Richard Bruton
Ceist:45 Mr. Bruton asked the Minister for Finance the assumptions and methodology underpinning his estimate of the increase in revenue from capital taxes in 2006 (details supplied). [8219/06]
Amharc ar fhreagraTax Yield.
Ceisteanna (15)
Freagraí ó Béal (29 píosaí cainte)
The assumptions underpinning the forecasts for capital taxes are based on the economic growth estimates in the stability programme update, which is published on budget day. These estimates include GNP growth forecasts, projected changes in consumer prices and developments in the construction sector.
The methodology for forecasting receipts from capital taxes in 2006 first required my Department to estimate the outturns for the base year, in this case 2005. These projected outturns were then adjusted to take account of known once-off factors, both negative and positive, likely to impact on the yield in 2006. An example would be the discontinuance in 2006 of the bank levy, the receipts from which come under stamp duties. The figures were then refined to take account of the impact of budget measures. These various steps provide the base upon which the 2006 forecasts were built.
The base is then inflated for projected economic developments in 2006. In the case of capital gains tax and capital acquisitions tax, estimated growth is driven by the forecast change in nominal GNP and in the consumer price index, CPI, respectively. For stamp duties, since the bulk of the yield is from transactions in residential and non-residential property, the forecast for 2006 is largely based on estimated volume and price growth in the residential and non-residential property sectors. The methodologies used continue to be developed and my Department continually reviews any available international and domestic developments in forecasting methodologies to improve our approach.
Capital tax receipts are always hard to forecast as they tend to reflect movements in property markets and once-off decisions by buyers and investors. With this in mind, my Department's estimates for revenues in 2006 from capital taxes are as follows: capital gains tax —€2,035 million, capital acquisitions tax —€260 million and stamp duty —€2,685 million. The capital gains tax estimate represents an increase of 3.8% and the capital acquisitions tax estimate an increase of 4.4% on the respective outturns for these taxes in 2005. The stamp duty estimate represents a decrease of 1.5% on the outturn for stamp duties in 2005 but this largely reflects the non-renewal of the bank levy.
The estimates for all three taxes assume a lower rate of growth in revenues from these sources this year than the significant increases experienced last year. They assume, however, a reasonably buoyant market this year, both residential and commercial.
If one looks back over the past three years of the Minister's forecasts in respect of capital taxes, the aggregate increase he forecast in his Budget Statement was €40 million but the actual increase was €2,975 million. He was 7,440% out in his projection of the increase in capital taxes over the three years. That is a truly extraordinary deviation between forecast and actuality. To suggest, as the Minister does, that he is using best international practice to underpin these forecasts reflects poorly on best international practice which, I suspect, was not so far out.
Almost the entire overrun on tax is from the capital tax area in the past three years. The implication of this wrong estimation is that ordinary taxpayers are paying far more than the Dáil approved under the budget. It also means that the glowing claims the Minister makes at the end of each financial year that his figures have come in ahead of target have largely nothing to do with his management but are due to the people who are stumping up more and more money, particularly in stamp duties.
Does the Minister believe that the forecasts, which were 7,440% wrong, could conceivably be treated as best practice? Is there not a need for the Department's officials to go back to the various experts and re-examine how these yields are being estimated? It is putting a huge extra burden — a sum of €3,000 million over three years — on ordinary taxpayers.
It is not putting a burden on ordinary taxpayers but is ensuring that capital taxes, given that there are low rates of income tax, are making a far better contribution than we expected. Sustained buoyancy in the property market in 2005, which is behind the excess yields in stamp duties, and capital gains taxes defied expectations. The Department of Finance, in common with most other commentators, including the Central Bank and the ESRI, had expected a cooling off in the property market in 2005 but it did not occur. In the circumstances, there was no real basis in December 2004 for projecting increases of more than 30% in these taxes, which took place in 2005.
The big four taxes — VAT, income tax, corporation tax and excise duties — represented close to 90% of all targeted tax revenues in 2005 and accounted for 87% of tax revenues collected. Excluding the excess from the Revenue Commissioners' main special investigations, these tax headings together came within less than 1% of target and accounted for approximately 13% of the total excess in tax revenues in 2005.
The Minister is saying that 74 times more than was projected is somehow justifiable.
No. In contrast, the relatively smaller tax headings, which are the subject of the question, that is, capital taxes, stamp duties and customs, represented about 10% of targeted revenues in 2005 and they accounted for 13% of tax revenues collected. The excesses in these tax headings account for 70% of the total excess in tax revenues in 2005, due mainly to the continuing strength of the property market. We expected 90% of our tax revenue from the big four taxes but got 87%.
That was not my question.
I know. I am explaining——
Time is scarce so the Minister should focus on the question asked, not some bogus question he thinks——
I am putting it in context.
The Minister is not answering the question.
I am answering the question.
The Minister is not.
I am. I have outlined the methodologies——
They are not working.
The Deputy does not want to hear my reply.
They are not working.
A total of 10% of revenues were expected to come from the tax headings mentioned by the Deputy but they made up 13% of total revenues. When one considers that total revenues are more than €42 billion, it gives an indication of what forecasting involves.
The time for this question has concluded. We will move to Question No. 46 from Deputy Burton.
The Minister has failed to address the issue.
I am sorry, Deputy, we have already spent seven minutes on this question.
It is a serious issue because it has cost people €3,000 million.
Nonsense.
That is the truth. The Minister should look at the figures. The truth is that he did not bother to look.
I did look at them. This is nonsense.
The Minister did not look at the figures.
Allow the Minister to proceed to the next question.
I am sorry but we are building and selling more houses than expected. Is the Deputy saying it should be done for nothing?
I am saying the projections should have a sound basis. They are wrong every year and people are paying too much tax as a result.
Allow the Minister to reply to Deputy Burton's question.
Public Expenditure.
Ceisteanna (16)
Joan Burton
Ceist:46 Ms Burton asked the Minister for Finance, further to Exchequer returns for 2005, the reason for the very significant differences between the forecasts given on budget day for public spending and the Exchequer deficit; the way in which the Government apparently underspent in the region of €564 million in the final three weeks of 2005; and if he will make a statement on the matter. [8065/06]
Amharc ar fhreagraFreagraí ó Béal (8 píosaí cainte)
Estimated end year total gross spending by Departments was approximately €45.1 billion in 2005, an increase of €3.9 billion or 9.5% over 2004. The end year outturn for gross spending by Departments was €225 million less than the original 2005 estimate adjusted to take account of certain Health Service Executive spending.
The increase in spending in 2005 over 2004 represented the costs of very significant improvements in public expenditure and I will mention just a few of these. The social welfare budget day package I announced in December 2004 cost in excess of €800 million, for instance, old age pensioners got an increase of €12 per week from January 2005. There was additional and better services in the education sector, where spending increased by €570 million or 9%, additional and better services in the health sector where the increase in spending was in excess of €1 billion and additional spending on ODA which went up by 15% over 2004.
These and other significant improvements in public expenditure are pitched across the spectrum of public services. I am satisfied that this was an appropriate increase. Equally, I am satisfied that the additional €1.4 billion being allocated to social welfare spending in 2006, the additional €1.3 billion in health spending and additional spending in many other areas is warranted and that it is appropriate for the Government to share the fruits of growth by reinvesting in the social and economic needs of the country.
As to variations in any given period between spending costs and outturns, these are nothing new. Estimates produced at any time for gross expenditure are dependent on the level of factors, such as take-up on demand-led schemes and the timing of bills received by suppliers and contractors. In addition, the level of receipts, which are reflected in net expenditure, cannot be predicted with certainty as they can be affected by timing of payments submitted by employers for PRSI and health contributions. Similar timing issues affect many other headings, such as European receipts. The simple fact is that if payments are received earlier than expected and if payments are delayed or demand for schemes lower than anticipated or if receipts are higher, this results in lower spending. The relevant Ministers will be able to give the details for each Vote to the Deputy.
Turning to the 2005 Exchequer balance, this showed an outturn deficit of €499 million compared to an original budget day target deficit of €2,988 million. This improved outturn was partly driven by lower than expected expenditure but was primarily due to higher than anticipated tax receipts during the year. Tax revenues for 2005 were €1.75 billion above the level targeted on budget day 2005. The improvement was due to a number of factors, including Revenue Commissioners special investigations, buoyancy in the property market, strong employment growth and the strong performance of the economy in general. I am sure the Deputy would agree that this positive budgetary performance is a welcome development.
On Estimates day in November the Minister for Finance stated that the targets for spending were broadly on course and on budget day, 7 December, he stated that there would be €92 million in unspent balances on current spending, which is a significant jump on the position in previous years. However, by 31 December that figure of €92 million had jumped to an underspend of €564 million on current spending.
There are only two possible explanations for this. Either officials in the Department of Finance cannot add, which I refuse to believe, or an election war chest is being built up so the Minister can distribute largesse during the period before the election. As with the actions of the former Minister, Mr. McCreevy, in the run-up to the 2002 general election, that was good for Fianna Fáil but it was not good for our economy. Given the trolley crisis, the lack of nurses and all that we know about underspending and demands for services, the Minister is telling people that he underspent by €564 million.
I would like the Minister to comment on a further consequence. He stated that the budget increase in spending for this year was approximately 11.9%. Given the adjusted figures which he introduced on 31 December, the estimated increase in spending this year will be approximately 13.8%, which points to a pre-election spending splurge. Will the Minister explain how we makes sense of this chopping and changing with regard to the figures?
If there is any chopping and changing, I have just heard it from the Deputy. On the one hand she accuses me of underspending in one year and, on the other, she tells me I am spending too much in the next year. The bottom line is that last year the total Exchequer spend was €35.467 billion. There was an underspend of €225 million, when all the headings are taken into account, as well as a €300 million increase in receipts. Therefore, there was not a €564 million underspend.
The issue with regard to the final Exchequer balance at the end of the year, as I explained in the main body of my reply, is that the variations between spending costs and outturn depend on the final take-up of demand-led schemes, the timing of bills received by suppliers and contractors and the level of receipts, which are reflected in net expenditure and which cannot be predicted with certainty. The basis of the end of October figures for the Estimates requires the following two months data to finalise the figures for any given financial year.
I emphasise that the level of spend is such, at almost €35.5 billion, that the variation is quite small as a percentage of overall spend. It is based on calculating the balances at the end of the year and depends on what cheques have issued and what bills have been paid before 31 December, all of which must be finalised.
Total gross expenditure by the Department was approximately €45.1 billion last year, which is an increase of 9.5%. The allocations for health and other areas represented record increases, including an increase of 10% for health. All the changes we have seen with regard to the HSE and otherwise have ensured that we are in the business of transforming and transitioning health expenditure from the health boards to the HSE.
The total spend is as I have indicated. It is not made on the basis of building up war chests or any other conspiracy theory. It is simply a matter of explaining the spend at the end of the year, as was done in other years, and making sure that we go forward to meet the requirements of the situation and implement the spending we envisage for this year, which will be in the priority areas of health, education and social welfare, which received record increases. I defend that spending. If the Labour Party believes we spent too little last year and are spending too much this year, we will have to wait to hear what the spinning top will say at the end of this year to know what its view is at that time.
We must move to Question No. 47.
The Minister's pre-election cash pile is piling up faster than the trolley counts in our hospitals. On a day when we heard that young people are paying record amounts for an average family house, is the Minister not concerned that what he has done in terms of bumping up spending in the pre-election year after depressing spending last year is playing fast and loose with the Irish economy? The former Minister, Mr. McCreevy, did it and I am sorry it seems the current Minister is determined to repeat it. The only people who will have to bear the fall-out from this are those who did not get the services they were entitled to last year——
The Deputy should be brief. We have exceeded the time limit.
——and those such as house buyers who will end up paying more for houses because the Minister will fuel inflation given the extraordinary increase in spending that will happen this year.
I refute all those political assertions because they have no foundation in fact. I remind the Deputy once again that we had a deficit last year of €499 million so I do not know where I am supposed to be storing up this money. Thankfully, due to the extraordinary continued growth in our economy and the employment we are creating, the deficit was €1.75 billion less than was expected, which I would have thought was to be welcomed. I noted when that information emerged that the Opposition found it depressing news.
Financial Services Regulation.
Ceisteanna (17)
Dan Boyle
Ceist:47 Mr. Boyle asked the Minister for Finance his plans to review and amend the Credit Union Act 1997 to lift the current operating restrictions being encountered by the Irish League of Credit Unions. [8067/06]
Amharc ar fhreagraFreagraí ó Béal (8 píosaí cainte)
The Credit Union Act 1997 provides the legal framework for the regulation of credit unions. The Act was designed to provide the credit union movement with a regulatory structure that reflected and promoted the particular ethos and philosophy of the credit union movement, its strong tradition of volunteer service and the core objective of providing opportunities for saving and lending for members of credit unions. In the context of this legislative framework, the Registrar of Credit Unions, within the Office of the Financial Regulator, is responsible for the operation of the regulatory and supervisory regime for credit unions.
The Credit Union Act has provided the legal and regulatory framework within which the credit union movement in Ireland has continued to grow and develop over recent years. The assets of credit unions, largely comprising members' savings, have increased to €11.5 billion. This highlights the continued success of credit unions in meeting the financial needs of local communities and occupational groups falling within the common bond.
The rules-based approach to the regulation embodied in the Credit Union Act has served the credit union movement well by providing clarity and certainty to individual credit unions, their directors and members. It has helped support the continued stability of the credit union movement and safeguard the members' savings during a period of rapid growth. The Act provides some discretion to the Registrar of Credit Unions to issue regulatory directions to individual credit unions in these matters.
As Minister of Finance, my role is to ensure that the legal framework for credit unions is appropriate for the effective operation and supervision of credit unions in light of the current state of development, capacity and capabilities of credit unions as a whole. A range of issues arising in that context, including savings protection, investment rules and proposed legislative and regulatory changes, is under examination by my Department with the assistance of the Registrar of Credit Unions and is the subject of consultations with the representative bodies for credit unions. I assure the Deputy that these issues will be assessed on their own merits with a view to establishing an appropriate balance in the regulation of credit unions between the need to facilitate credit unions in adapting to the changes taking place in Irish society and ensuring the stability and financial sustainability of credit unions and the safeguarding of the very significant savings entrusted to them by their members.
My decisions in these matters will be based on the advice and information provided by the Registrar of Credit Unions, the Credit Union Advisory Committee — the statutory advisory body on credit union matters — and the credit union movement itself.
Does the Minister feel that after nine years, the Credit Union Act 1997 is badly in need of reform given that significant problems have arisen particularly regarding the asset to loan ratio of credit unions, which at the time of the introduction of the Act was 2:3 and is now approximately half of the asset base of credit unions? Further difficulties arise in terms of the ability to put money on deposit with credit unions as opposed to holding shares, given that the current limit of €26,000 set by the 1997 Act puts credit unions at a severe disadvantage particularly with the maturation of the special saving investment accounts. A limit of closer to €100,000 would be more appropriate.
The restrictions on investments as a result of the Credit Union Act mean that many credit unions now have debt capital and are forced to invest in a very restrained way which yields little return. Would the Minister agree that credit unions should be free to invest in the same way as other financial institutions and in the same way that the National Pension Reserve Fund is allowed to invest particularly regarding equities? Can the Minister confirm that the only legislative proposals on the table at the moment emanate from the Financial Regulator regarding changing the terms of the savings protection scheme for credit unions, which will threaten the ability of credit unions to operate on an all-island basis because of their membership of credit unions in Northern Ireland?
The Minister for Finance is obliged to make new legislative proposals for credit unions owing to the current fraught relationship between credit unions and the regulator for credit unions because, as many of us feared at the passing of the Central Bank and Financial Services Authority of Ireland Act, having the regulator for credit unions included within the Office of the Financial Regulator has compromised the ability of credit unions to be treated in a distinct way. This is especially true now, nine years after the introduction of the Credit Union Act.
A number of general points need to be made in response to the Deputy's questions. Significant funds are held in the credit unions and we all agree that a regulatory framework is required to deal with them. When we consider the investment issues for credit unions and how we can proceed, in the light of the high proportion of credit union assets now invested, the registrar has highlighted that under the current investment rules credit unions are not precluded from taking on inappropriate levels of risk. The registrar made proposals in November 2005 for a new investment framework to protect and safeguard the risk profile for credit unions and ensure that members' savings continue to be safeguarded.
The registrar is consulting the representative bodies for credit unions with a view to securing an agreed approach to the measures and to the implementation of the proposed new investment framework. Notwithstanding the continuing discussions regarding certain details of the new rules, there is a broad consensus that a tightening up of investment rules is required, taking into account the need for credit unions to generate a reasonable return on their investments. My intention is, therefore, to submit both the registrar's proposals for the new investment framework and the league's proposals for regulatory and legal changes to the Credit Union Advisory Committee, which is the statutory advisory body for credit unions under the Credit Union Act, at an early date for its views in order to inform my decision on the next steps required.
In addressing these matters my priorities will remain the need to ensure the interests of members of credit unions are protected and that the regulatory system operates effectively. This will underpin the continued stability and financial sustainability of the credit union movement and provide a framework which supports the continued growth and development of the movement.
The legal framework for credit unions has worked well and has met the needs of the credit union movement to date. This is not to say that the Credit Union Act is perfect and is not in need of some amendment. However, the legislation has enabled the movement to respond to the changing environment and the changing financial needs of its members, by introducing a wider range of savings products, insurance products, foreign exchange etc. The ability of the movement to respond to SSIAs and to take on board a significant chunk of this market is also an indicator that the framework works and is adaptable and reasonably responsive to the movement's needs.
A discourse is ongoing and we will refer all those matters to the Credit Union Advisory Committee and take our next steps from there.
Would the Minister not accept that the tightening of regulations in investment to which he referred is putting credit unions at a competitive disadvantage and if applied directly now credit unions would lose €60 million in a given year? While the Minister might need to reply to this by letter, I ask him to reply on an itemised basis to the concerns I raised in my question.
The Deputy asked for my plans to review and amend the Credit Union Act 1997 in order to lift the current operating restrictions being encountered by the Irish League of Credit Unions.
I asked about the asset to loan ratio, the investment restriction and the savings protection scheme.
Those matters are all being considered through the various mechanisms I have discussed and will be forwarded to the Credit Union Advisory Committee for further consideration. One must balance the question of what is prudential, what is the right allocation of risk, what is the right risk to take on, given the nature of the institutions concerned and the amounts of money involved while at the same time being as flexible and responsible as one can be with regard to some of their requirements. It is important that balance be achieved. It is not simply a question of whether one accedes to certain requests without taking into account other considerations, nor is it expected that I would do so. However, a process is in place which could involve further future amendments and changes including those the Deputy has specifically mentioned regarding the ILCU submissions that have been made. However, those must be taken in the context of a series of considerations and not taken in isolation.
As Deputy Paul McGrath is not present Question No. 48 falls.
Question No. 48 withdrawn.
Construction Industry Review.
Ceisteanna (18)
Joan Burton
Ceist:49 Ms Burton asked the Minister for Finance the steps the Revenue Commissioners are taking to deal with the problem of bogus subcontractor and agency worker phenomenon in the construction sector; and if he will make a statement on the matter. [8066/06]
Amharc ar fhreagraFreagraí ó Béal (5 píosaí cainte)
I am informed by the Revenue Commissioners that establishing employee or subcontractor status is one of the areas they specifically concentrate on in their monitoring of tax compliance in the construction sector. On an ongoing basis, Revenue auditors, based on risk assessment, audit the books and records of a considerable number of contractors and subcontractors. The matter of employee to subcontractor status is always examined as a routine part of such audits.
In this regard, I am informed that Revenue does not accept at face value assertions as to subcontractor or independent agent status. The true nature of the relationship between the parties is looked at having regard to factors such as the degree of control, obligation, integration or exclusivity involved in the relationship. These factors are set out in the code of practice in determining employment status that was published by Revenue with the assistance of the Department of Social and Family Affairs and the Department of Enterprise, Trade and Employment and the Irish Congress of Trade Unions.
During 2006, Revenue is devoting a quarter of its audit and compliance resource to policing building-related sectors. As part of this national project, the issue of misclassification of building operatives as self-employed will continue to be actively dealt with. Revenue also continues to meet industry representatives and trade unions to ensure compliance in this area and to help the industry get the status of their workers right. Ongoing improvements to Revenue's computer system used to monitor relevant contracts tax will also assist in targeting cases of likely misclassification of employees as subcontractors.
Is the Minister concerned at the cost to compliant taxpayers including compliant building firms, of using the sub-contracting system? Would he agree that in some years it is possible that up to €400 million of taxation has been underpaid by the construction industry, which includes building, forestry and the meat industry? The Minister knows that for 18 months it was not possible for officers of the Revenue to go on site and I ask him who was responsible. When the health and safety legislation was introduced the tax inspectors did not have the boots or overalls and in particular did not have the training to safe-pass standard, which is required by anyone on a construction site regardless of whether they are construction workers or Revenue workers hoping to make checks.
Is the Minister concerned about the loss that would arise in relation to young building industry workers who, despite paying tax at 35% and being told they are compliant for tax purposes, have no PRSI cover in the event of an accident and for whom, consequently, if they were to end up badly injured, the cost would fall back on to the State? We have a booming construction industry, but that is no excuse for the Minister's complacency in allowing rogue players in the industry to get away with significant financial scams to avoid the payment of their proper tax.
There is no complacency on my part or on the part of the Revenue Commissioners. The Finance Bill 2006 proposes a number of changes in relation to the legislation governing the administration of relevant contracts tax aimed at tightening control and discouraging fraud. First, the Bill provides a statutory basis for the limit that the Revenue currently applies administratively on the amount of gross payments that a principal contractor can pay to a subcontractor on foot of a relevant payments card. Second, the Bill contains provision to allow Revenue to refuse a certificate of authorisation to an applicant where a person connected to the applicant does not meet the compliance requirements of RCT legislation as regards payment of tax, making of returns and keeping of records. Third, the Bill provides for the Revenue to take into account an applicant's likely future tax compliance in determining whether a C2 should be issued.
Revenue has a continuous history of paying attention to the misclassification of building operatives as self-employed contractors. In 2004 Revenue devoted over 18.5% of audit programme activity to the industry and carried out 3,036 audits across all main programmes, out of a total of 16,321 audits. These audits yielded approximately €57 million which, out of a total audit yield of €549.6 million, amounts to approximately 10% of the total audit yield recovered that year. Approximately 45% of the audits were nil yielding, but that figure is not out of line with the percentage of nil-yielding audits across all programmes.
The focus on construction continued in 2005 with up to 20% of audit and compliance interventions being targeted on the construction sector. Up to the end of October 2005, the more than 4,400 compliance interventions that Revenue carried out in the sector yielded in excess of €73 million. Obviously, that total will rise when the annual figures are available.
The substantial increase in the level of Revenue's construction industry activities was enhanced in 2005 by a number of new special compliance initiatives. For example, in the east and south-east region significant audit resources were devoted to a special investigation of construction industry projects in the region. As part of this, in the first six months of 2005 the status of 500 subcontractors was examined. It was found that only three subcontractors should properly have been classified as employees.
As I said, we have undertaken an in-depth review and evaluation of the risks in the sector. A comprehensive action plan has been agreed by Revenue's management advisory committee to implement some technological and administrative changes and legislative proposals. These developments, together with the increased resources targeting the construction industry, will greatly increase tax compliance in the sector. Revenue will continue to refine risk evaluation and further target resources in the light of emerging results and insights from the 2005-06 results.
Does the Minister have an estimate of the tax loss to the Exchequer from the construction industry's fraudulent use of bogus subcontractor status and agency arrangements?
As I said, in what I thought was quite an informative reply, audits of the construction sector in 2004 yielded €57 million, or 10% of the total audit yield. Nearly 20% of the audit programme was devoted to the sector. The yield for 2005 up to October was €73 million. An in-depth investigation on projects in the east and south-east region showed three persons out of 500 were misclassified as subcontractors.
Data from the Central Statistics Office indicate that in the year to the third quarter of 2005 employment in the construction sector increased from an estimated 221,700 to 252,100, while the numbers of self-employed are estimated to have increased from 56,200 to 57,300. In other words, the increase in overall employment in the sector seems to have been in the employee rather than self-employment category.