As Mark Twain might have said, rumours of this House's demise are much exaggerated.
A year ago when I addressed this House on the 2010 budget, I highlighted the background of an unprecedented rate of economic decline experienced since 2008. I went on to say, however, the Government's strategy over the previous 18 months was working and we could see the first signs of a recovery in our main international markets. I also pointed out the measures taken by the Government up to then had been commended by international bodies such as the European Central Bank, the European Commission, the International Monetary Fund and the Organisation for Economic Co-operation and Development, as well as winning the approval of the international markets.
After the 2010 budget, improvements continued into the early months of this year until the crisis in Greece in April. This crisis precipitated a series of events which led to the costs of funding for the State and for our banks becoming increasingly expensive. Also, during the autumn, firm estimates of the cost of dealing with the banks became available and were higher than previously calculated. This, as well as concerns about the prospects for the global economy, added to doubts in the markets about the sustainability of our public finances and our capacity to fix the financial system without outside help. These doubts continued to grow, as did the price of Irish debt in secondary markets. Therefore, it became clear these stresses would not go away but, instead, would have intensified and have led to disaster for our banks and the economy unless they had been urgently addressed.
This was the background to the Government's decision to seek support from our European and international partners to achieve a sound and smaller banking system, as well as a sustainable budget position, to implement structural reforms to underpin economic stability and enhance growth and job creation. If we had not been able to obtain this support, it is doubtful if the State could have borrowed the money needed, other than at exorbitant interest rates, to maintain our public services or a functioning banking system.
Prior to seeking this support, the Government had already begun work on a comprehensive plan to secure a return to sustainable growth in our economy and put our public finances in order. The policies set out in the joint programme of assistance incorporate to a considerable extent the blueprint set out in the National Recovery Plan 2011-2014, published on 24 November. The policies in the programme are not new ones imposed on us by outsidersbut are a continuation of the Government's strategy for recovery which best fits our circumstances.
At the end of last September, during my speech to this house on statements on the economy, I mentioned the many pointers to a stabilisation in the economy and in the public finances that were becoming apparent at the time. Notwithstanding the crisis that led to us having to seek support through the joint programme, the real economy and the public finances have continued to improve.
It is now expected that gross domestic product will record a small increase this year after a fall of 7.6% last year. Exports increased by approximately 7% in real terms in the first half of this year and are expected to grow by more than 6% for 2010 as a whole. Output in the manufacturing sector was up 12% in the third quarter of this year. There are signs that conditions in the labour market are beginning to stabilise. Last week, we saw a fall in the underlying live register for the third month in a row, marking the first time we have seen such a sustained drop since 2004. In the 12 months to November 2010, redundancies notified to the Department of Enterprise, Trade and Innovation were 21% fewer than in the same period last year. I accept migration by Irish and other citizens may contribute to this outcome, however.
Our underlying budget deficit has stabilised. Our tax revenues in 2010 are ahead of target despite a weaker start to the year and our spending has been brought under control. These data taken together paint a picture of an economy that is returning to growth after a deep and prolonged recession.
Looking to the future until 2014, real gross domestic product is forecast by the Department of Finance to strengthen to an average increase of almost 2.75% per annum. Again, it must be taken against the backdrop of the large drop in 2009. The most recent indicators point to economic recovery. However, the scale of the adjustment needed in the public finances is such that any rate of economic growth that could reasonably be expected over the medium term would fall way short of providing the resources needed to close the huge gap in the public finances by 2015 or to stabilise the banking system. Accordingly, the adjustments in the 2011 budget have had to be severe, both as regards expenditure cuts and tax increases. We do not have any choice, however. Adjustments on this scale must be made and we must make them now. Notwithstanding the severity of these measures and despite arguments to the contrary, the actions taken in this budget to stabilise our public finances and those planned for the years ahead are consistent with economic recovery. This is because they will provide a degree of certainty that will encourage consumers to spend and businesses to invest, as well as — this is perhaps the most important aspect — boosting the competitiveness of our economy.
I will turn to outlining the various measures in the 2011 budget and the rationale for each of them. In the national recovery plan we have set out the timetable for achieving an overall adjustment of €15 billion in tax and expenditure adjustments over the next four years. We need this adjustment to reach the target to bring our deficit down to 3% of GDP by 2015. Owing to lower than expected medium-term growth prospects as well as higher debt interest costs arising from the bank rescue, the European Commission has agreed to give Ireland an extra year to reach the 3% deficit target required under the Stability and Growth Pact. This extra year will change neither our targets nor our timetable for achieving them.
As outlined in the plan, €6 billion of the overall adjustment is being made in the 2011 budget. Big as it is, this is the scale of the adjustment needed to demonstrate we are serious about restoring order to our public finances. The benefits of the now-gone boom were spread across every section of the population. Between 2000 and 2008, public spending increased by in excess of 140% while the consumer price index increased by just 35%. Working age social welfare rates are now more than twice their rate in 2000. Over the same period, the State pension almost doubled. These increases were therefore well ahead of the cost of living. At the same time, taxation was reduced and the proportion of income earners exempt from income tax increased from 34% in 2004 to an estimated 45% this year.
It is important to keep things in perspective. The current spending reductions set out in the national recovery plan to 2014 will bring total gross voted current spending back only to 2007-2008 levels. The income tax measures in the plan will bring us back only to 2006 levels. Today, the CPI is where it was in April 2007, which is an important factor to bear in mind.
The Government has maintained working age rates of payments at a rate which far exceeds total inflation since 1997 and has now become unaffordable. This rate of increase also has implications for replacement rates for the unemployed. This is why the Government has decided to reduce working age rates of payment by about 4%. These new rates will still be slightly ahead of the 2007 working age rates of payment when price levels were about the same as they are now.
Between 2000 and 2009, expenditure on child benefit grew from €638 million to approximately €2.5 billion per year, which is 12% of gross social welfare spending. There will be a €10 reduction both on lower and higher child benefit rates, with an additional €10 reduction for a third child only. This is a step in the direction of diverting support to selective poverty reducing measures, such as the family income supplement and qualified child increases, as well as rationalising the child benefit structure.
The large increases to the State pension in the past ten years or so have been successful in addressing poverty in that age group. This is shown in the recently published 2009 survey of income and living conditions in Ireland which revealed that the proportion of persons aged 65 years or over living in consistent poverty has been brought down to 1% or lower. Despite the huge pressures on the public finances the Government is determined to preserve this achievement, which is why it decided not to reduce the State pension.
Despite the fact that considerable savings have been made in the cost of delivering public services, further savings and reforms are needed. This is why savings will continue to be made through planned reductions in the number of public servants and through greater efficiencies in delivering public services. The salaries of the Taoiseach, Tánaiste and Ministers will be reduced by €14,000, €11,500, and €10,000 per annum, respectively, and the Government will seek a maximum salary rate of €250,000 in the public sector.
I wish to elaborate on this point. One of the famous sayings of Eamon de Valera when he took office in the early 1930s was that no man was worth more than £1,000 a year. In terms of net public sector take-home pay, it is now the case that no one is worth much more than €100,000 a year. For example, the Taoiseach's net pay and gross income have declined. In 2008, his gross income was €285,000 while it is now down to €214,000. Taking into account all the various changes that have been made, his net take-home pay has gone down from €174,000 to €102,689. It may come as a surprise that in the case of TDs, for example, the gross income has come down from €100,000 to €92,672. This will be especially relevant to those of us who will again be Dáil candidates. The net take-home pay has come down from €69,000 to scarcely more than €50,000. I do not have figures for Senators but they are obviously less. I do not think the public has any idea of that situation. I welcome it, however, because over the past ten years in particular, salaries across the top levels of the public sector got completely out of hand in line with the general euphoria of the late Celtic tiger era. This is the new situation. As announced in the national recovery plan, provision will be made in legislation for a 10% reduction to be applied to the pay of new entrants to the public service, including those appointed to hold office in the Judiciary in 2011.
The cost of providing public service pensions has risen by 56% to €2.235 billion in the period 2006 to 2010. Failure to reduce the cost of pension provision could undermine the longer-term viability of the public service pension system. Up to now, existing public service pensioners did not have their pensions reduced to reflect the pay reductions applied to serving public servants. Accordingly, it is appropriate and reasonable that public service pensions above €12,000 a year would be reduced by an average of 4%. Those on a pension below €12,000 a year, roughly equivalent to the value of the social welfare pension, will be exempt from the reduction. The reduction will apply to former political office holders, retired members of the Judiciary, and their survivors or dependants.
The grace period under which previous salary levels for public servants are to be used to calculate pension entitlements, which was due to expire by the end of 2011, is being extended by two months. As the Minister explained in the Dáil, that is to prevent a pile-up at the end of this month. The new pension scheme based on career average earnings for new entrants to the public service, which was announced in last year's budget, will come into effect in 2011. Under this scheme, post-retirement pension increases will be linked to retail price inflation rather than to pay.
Notwithstanding the considerable programme of investment in recent years, the Government will invest 3.6% of GNP in 2011 in the Exchequer capital programme, which will be augmented by the investment programmes of the commercial State-sponsored bodies. In addition, the National Pensions Reserve Fund, NPRF, has confirmed that it is willing to invest in Irish infrastructure assets on a commercial basis in partnership with third party institutional investors. The Government will help to identify opportunities for the NPRF and other private investors. While it is to be regretted that public capital investment has been reduced to this level, we must bear in mind the huge level of capital investment that has occurred in the past ten years. It has given us a national motorway network and many other assets.
The OPW capital allocation for 2011 includes €41million for flood risk management. Although we were allocated €50 million for this year, we only succeeded in spending approximately €38 million or €39 million on a huge programme around the country this year. Some of that will be carried over, giving €44 million next year. Major flood relief schemes are under way at Mallow, Clonmel, Ennis, Fermoy, Bray and Clontarf. We have also undertaken a couple of hundred minor flood relief works around the country in conjunction with county councils. It is a major amount of activity.
Public procurement represents a considerable proportion of economic and commercial activity and is estimated to account for up to or more than €15 billion, close to 12% of GNP. The public procurement function has been receiving particular attention from Government in recent times and a number of reform initiatives have been undertaken. The national procurement service, the NPS, was recently established in the Office of Public Works and has been given the task of implementing the ongoing programme of reform. The main aim of national policy on procurement is to achieve value for money in a regime of probity and accountability. The primary objectives of the NPS include achieving value for money from large-scale public service procurement exercises, assisting in the training and development of public service procurement officials and facilitating greater collaboration. Through its strategic approach to procurement the NPS ensures that appropriate engagement takes place with both suppliers of all sizes and public service clients prior to the running of any competitive process. It is recognised that when officials, across sectors, work together to identify suitable opportunities for demand aggregation, significant cost savings can result. The resulting cost reductions can alleviate the impacts that reduced budgets would otherwise have on the delivery of public services. We are very conscious of the importance of public procurement for small and medium-sized enterprises. We have done our best in terms of revising the documentation and conducting outreach courses in order to make procurement as user-friendly as possible, particularly for such enterprises. Despite impressions to the contrary, a high level of procurement contracts remain within the country. At the same time, there is no point in thinking we can apply that pre-1958 approach to public procurement, following the old Sinn Féin economic policy. Firms engaged in this must be competitive and must seek and win contracts abroad. Many of them are doing so.
It is essential that Ireland's tax system provides the resources to pay for public services without damaging our economic growth potential. That is why the Government has decided in the national recovery plan that two thirds of the required adjustment should be through expenditure reductions and one third should be raised by taxation. Our tax base is too narrow. Too few income earners pay any income tax. This year, just 8%, earning €75,000 or more, will pay 60% of all income tax while almost 80%, earning €50,000 or less, will contribute just 17%. Also, many high earners have opportunities to shelter their income from tax. These are serious structural defects that must be addressed to create a system that is rational, sustainable and fair and that delivers the resources required. Such a system cannot be created in one budget but the following major steps forward in the reform process have been made in this budget. This budget has replaced the income levy and the health levy with a single universal social charge, governed by one set of rules on a broad base; removed the employee PRSI contribution ceiling, as has been long called for; increased the PRSI rate for the self-employed, higher earning public servants and office holders; reduced the value of bands and credits by 10% in line with overall reductions in incomes; tackled over-generous reliefs associated with private pension provision; abolished or restricted many tax reliefs that higher earners use to shelter income unfairly; and targeted the remaining reliefs more clearly on employment growth. By broadening the base at both ends of the income spectrum, the nominal rates of tax can be kept lower while the effective rate can be raised in a way that is fair to all. Those on the new reduced minimum wage will not be brought into the tax net. The top marginal tax rate will be maintained at 52%.
The national recovery plan contains a commitment to the abolition or curtailment of tax expenditures and to the phased abolition of property-based legacy reliefs. The 16 measures identified in the plan will be given full legislative effect. This budget will abolish or restrict a further nine reliefs, bringing the total to 25. Property-based legacy reliefs will be further restricted. Three new measures in particular will be targeted at passive investors. Restrictions on the carry forward capital allowances will start in 2011 and have an impact progressively over the next few years. From 2011, section 23 relief will be restricted to income from section 23 property. A guillotine provision will ensure all unused capital allowances after 2014 and section 23 reliefs will be lost, effectively terminating all property-based reliefs in 2014. Following the economy-wide fall in asset values in recent years, the base for capital acquisition tax will be broadened by reducing the tax free thresholds by a further 20%. Finally, the deposit interest retention tax, DIRT, rate on ordinary deposit accounts is increased by 2% to 27% and on longer-term deposit accounts by 2% to 30%.
The national recovery plan contains a commitment to significant reform of pension tax relief. Employee PRSI and health levy relief on pension contributions have been abolished. The annual earnings cap for tax-relievable pension contributions will be reduced. The portion of retirement lump sums above €200,000 will be subject to tax and the maximum allowable tax-relieved pension fund will be reduced.
Employer PRSI relief on employee pension contributions is being reduced by 50% from 1 January next. The effective tax rate on approved retirement funds will be increased by raising the deemed annual distribution of assets in those funds from 3% of end-year assets to 5% per annum with that distribution subject to full income tax each year.
The Government's commitment to the 12.5% corporation tax rate was restated in the national recovery plan. Recent comments by European finance ministers who understand the importance of this issue to Ireland are welcome. There will be no change to Ireland's corporation tax rate.
In order to stimulate the property market as well as to provide necessary valuation information for a site value tax and to increase market transparency for the smooth operation of the market, stamp duty on residential property transactions has been reformed with immediate effect. From today there will be a flat rate of 1% on all residential property transactions, old or new, up to a value of €1 million with 2% applying to amounts above €1 million. All existing reliefs and exemptions for stamp duty on residential property are abolished. This is in line with the aim of this budget to broaden the tax base. Instead of increasing rates of tax, which experience shows leaves us with less revenue in many cases, the choice has been made to broaden the tax base if the objective is to bring in extra revenue. There is no increase in the standard rate of VAT, which has implications for Border counties and the country north of a line from Dublin.
An air travel tax on passengers departing Irish airports was introduced on 30 March 2009. The tax is expected to yield €105 million in 2010, despite the impact of the volcanic eruption on air travel this year. Similar taxes, often at a higher rate, apply in many countries. There have been consistent calls for the abolition of the tax which is blamed for the reduction in visitor numbers. I have debated the issue many times in the Dáil and the Seanad. The rate of the tax is being temporarily reduced to €3 from 1 March to the end of 2011. The position will be reviewed next year and the rate will be increased again, unless there is evidence of an appropriate response from the airlines.
Excise has been increased by 4 cent per litre on petrol and 2 cent per litre on auto-diesel, both increases inclusive of VAT, from midnight last night. However, the cost of petrol and diesel will still be cheaper south of the Border than it is north of the Border.
In the light of its success, the car scrappage scheme introduced last year will be extended for a further six months to 30 June 2011. The VRT relief provided in that period will be up to a reduced maximum of €1,250. The VRT relief for series production hybrid and flexible fuel vehicles has been extended for two years to the end of 2012.
A review will be undertaken of the excise duty payable for licences for on-trade and off-licence sales of alcohol products during 2011 to ensure the system is both transparent and fair.
The construction sector has been at the centre of the economic downturn and it will be some time before the sector returns to a sustainable level of output. In the meantime the Government wants to ensure existing employment levels are, as far as possible, protected, although they have been greatly reduced, and support construction businesses operating in the legitimate economy. To that end, the budget proposes significant reform of the relevant contracts tax regime to enhance its effectiveness and reduce the opportunities for fraud and includes a new 20% rate for those registered for tax to foster compliance.
The budget also introduces a new tax incentive which will support employment, while improving energy efficiency in homes and complement the grant aid available through the home energy savings scheme available from the Sustainable Energy Authority of Ireland. Contractors employed to complete the work must be registered with the Revenue Commissioners.
Small and medium-sized companies are a cornerstone of employment and innovation in the economy. As job creation and protection is the Government's priority, it is essential that schemes such as the business expansion scheme and the three-year corporation tax exemption for start-up companies are targeted and evaluated against jobs created or retained. Accordingly, the business expansion scheme is to be refocused as the investment for employment initiative with increased limits and simplified certification requirements. The new incentive will expire on 31 December 2013. The three-year corporation tax exemption for start-up companies commencing a new trade in 2011 will be extended and refocused on employment creation in order that companies which create jobs will be rewarded. The accelerated capital allowance scheme for energy efficient equipment will also be extended for a further three years.
The national employment action plan is being refocused to establish clearer pathways to employment by ensuring there will be early and ongoing contact between State agencies and those who have lost their jobs to provide them with opportunities to participate in education, training or work experience placements, as appropriate. An additional 15,000 activation places and supports for the unemployed will be provided at a cost of approximately €200 million. The skills development and internship programme will provide up to 5,000 places in the private sector. The work placement programme will provide up to 5,000 places in the public service. A new community work placement scheme will provide up to 5,000 additional places in the community and voluntary sector. The labour activation measures will be complemented by the extension of the employer job, PRSI, incentive scheme to the end of 2011 and transforming the business expansion scheme into a new investment for employment initiative. The national recovery plan provides for reform of the labour market and the removal of barriers to job creation resulting from inflexible employment agreements and the wider impact of the current level of the national minimum wage. The aim is to stimulate employment in labour-intensive sectors, particularly for the young.
The budget has involved hard decisions and choices and will result in reductions in the living standards of nearly everyone in the State. It is nevertheless the right budget to address the serious problems which threaten the economy and financial sector which are the fundamental basis of our future material well-being. The budget, while severe, has been fair and seeks to get most from those who can pay most. Where it has affected the less well-off, particularly those dependent on social welfare, the cuts made have taken account of the substantial increases in such payments in past years which, combined with the recent falls in prices and the prospect of low inflation in future years, will keep the standards of living of these citizens substantially intact.
This is not just a budget to increase taxes and reduce expenditure; in our current economic circumstances we have to do far more than this. It is also, crucially, a wide-ranging plan which points the way to securing stability in the public finances and the economy which will be followed by sustainable economic and employment growth in the years ahead and which will also be underpinned by reforms in key areas that will boost the performance of the private and public sectors. An important point made in a recent debate in this House is that difficult and critical situations such as at present do provide an opportunity to undertake fundamental reforms that are often recognised as desirable in better times but where there is not the impetus or obvious necessity to undertake them. The point has been made at least as often on the Opposition benches as on the Government side. This is an opportunity to undertake some fundamental restructuring which will not just save money but also put us on a more sustainable basis for the future.
The economy is showing widely based and strong signs of recovery. That should not be surprising because it still has many fundamental strengths. We have a young, highly skilled, well educated and flexible labour force. Our infrastructure which had been a serious drag on the economy has been brought up to the standard needed to support growth and the Government will improve on the existing good standard of provision. Our taxation system strongly supports enterprise and will continue to do so. Already we have won back much of the competitiveness that we lost earlier in this decade. However, there is a long way to go yet.
I was struck by a letter to The Irish Times in the past week or ten days from an Irish citizen living and working in Germany, pointing out that, on many fronts, their costs and welfare rates were lower than ours. I am not sure if I have it to hand, but it is somewhere among my papers. I was struck forcefully on two recent visits to Germany, one private and one official, to Berlin and Frankfurt, respectively. This one example is not necessarily hugely significant, but one could get from the centre of Berlin or Frankfurt to the respective airports by train for a fare of €2.50, whereas the minimum fare from somewhere like Busáras is €6. I am afraid this is replicated in a lot of fields, although not everyone might like to hear it. There has been talk about dictation from outside, appealing to a latent anti-German feeling, of which I do not think there is much in this country which is in the eurozone. If we did not realise it before, we do now and have to internalise the logic of this. We must never again allow ourselves to become uncompetitive and lax because of the apparent ease of conditions, particularly credit conditions, that we have experienced in the past ten years. Although there is a long way to go yet, the budget is an important first step in restoring stability to our public finances and economy so that we can move with increasing strength and confidence towards securing strong, enduring and job-rich economic growth.