I move: "That the Bill be now read a Second Time."
The Finance Bill gives statutory effect to the taxation changes introduced in the 1986 budget. It also contains a number of other provisions not announced in the budget. The more important of these are additional measures intended to encourage economic activity and employment and to promote greater employee involvement in share ownership.
I will deal in due course with the more significant individual aspects of this Bill. I would like in the first place to speak on the general economic and budgetary position and on the broad taxation startegy underlying the Bill.
There is a new optimism in the economy. The reduction in energy prices and the continuing downward trend in inflation have increased confidence. This will be reflected gradually in improving investment and employment prospects. We have a good competitive position internationally and the opportunities exist in the new climate for significant economic growth. The Government's role is to provide the best possible environment for growth and to provide special incentives where appropriate. In particular, we must encourage investors to break out of the traditional mould and to show a greater willingness to take risks in building up enterprise. For the first time in several years the outlook is bright, we are on a rising curve and we must not miss our opportunity.
Since the budget, the positive outlook for the Irish economy and for other oilimporting countries has been enhanced by the steep fall in energy prices. While oil experts and economic commentators are still unsure about future trends, there is general agreement that the maintenance of lower prices will boost the projected growth in demand in most economies and lead to a more pronounced reduction in inflation rates than had been envisaged some months ago. This should benefit our economy in a number of ways. The annual increase in the consumer price index at mid-February of 4.6 per cent was the lowest since 1968. Inflation will be lower than projected at budget time and should average no more than 3 per cent this year. Indeed, the year-on-year rate of increase will decline further to around 2 per cent in the second half of the year. As a result of this reduction and the income tax reliefs in the budget, the growth in real personal expenditure should be considerably more buoyant than in 1985. Investment should also maintain the upward momentum experienced last year due to the better economic climate now in prospect and due to the measures introduced by the Government to assist activity in the building and construction sector.
The stimulus to the economy from public expenditure will be somewhat larger than originally intended. As most public expenditure outlays have already been determined in nominal terms, the lower level of price increases now being forecast will lead to a higher real level of spending. The Government have already reaffirmed that the cumulative increase of 7 per cent under the 25th pay round is still on offer despite the lower projected rate of inflation. I am sure that public servants in particular will recognise the real benefits which these proposals will c on them over the next 15 months and that they will appreciate that the pay provisions in the budget represent the maximum that we can afford.
The prospects for the balance of payments are that the surplus on the balance of trade will continue to grow. Overall, the balance of payments deficit in 1986 should be much less than the 3 per cent of GNP projected in the national plan.
With lower inflation and higher economic growth, the climate for employment should continue to improve. The indications are that non-agricultural employment showed a small increase towards the end of 1985. Overall, the economic environment for 1986 augurs well for a continuation of this upward trend which will be supported by the wide series of measures introduced by the Government to increase the opportunities for employment.
The returns on Exchequer receipts and expenditure for the first quarter of the year show that the budget targets are on course. While price reductions and other developments will give a welcome boost to economic activity, they will have only a negligible impact on the public finances and will not allow for any relaxation of budget discipline. The budget deficit remains uncomfortably high and reducing this deficit must continue to be a priority. In emphasising this I am not preoccupied with book-keeping but merely drawing attention to the fundamental reality that we have a serious public finance problem and pointing out that, while the improved economic outlook offers considerable opportunities, it also carries the risk of generating unrealistic expectations about our public finances.
The improvements in personal taxation, which were announced in the budget, are now in effect and the taxpayers generally are beginning to feel the benefits. In addition, the new child benefit is payable from this month onwards. The tax improvements will cost the Exchequer £120 million this year and more than £200 million in a full year. The improvements more than meet the Government's commitments on personal taxation in the national plan and they will result in a significant increase in disposable incomes. To put them in perspective, the £120 million cost of the concession in 1986 adds up to 8½ per cent of the total estimated yield from income tax in the same period.
Despite these improvements however, I readily acknowledge that our levels of taxation remain unduly high. While we are committed under the national plan to no further increase in the burden of personal taxation the aim should be, as in 1986, to improve on that objective in so far as the constraints allow. Tax increases have borne the main burden of public finance adjustment in recent years and they no longer provide a means of closing the budget gap. All the economic arguments are in favour of reducing taxation and spreading the tax burden more widely. We can make steady progress in this direction provided we accept that it requires us to bring down our expenditure profile. If we cannot accept the logic of this, then there can be little prospect of tax reductions.
The consequences of high taxation are disturbing. It encourages the practice of payment through benefit-in-kind so as to avoid high marginal tax rates. This is becoming a widespread problem and these benefits must be taxed more comprehensively in future. High taxation also gives a boost to the black economy, making life more difficult for the legitimate trader. It causes distortion of trade because of price differentials and the leakage of trade across the Border is now very worrying. Finally, it adds to the problems associated with tax collection and enforcement. If taxes are perceived to be severe and the incentive to evade is sufficiently attractive, then the difficulties of a tax collection system, however effective, are magnified. As matters stand, our tax collection system is by no means as effective as it should be. Some changes have already been announced, further changes are under examination and I consider improvements in collection to be a priority.
If we want lower taxes, we must be ready to accept certain consequences. I mentioned already the necessity to reduce expenditure. The other fundamental requirement is that the tax base be widened. This requires that we limit exemptions and reliefs. This is the nub of the problem. People are most reluctant to concede tax benefits, which they have come to take for granted. Interest groups are continually pressing for bigger and better tax incentives. The common attitude is that tax adjustments to widen the tax base are most welcome in principle but unacceptable in practice. We must get off this treadmill of illogicality and decide where our priorities lie.
There are significant tax changes incorporated in this Bill. First and foremost are the changes in personal income tax, which have not so far received the attention that they merit. Much attention has been focused, however, on the taxation measures affecting the financial institutions. The moneys being raised from this source are required to meet the reductions in personal income tax. This is entirely consistent with the policy, which I have outlined, of widening the tax base in order to lower overall tax levels.
There are a number of provisions, including the reduction in the tax take on income from dividends of manufacturing concerns and incentives for research and development, which are designed to encourage risk capital investment by a wider cross-section of the community. We do not have a strong tradition of such investment and we are behind others in this respect. This is a pity because we need indigenous investment of this kind to lift the economy and provide more employment. I have a strong interest in promoting the profit-sharing idea or employee shareholding and a provision is included in the Bill to give a further impetus to this. There are also changes in the treatment of share options.
I turn now to the individual sections of the Bill and I will concentrate on the more significant items. As the Bill is long and much of the text is of a technical nature, it would be impractical to deal with all sections.
The early sections of the Bill give effect in the main to the income tax changes announced in the budget. These provide for the increases in the exemption limits, the new rate bands and the changes in personal reliefs. These changes in conjunction with the abolition of the 1 per cent income levy will mean a substantial improvement in the take-home pay packet of practically all workers. For example, a single PAYE taxpayer on £11,000 will have a reduction of £290 in tax, while a married couple with two children on £15,000 will be £322 better off as a result of the tax changes and the new child benefit. These are the most significant improvements in income tax for several years. I expect that workers generally appreciate the value of those changes, now that the benefits are coming through to them.
In recognition of the special circumstances of elderly people the age allowance has been doubled from £100 to £200 and the age exemption limits have been increased by 5 per cent. In conjunction with the retention tax concession being granted to those aged 65 and over, the standard of living of elderly people will definitely be improved as a result.
The abolition of the 1 per cent income levy and the reduction of the top rate to 58 per cent will, together, have a significant effect on those highly paid employees with particular skills who may feel that there is little incentive for them to earn additional income. Their income tax on each additional pound earned is being reduced from 61 pence to 58 pence.
The Bill contains a number of new significant incentives to encourage business. The current tax treatment of stock options is based on the date on which an option is first exercisable. This may act as a disincentive for some companies to make use of stock option schemes to buy shares at below the market price and it leads to uncertainty about ultimate tax liability. Provision is being made so that, in future, a charge to income tax will arise at the date the option is actually exercised and capital gains tax will be payable on the difference between the market price at the date of acquisition of the shares, irrespective of the price paid for them, and the proceeds received on sale of the shares.
It has been alleged that the new tax treatment of share options will reduce their attractiveness. This may be so in particular circumstances where options are granted at the market price and I propose to introduce an amendment to avoid this possibility. The provisions now incorporated in the Finance Bill will be extended to provide that, where an employee or director obtains an option in respect of shares in a company, or in another company by reason of his employment with the company and the option price is not less than the market value of the shares at the time the option is granted, an income tax charge will not be imposed in respect of the benefit. The gain on the ultimate disposal of shares will in all cases be treated as a chargeable gain for capital gains tax. It is worth recalling that the Bill also provides significant improvement in regard to capital gains tax anyway with the rates on long term gains down to 30 per cent.
In support of my belief that increased share ownership can only help to improve the general industrial climate of the country and increase the productivity of workers, in section 8 I am reducing the qualifying period for full tax relief from seven years to five for shares issued under approved profit sharing schemes. I will also introduce a Committee Stage amendment to abolish the 1 per cent stamp duty payable on the first sale of such shares.
Given the success of the Business Expansion Scheme, which in its first full year of operation caused some £5 million to be invested in qualifying companies, I have extended the scheme to 1991. In 1985, some 570 investors have qualified for tax relief under the scheme. The attractiveness of the scheme has been further enhanced with the recent launching by the Stock Exchange of the smaller companies market. This market will provide an additional exit mechanism for investors in the shares of qualifying companies.
Section 10 of the Bill provides for a scheme of relief from full rates of income tax on dividends paid out of the income of companies qualifying for the 10 per cent rate of corporation tax. The aim is to improve substantially the after-tax return to Irish shareholders in such companies so as to provide an enhanced incentive to encourage increased equity investment from Irish sources in manufacturing companies here. The mechanism by which relief will be given under the new scheme is to exclude from the charge to income tax an amount equal to 50 per cent of all dividends received by individual taxpayers. The balance of a taxpayer's dividend income will then be liable to income tax at his marginal rate after deduction of the full tax credit. It follows that the effective rate of income tax on the distributed profits of manufacturing companies and certain export service companies qualifying for the 10 per cent rate will be 23.74 per cent. The total tax take on such profits, inclusive of corporation tax in the hands of the company and income tax in the hands of shareholders, will fall from 60 per cent to 32.55 per cent under the scheme.
Relief will, however, be subject to a limitation in the form of a ceiling on the amount of dividend income which may be excluded from the charge to income tax in any year. The ceiling for each taxpayer has been set at £7,000 per annum. Given average rates of return on investment in Irish industry today, the level of relief available under the new scheme will be sufficient to enable an individual to invest a sum of almost £300,000 and still obtain the full benefit of relief. It is, therefore, an extremely generous relief by any standards. By providing a facility to receive investment income of an amount up to £7,000 per annum completely free of income tax, the new relief will represent an incentive to encourage Irish investment in qualifying companies which is unequalled in the member states of the EC and may be without parallel anywhere in the world.
This, to my mind, is a very important part of the Finance Bill and should be seen to be linked to the Government's White Paper on Industrial Policy. In the White Paper the Government said that, while they appreciated the importance of foreign manufacturing investment in Ireland, they wanted to see a greater development of strong Irish-owned companies in manufacturing rather than major Irish companies in the service or semi-protected sectors of the economy. The best way of doing that is to encourage Irish people to invest in either whollyowned Irish companies or in companies operating in Ireland which may have some ownership outside as well.
The philosophy underlying the Finance Bill is one which seeks to attract funds of Irish people away from forms of saving which are not autonomous wealth generators, where in a sense the money is being kept safe or static, into risk investments and into the manufacturing or trading sectors of the economy where the benefit will be enjoyed not just by the saver but by our population generally since that investment of savings will also create jobs. By developing a flow of funds into Irish-owned manufacturing companies we will be reducing what in the past may have been an undue dependence on foreign investment for the growth of manufacturing in Ireland.
This and other provisions in the Finance Bill should be seen as a direct consequence of earlier decisions taken by the Government in the White Paper on Industrial Policy to shift the incentive for saving into the risk oriented sector and to shift the emphasis towards domestically-owned companies rather than an unhealthy reliance on foreign-owned companies.
Section 11 of the Bill provides for the continuation for a further year of the existing stock relief arrangements for farmers. Section 12 provides for a credit for farm tax paid against income tax liability generated by farming.
In Chapter III of the Bill there is a new mechanism designed to encourage taxpayers to invest in research and development projects, where the risk is high, but where the rewards may be equally high when they materialise. The level of R and D in this country is disappointingly low by international standards and we must do something about this. Expenditure in 1984 on industrial research and development in Ireland accounted for 0.4 per cent of GDP as compared to 1.2 per, cent average for the OECD. The scheme for relief for investment in R and D may appear detailed and lengthy as it is set out in the Bill.
The need for complex legislation arises in order to prevent the provisions of the scheme being abused and serving solely as a means of avoiding tax rather than facilitating the objectives of the scheme. Such detailed legislation will also assist genuine prospective investors by removing any uncertainty as to the scope or application of the relief. Under the scheme qualifying investors may get tax relief of up to £25,000 in respect of moneys invested in a research and development company. The investment may be short to medium term and it is unlikely that many long term investment projects will be involved.
Qualifying research and development is defined in terms broadly similar to those used in the Industrial Development Act, 1969. Because of the varied nature of the projects which it is desired to promote it is not possible to provide a more detailed definition of "qualifying research and development" without running the risk of excluding some worthwhile project. There is a requirement that the benefits of any such project must accrue substantially to this country and, in order to encourage involvement by outside investors, the ceiling on investment by the sponsoring company, which must be a manufacturing company incorporated in this country, will be limited to 20 per cent. This incentive will supplement the existing provisions of the business expansion scheme which may be used for raising capital for research and development in the case of a manufacturing company.
There has been, as Deputy O'Kennedy will recall, some criticism from time to time of the business development scheme. It was said that it was unduly complex.