I welcome the opportunity to respond to the motion tabled by Senator Dardis and others. I congratulate him and his colleagues for frankly setting out the benefits which the budget bestows and for reminding us of the considerable and strategic reform of the income tax system which it has inaugurated. It is important to set last week's budget in its proper context. The performance of the economy in recent times and the new challenges we now face provide the relevant background. I will begin my contribution, therefore, by briefly summarising recent developments.
In 1999 the economy grew faster than expected by the Department of Finance and all other commentators. GNP is expected to have grown by 7.25 per cent in 1999, broadly in line with the average of the exceptional growth since 1994. Employment for the year as a whole is estimated to have increased by 74,000 or 4.75 per cent. Employment has risen by over 150,000 over the last 2 years and unemployment has fallen and now stands at 5.1 per cent, compared to 10 per cent when the Government was formed. Inflation has remained low, although there are some pressures emerging.
The increase in employment, the fall in unemployment and the increase in disposable incomes shows that the Government's policies are working. The economy has been transformed and I am glad to say that the Government has built on the economic achievements it inherited. Public finances have also been transformed. The general Government surplus will be over 1.4 per cent of GDP in 1999. Our debt to GDP ratio continued to fall in 1999 and is expected to be around 47 per cent at the end of the year.
Our current economic situation has created great opportunities for society. However, it also presents a new set of challenges which the Government is determined to address through the implementation of the budget strategy and the national development plan announced last month. Rapid economic growth is leading to problems – labour shortages are emerging in the economy, the cost of child care has become an issue, in our towns and cities congestion is increasing and house prices have also risen but show signs of stabilising. The budget sets out proposals for action in all these areas to reduce the emerging pressures.
The budget must also prepare for the future. Economic growth will inevitably moderate in the coming years. The Department of Finance now forecasts that the economy will grow at 6.25 per cent in GNP terms in 2000 decelerating to 5 per cent by 2002. These forecasts present a very favourable assessment of our future prospects. Of course, a shock to the economy would upset this scenario and adversely affect the public finances. A prudent policy is, therefore, to run a substantial surplus now to prepare for a period of slower growth. This is a key element of the Government's budgetary strategy. This approach also ensures that we manage our economy in such a manner as to ensure that our current economic success is consolidated and continues in future years.
As stated on a number of occasions, we must prepare the public finances for the costs associated with an ageing population. The population over 65 will increase substantially during the next 25 years. This will lead to a significant increase in health and pension expenditure. To help to meet these costs the Government has decided to allocate 1 per cent of GNP per annum to two pension funds which will part fund our future pension costs. There has been some confusion about this pre-funding decision, with some commentators suggesting that all the moneys are being allocated for public service pensions. Let me be clear on this, the Government is allocating two thirds of the funds for social welfare pensions and the remainder for public service pensions.
The budget foresees continued surpluses and reduction in debt levels as a percentage of GDP. In that context, it is possible to devote substantial resources to tax reductions and spending increases without undermining stability. Last week I introduced a budget which delivered the biggest tax and social welfare package in the history of the State. Let me summarise exactly what the budget did.
In expenditure terms, the budget increased all old age and related pensions by £7 per week and all other personal rates by £4 per week. It gave the biggest increase ever in child benefit of £8 per month for the first and second child and £10 per month for the third child and subsequent children. It increased the qualified adult allowance and brought in a new insurance based carer's benefit, and it increased health, mental handicap and education spending substantially and launched a major programme of grants and assistance to increase the supply of child care places.
In regard to taxation, the budget provides over £940 million in personal tax reductions – in addition to over £1 billion in tax cuts delivered in my first two budgets. It removes almost 50,000 people from the tax net, including 10,000 over the age of 65 and it takes 125,000 taxpayers off the top tax rate by substantially widening the standard rate tax band for single and two income married couples. It reduces the standard and top rates of tax by 2 per cent in each case and it increases the basic personal allowances by £500 single and £1,000 married so that no PAYE earner enters the tax system until they earn £110 per week or more. It takes the first step in putting in place individual tax bands so that all taxpayers will be taxed on what they earn as individuals and not, as now, on their marital status. It doubles a series of personal allowances for the aged, widowed, dependent relatives, blind, incapacitated children and converts them into tax credits at the standard rate of tax and makes them of equal value to all taxpayers; reforms mortgage interest relief to make it more simple and of greater value to almost 300,000 taxpayers; increases rent relief by 50 per cent for under 55s and in the case of those aged 55 and over doubles the relief for 80 per cent of claimants on the standard rate of tax.
In the capital taxes area, I took the major steps of exempting the shared family home from CAT for all those sharing the home irrespective of the circumstances of the family relationship; cutting the CAT rate to 20 per cent and simplifying it from a three band structure of 20 per cent, 30 per cent and 40 per cent; increasing the thresholds for payment of CAT by substantial amounts so that no immediate family members will pay tax on inheritances under £300,000; and changing the basis of liability for CAT from the arcane and archaic concept of domicile to the more straightforward basis of residence, which is applied to income tax and capital gains tax and which most other countries follow in their law.
In the area of business taxation, the budget introduces the 12.5 per cent corporation tax rate from 1 January 2000 for small and medium-sized companies with profits under £50,000 per annum. This benefits almost 20,000 of the 29,000 companies paying corporation tax in the State. Provision had already been made in the Finance Act, 1999, to cut the standard rate of corporation tax from 28 per cent to 24 per cent on trading profits in order to reduce it to a single rate of 12.5 per cent generally by 2003. The budget also reduces capital gains tax to 20 per cent on land sold for commercial purposes and applies a 20 per cent rate of profits tax to land sold for residential purposes by companies or individuals; gives accelerated capital allowances to stimulate further investment by private firms in the provision of child care facilities; and puts the basis of taxation of life assurance and other funds on the same footing as most of our EU partners.
With regard to excise tax, the budget abolishes travel tax from the end of the year; cuts the tax on kerosene by one third to address the price differential with Northern Ireland; and increases the tax on tobacco substantially to bring in more revenue to directly fund the health service. This list of tax measures is an unparalleled package of tax reduction and reform. One proposal to individu alise the standard tax rate bands has attracted most attention. The budget delivered cuts in rates, fewer taxpayers on the higher rate and reductions in the tax burden, all of which were promised to the electorate when we sought office. The voter remains the ultimate arbiter of the budget and the democratic mandate is a basic principle which we must respect.
