I get many suggestions from my eminent colleagues, especially from those in the Opposition, on how I should do away with taxes, but they never give me any alternatives. They also write another letter in the same post looking for more expenditure. Unfortunately, until we learn the basic lesson, which is not even an economic one, that if we want to reduce our level of taxation and borrowings, which we will have to do, we have to stop looking to increase expenditure and all the things that drive it forward.
I am glad to have the opportunity to reply to this debate tonight. It is important first for me to set down a few basic facts about what we are trying to achieve on the taxation front. Resolving our critical unemployment situation must be our overriding economic and social objective. This requires our efforts and policies to be firmly focused on maximising the number of sustainable jobs. Ensuring that taxation policy is pro-employment is therefore essential. This means that the process of tax reform, now under way for the last seven years, which is aimed at increasing the rewards and incentives for work and reducing the cost of employing workers, must be continued.
It has been recognised by many national and international bodies who have commented on the area of tax reform that personal income tax in our country impacts most negatively on enterprise, incentive and employment. Despite the considerable progress already made, it remains an aspect of our tax system in need of positive reform. In particular the burden of income tax can bear heavily on those with modest incomes. In part this is because the proportion of all tax which must be levied on income is high, but it also reflects the structure of income tax. The point at which individuals begin to pay tax is relatively low and, more importantly, the level of income at which the higher rate of tax comes into play in comparatively modest.
The Government is faced on a daily basis with urgings to reduce tax in this area or that. However, few of those who seek tax reductions are willing to be specific as to which of the services from which they benefit they are willing to forego. The plain fact is that tax reliefs cost money. This money must come from somewhere, whether from expenditure curbs or alternative modes of taxation. With our level of national debt, borrowings on any substantial scale for any purpose is not a realistic option, either now, in the medium or long term. There is a clear onus on those who call for major tax cuts, be they in the area of income tax, PRSI or corporation tax, to cost such proposals and to specify where they think the money to fund these costs should come from.
I would ask those who proposed tax reform not to play the tired and predictable game of "Yes, but ...". This involves ardent declarations of support for the broad concept of tax reform. They are the kind of people who come on the radio or the television urging tax reform, believing it is manna from heaven, the panacea to all of our problems and the road to utopia. If we would only bring in tax reform, all of our problems would be solved. That is followed by the heartfelt denunciation of the particular changes that ensue from putting an effective tax reform package into place. The practical reality is that any revenue foregone in the process of tax reform must for the most part be recouped within the overall area of taxation. This means, in essence, increasing other taxes, imposing new forms of taxation or broadening the tax base generally. There is no getting away from the fact that there is no such thing as pain free tax reform.
It bears repeating and underlining that significant progress has been made in recent years in the area of tax reform. Base broadening measures have been implemented, especially in corporate, capital and indirect taxation. This has enabled the standard rate of corporation tax to be cut by 10 percentage points, from 50 per cent to 40 per cent, and the standard rate of VAT to be reduced from 25 per cent to 21 per cent.
Considerable progress has also been made towards improving the income tax system, despite the constraints of the serious imbalance in the public finances. The standard rate of income tax has been cut from 35 per cent to 27 per cent and the top rate from 58 per cent to 48 per cent, substantially reducing marginal tax rates for the majority of taxpayers and the number of rates was also reduced from three to two. In addition, personal allowances have been increased and the standard rate tax band has been broadened. The general income tax exemption limits, below which no income tax is payable, have been increased and a child addition was introduced into the exemption limits in the 1989 budget and considerably improved on since then.
This year's budget continued the process of tax reform. It had two particular focal points: first, it continued to address the most acute problems in the area of personal income tax and, second, to improve the fiscal environment for business, with special reference to the position of small and developing enterprises. By any standards, the reliefs in this year's budget in mainstream income taxation were substantial. They reduced the overall take from income tax by almost £200 million in 1994 and by over £330 million in a full year compared to what it would be otherwise.
The budget increased the personal allowances by £175 for a single person and £350 for a married couple, the largest single increase in personal allowances since 1984. The standard rate band was extended substantially with the result that the thresholds for the higher tax rate in the case of most employees, before any allowance is included for discretionary reliefs, have increased to around £22,200 if married and to over £11,600 if single.
These measures reduce considerably the burden of taxation on low and middle income earners. Moreover, they result, notwithholding other changes, in over 40,000 fewer taxpayers being on the top rate of tax.
Finally, to help maintain and create employment, especially in labour intensive sectors, a differential employers PRSI contribution rate structure was introduced. A reduced rate of 9 per cent is now levied on incomes up to £173 per week. The obligation for employers to pay the cost of the health and employment and training levies on behalf of employees with medical cards has also been removed.
The phasing in of standard rating of mortgage interest reliefs over a four year period demonstrates the Government's commitment to a well thought out and consistent programme. Our commitment to redirecting the proceeds of standard rating towards broadening the standard rate band is clear evidence of our belief in long term and lasting solutions rather than quick fixes. It would be easy to muddle on from year to year tinkering with the system and conceding relief after relief to the various interest groups. It would, of course, do nothing to remove the disproportionate tax burden on employment. It would do nothing for the silent majority who earn average incomes and find themselves paying the higher rate of tax on every extra pound they earn. This Government is not going to let the ordinary taxpayer down. We have grasped nettles in their interest and we will continue to do so.
What these reforms are about is the construction of a tax system that seeks to reward work, by easing the burden on the lower paid and taking as many people as possible out of the higher rate. I am sure the House will agree with me when I say that a transparent, equitable and work-centred tax system is worth fighting for.
In the case of mortgage interest relief, the new provisions will ensure that the relief is of equal value to those on average and higher incomes and particular assistance is given to those who are getting into the housing market for the first time. If looked at objectively this system is far more sensible than a regime which is of greater benefit to those on the highest incomes.
It is important for taxpayers with mortgages to appreciate that the reduction in their allowances this year came about mainly because their mortgage outlay has fallen substantially compared with early last year. This fall in interest rates is, of course, a reflection of general investor confidence in this Government's management of the economy. Taxpayers should look not just at their allowance for interest but also and more importantly at the important reduction in their mortgage payments over the past year and a half. Overall, they will see that they are significantly better-off, because the net cost of their mortgages has declined, while their other tax allowances have risen significantly and the 1 per cent levy is no longer in the picture.
While first-time buyers' allowances are affected by the adjustment for lower interest rates, they now enjoy for the first time 100 per cent relief for the first five years of their mortgage and, from 1994-95, will no longer have the de minimis of £100/£200 deducted from their allowable interest. Even taxpayers who first claimed mortgage interest relief as far back as 1990/1991 benefit this year. This approach is a good example of this Government's attitude towards tax reliefs. Such reliefs should be carefully targeted so as to achieve clearly defined social objectives; in this particular case, assisting young couples and others who are into mortgages for the first time.
I want to emphasise that this Government is fully committed to the principle of owner occupation and to giving reasonable assistance to families to acquire their own housing. The increase of the new house grant to £3,000 and the new mortgage interest relief concessions to first time buyers are tangible evidence of this commitment.
It should be remembered that the tax reliefs on house purchase and mortgages are the equivalent of a major programme of Government expenditure. Mortgage interest relief will cost about £140 million in the current 1994-95 year and the stamp duty exemption on new houses costs in the region of £30 million per year. The Department of the Environment in 1994 will pay out new house grants to the tune of about £20 million. This puts the combined annual cost of these pro-home ownership measures at over £190 million in 1994.
Even when standard rating of mortgage interest relief is fully implemented, there will still be very substantial assistance through the tax system, that is from the general body of taxpayers, to those people who borrow to buy a house.
The residential property tax as extended is both a modest measure of equity in the tax system and a contribution towards redirecting the balance in the tax code more in favour of productive investment, which helps in creating and safeguarding employment. The present tax structure has tended to encourage a disproportionate amount of investment in housing. In particular, it has given rise to a tax-driven trading-up, with an undue bias towards the purchase of dearer houses as investments rather than homes. These views have been echoed in all major reports in the last 15 years, including those from the Commission on Taxation, NESC, Culliton, the ESRI and the OECD. The changes to the RPT introduced this year constitute a very modest element in the overall strategy for reducing the levels of income taxation and improving the equity of the tax system and for curtailing the relative tax advantages of investment in dearer residential property as compared with industrial and commercial investments.
The increased RPT charge will in the vast bulk of cases be far outweighed by income tax reliefs introduced. For instance, a married couple with two children earning £30,000 gain £630 from the mainstream income tax and levies reliefs. To put this in context, the RPT charge on an £100,000 house for this family will, following the adjustments introduced, be £90, or less than £2 per week.
The fact that the increases in the residential property tax are modest should not be interpreted as being an indication that further increases are planned. I confirm that there is no intention to reduce the thresholds further. While many economic reports have recommended the introduction of a comprehensive property tax, the changes in the long-standing and limited residential property tax are once-off and should not be interpreted as a first step on that road.
I do not think it makes any sense, at a time when Government is actively seeking to encourage a flow of resources into job-creating investment in business and commercial ventures, to give signals through the tax system — both in interest relief and in exempting from the RPT very many valuable residences — that the best repository for savings or borrowing is to acquire a dearer type of house. This year's budget moved to redress the imbalance in tax treatment between investment in house property and areas which contribute directly to supporting employment, but in such a way as to maintain reasonable and equitable assistance towards owner-occupation and not imposing any property tax charge on people with average income or with houses not valued over £75,000.
The Government is responsive to concerns over anomalies within the RPT scheme as it had existed. We have adjusted the tax to deal with those anomalies. These adjustments preserve the essential features of the budget proposal, particularly in terms of promoting employment; at the same time they cater for the more deserving cases which have been highlighted.
The adjustments are intended to eliminate hardship for elderly or incapacitated owner-occupiers of houses coming with the scope of the RPT. They cater for the situation where a houseowner needs to bring in a carer on account of his or her incapacity or, if widowed, on account of having dependent children. They also ensure that no household will be brought into charge to the RPT simply on account of caring for an elderly or incapacitated person. They further provide that no RPT charge will arise from alterations made to a property because one of the people living in the house is permanently incapacitated. A provision was also introduced to give the Revenue Commissioners discretion to deal with possible hardship cases which are not covered by the various specific reliefs.
A very important point, often overlooked, is that the child relief substantially reduces the actual charge for all families with dependent children. All residential property tax bills are reduced by 10 per cent for each eligible child in a household. Thus, where there are four children, the charge will be only three-fifths, or 60 per cent, of the full figure.
Moreover, the income-related marginal relief serves to greatly reduce the actual residential property tax charge for people whose income is relatively close to the new income threshold of £25,000. Under the revised scheme marginal relief has been extended to £35,000 income. There is a one-tenth reduction of the RPT charge for every £1,000 below £35,000. For example, where the household earnings are £30,000 the RPT charge is reduced by 50 per cent. This means that all households with an income between £25,000 and £35,000, including those who benefited from marginal relief in 1993, will get income-related relief in 1994.
The Government looked at the argument that taxpayers should be allowed to set off an outstanding mortgage against the value of residential property. However, the existence of a mortgage is adequately recognised by the fact that RPT does not apply to the first £75,000 of value and interest on mortgages qualifies for income tax relief itself. At the same time, we were conscious that the residential property tax charge in respect of the larger family home increased quite sharply due to the combined effect of the reduction in the value threshold and the increase in the rate to 2 per cent. Accordingly, the rate applying on the value between £100,000 and £150,000 was reduced to 1.5 per cent, with the 2 per cent rate applying on the value in excess of £150,000. This moderated by up to £250 the increase in the residential property tax charge on all properties valued in excess of £100,000.
Finally, a phased payment system was introduced as an option for those who would prefer not to pay in a single lump sum. The Government remains satisfied that the residential property tax as extended is a justifiable measure in redirecting the balance in the tax code more in favour of productive investment, which helps in creating and safeguarding employment, and also produces a greater measure of equity in the tax system. From the employment viewpoint, the relative tax advantages of investment in more expensive housing can only be to the disadvantage of industrial and commercial investment which is essential for employment creation. I make no bones about this: taxes have to be raised and if we can raise them in a way that does not hinder employment, so much the better. Senators will agree with this. The forms were due in two weeks ago. There was a great national debate about my budget figures and instead of the changes bringing in £9 million they would be an extra £3 million to £4 million. The so-called experts made much play of this and stated that the Government's figures were only one third of what would come in and that in money values it was only a small percentage. I am sure that you, Sir, will be glad to hear as will many Members of the House, although others will be very upset, to hear that the only mistake I made was that my figures were a bit over-optimistic. All the other so-called experts were, as usual, totally wrong.
