delay is damaging to our economic prospects.
The jobs fund was heralded in our Programme for a Partnership Government. The budget provides £260 million for this fund in 1993, comprising £148 million of expenditure related to the Cohesion Fund, £25 million for the new county enterprise partnership boards and an addition of £87 million to the Exchequer funding of the remainder of the public capital programme. In all, the year-on-year increase in capital spending will total almost £500 million — up by more than one quarter on last year's level.
This entails a major expansion in investment in environmental infrastructure and in transport, including roads, rail, commercial ports and airports. These projects as well as giving many new jobs in the implementation phase, will also underpin the longer-term potential for growth in the economy.
The county enterprise partnership boards, for which, as I have already mentioned, £25 million is provided, will have a mandate to support local initiative through assisting the start-up of small enterprises. They will take over responsibility for the promotion and assistance of local development plans in consultation with community organisations, the social partners and the public sector at a local level. The boards will also have responsibility for the promotion of tourism locally. The purpose is to tap into the considerable potential for enterprise, wealth and employment creation that exists at local level throughout Ireland, but which cannot always be harnessed to the fullest extent under existing structures.
In addition to State funds, the Government is making arrangements for contributions to the boards from financial institutions. The Government is confident, on the basis of commitments to date and discussions to be completed, that more than £100 million will be made available in this way.
The combination of the public capital programme, the Cohesion Fund expenditure and the additional expenditure for the county enterprise boards is by any standards a very substantial investment stimulus to the economy and a considerable boost to employment.
The pro-jobs bias in the budget does not end there. On the taxation side also there are measures that are decidedly pro-business. For instance, the business expansion scheme has been extended and improved, with the lifetime cap being lifted with immediate effect. The urban renewal incentives to allow delayed projects to qualify have also been extended. The urban renewal incentives are also available in Temple Bar and the Custom House Docks area until 5 April 1996 and 24 January 1997, respectively. Stamp duty has been adjusted to assist the building industry generally.
As part of the adjustments to the VAT structure announced in the budget, the Government ensured that particular account was taken of our employment needs by reducing the rate applicable to certain labour intensive services, such as garage repairs, dry-cleaning and hairdressing. All such services are now on a reduced VAT rate, which is 8.5 per cent below the standard rate. The rates applicable to flour, confectionery and non-chocolate biscuits were also substantially reduced in recognition of the employment intensive nature of the sectors concerned and of the exceptional rate differential which existed vis-a-vis Northern Ireland for the products involved.
The tourism sector can also be expected to benefit from the initiative in relation to the short term car hire fleet which was announced, as well as from the standstill for the excises on petrol and drink. The continued restraint shown in relation to the mainstream excises reflects the Government's awareness of the need to avoid trade diversion and associated job losses within the radically new environment of the EC Internal Market. I intend to deal separately with those areas where VAT increases were imposed and which have been the focus of much selective criticism.
The budget also contained measures aimed at improving the flow of equity finance to Irish business, such as the introduction of special investment accounts and the extension of the BES. The Government is keenly aware of the importance of equity investment for all Irish companies, whether large or small. The special investment accounts will enable those who invest in Irish equities, either directly or indirectly, to avail of a very favourable tax rate of 10 per cent. To benefit from this low tax rate, the funds will be required to invest 40 per cent of their assets in Irish equities this year, rising to 55 per cent in 1996. To ensure that the funds are not focused completely on larger companies, there is a further requirement that 6 per cent of assets are invested in smaller companies in year one, rising to 15 per cent in 1996. There is no requirement that the equities held have to be in quoted companies. Indeed, there is an extra incentive to invest in BES-type companies as the income and capital gains from these companies will be ignored for tax purposes.
As was pointed out in the budget speech, the largest group of investors in Ireland are pension funds. The total value of Irish pension funds' assets is now approaching £10 billion and their total annual net cash flow and investment income is of the order of £750 million.
The Government believes that Irish pension funds have a national responsibility to take the needs of the Irish economy, particularly the need for more jobs, into account when making their investment decisions and that they should make a greater contribution to the development of employment in Ireland. These funds should, therefore, invest as much as possible of their assets in Ireland and should reverse the trend of recent years, which has seen the Irish share of their total assets dropping from 79 per cent at the end of 1988 to 68 per cent at the end of 1991. Given that employer contributions account for the bulk of the annual cash flow of funds, there should be an obvious self-interest on the part of the pension funds to help Irish business. This will be to the long term mutual advantage of both Irish companies and employees.
In order to assist this process of Irish investment, the Minister for Finance has already set in train a process the aim of which is to set up a suitable mechanism for getting the pension funds to invest more in Irish job-creation projects, particularly in the manufacturing sector. It is his intention that this new initiative will come into operation within the next few months and thereby give an early boost to job creation in the areas selected. In pursuance of this, the Minister for Finance will be meeting with the Irish Association of Pension Funds later this week for further discussions on the matter.
Apart from the capital expenditure and the taxation incentives I have listed, there is a further and pervasive pro-enterprise thread running right through this year's budget, and, indeed through its predecessors in recent years, and it is this: the firm control of the public finances and the steady improvement in the national debt ratio. This firm fiscal discipline is vital to investment, to long term growth, to enterprise and to employment consolidation and creation. In addition to the establishment of a climate conducive to enterprise through the adoption of appropriate taxation and macro-economic policies, the Government is committed to giving a renewed impetus to the task of developing and promoting industrial growth in line with the recommendations of the Culliton report. There have already been changes in the structure of government to give a sharper focus to industrial and marketing policies. Other changes in the structure of the promotion agencies and further policy initiatives are outlined in the Programme for a Partnership Government and will be implemented over a period of time.
Inevitably, attempts have been made to denigrate aspects of the budget. Two areas in particular of the taxation measures announced have been taken out of the context of the balanced overall package and selected as the focus for adverse comment. These criticisms relate to the necessary increases in the VAT rate applicable to certain goods and services and to the implementation of the temporary income levy.
I will deal with each of these areas in turn. First, however, I make the general point that some measures to increase revenue were inevitable if we are to maintain a prudent level of borrowing and if we are to remain on course for full participation in the Economic and Monetary Union. Discipline was also crucial to securing the downward movement in interest rates that has begun to emerge in the last few weeks. In that context, the Government looked mainly to taxes on spending and assets, so as not to impose any unnecessary burdens on the rewards for effort, enterprise and investment.
The primary purpose of the various VAT increases announced in the budget was, of course, to raise revenue. However, the changes involved were also necessary to achieve compliance with Community law and have contributed to a considerable simplification and consolidation of the overall rating structure.
Most severe criticism has been made about the effects of the abolition of the 10 per cent and 16 per cent rates. Among the areas previously taxed at 10 per cent were hotel and holiday accommodation, newspapers, building services and short term car hire. These are taxed at the 12.5 per cent rate from 1 March. In the majority of these areas, measures were taken to soften the impact of the increase. For example, the increases in respect of accommodation and short term car hire will not affect contracts already entered into prior to 25 February last.
In the case of building, measures are being taken to ensure that the local authority new house building programme and the voluntary housing programme are not adversely effected by the rate increase. To cushion the effect of the increase on the cost of new homes, the grant to first-time house buyers was increased from £2,000 to £3,000. Finally, where house building contracts existed prior to the budget, the earlier 10 per cent VAT rate will continue to apply. These measures demonstrate the Government's awareness, despite pressing budgetary demands, of the need to implement the increases as sensitively as possible and with the minimum of disruption.
Under EC law, only one VAT rate may now exist in excess of an agreed Community standard rate minimum level of 15 per cent: this meant that our transitional 16 per cent rate had to go. Budgetary circumstances dictated that the standard rate should remain at 21 per cent on this occasion and that certain categories such as adult clothing and footwear and telecommunications services, previously taxed at 16 per cent, should also be taxed at that rate. While it would have been possible from a legal standpoint to temporarily shift these activities to the lower 12.5 per cent rate, as was done in certain cases of certain labour-intensive service industries mentioned earlier, it was simply not possible because of the very difficult budgetary situation. Furthermore, in all fairness, it would have to be pointed out that, in his 1992 Budget Statement the Minister for Finance clearly stated that the 16 per cent rate was a temporary one and that the activities in question were destined to be liable at the standard rate.
The Government recognise that the increases concerned in some instances will add to difficult trading conditions but a significant contribution towards budgetary correction from the indirect tax area was unavoidable on this occasion. Naturally, the sectors facing rate increases feel aggrieved: the Government, however, has to take a view of what is best for the economy as a whole in terms of promoting economic growth and the sustainable jobs which flow from it. It is unreasonable for those who focus solely on the increases involved to do so without having regard to the wider employment-supportive nature of the budget or to say how they would have chosen to raise the additional revenue involved. There are no longer any easy options in that regard.
The Government did not lightly decide on the introduction of the income levy. The measure became unavoidable only at the end of a long and difficult budgetary exercise, in which both the expenditure and revenue aspects of the deficit equation were subjected to rigorous scrutiny. In the end, it was not possible to identify a realistic alternative to the temporary levy. I totally reject the argument that the levy represents a tax on employment to a greater degree than any of the other taxes, whether on income or expenditure, which are already applied throughout OECD countries in order to finance the range of State services which are essential to the maintenance of the social and economic fabric of modern society.
In reality, the levy will impact on employment only if taxpayers seek to compensate themselves through higher charges and wages rather than accepting that they should make a limited contribution towards the exceptional employment and other costs incurred through the protracted slowdown in the international economy. That would be an entirely illogical reaction and I am confident that, taking account of the universally accepted need to maintain our international competitiveness, the limited sacrifice involved will be accepted as such, particularly when viewed against the background of the substantial increases in real take-home incomes that have been secured under the Programme for National Recovery and the Programme for Economic and Social Progress.
I conclude by saying that high interest rates damage confidence and investment, and disimprove employment. The responsible and balanced nature of the budget this year has already been a major contributory factor in getting interest rates down. It is only in such economic conditions that real sustainable jobs will be generated in our economy. Unemployment and other problems can and will be tackled. I look forward to the support of the Seanad in our endeavours to provide the framework in which such progress takes place.
Members have put forward many interesting suggestions during this debate. Senator Quinn put forward some radical and positive suggestions on tourism, as Senator Magner has acknowledged. If there were more radical suggestions such as that from the other side of the House they would be more important and productive than criticising one area of VAT reductions first for the sake of criticising.