It is always useful when considering proposals such as those contained in the Bill to consider the historical context in which they arise. The Finance Bill is concerned with the raising and distribution of Government revenues. We fund the activities of Government principally by raising taxes and the concept of raising taxes is very ancient. The Crusades were funded by raising taxes. In this country, famine relief works were funded by raising taxes on a local basis. In Britain the First World War was funded by the introduction of a broad based tax on income and we have lived with taxes on income ever since. The building of such projects as Ardnacrusha power station and Shannon Airport and the development of new hospitals, not just recently but throughout the period since independence, the national road network, the education system, up to the provision of free second level education for all in the 1960s as well as new centres of third level education, are all powerful evidence, if it were needed, of the benefits that have accrued to the nation and its citizens from revenues raised by successive Governments. Taxation has also served to provide assistance for the weaker sections of society on a progressive basis.
As time has passed one of the most important ways in which the taxation system has helped society has been through the provision of financial incentives for the encouragement of industry. The 1940s and 1950s were a period of high protectionism for native industry but the 1960s under Sean Lemass saw a change of direction in Government policy which helped to prepare the country for the rising tide of economic growth through successive programmes for economic expansion. The introduction of the Shannon free airport development zone, a 10% corporate tax rate for manufacturing industry and, more recently, the development of the International Financial Services Centre were all crucial to the modern economic miracle we have witnessed. It would be impossible not to recognise the part our membership of the European Union has played in this development but we should never overlook that we have much to be proud of in our own efforts in this regard. Through our taxation policy and education system we have produced an economy that is the envy of many other countries.
The Bill is ample evidence of the success of the economic policies of Fianna Fáil in government. Since his appointment in 1997 the Minister for Finance has overseen serious reductions in the levels of personal income tax, capital acquisitions tax and capital gains tax as well introducing a number of innovations in the pensions area.
With regard to income tax the enactment of the Bill will see the standard and higher rates of tax reduced to their lowest levels since the foundation of the State. This must be viewed as a remarkable achievement. It is all the more notable when one considers the position that prevailed just over ten years ago. An article in The Irish Times on Monday of this week stated:
Today's booming economy is a vastly different creature to the battered economy of 1987. At that time, the public finances were in a shambles. Soaring inflation and interest rates, negative investment, a penal personal tax code, massive unemployment and widespread emigration had combined to bring the State to a virtual standstill.
Tax incentives created the foundation on which our booming economy was founded. The reductions in income tax proposed in the Bill, combining as they do with the proposals in the Programme for Prosperity and Fairness, will help to maintain growth in the economy on a steady course for the next few years. The Government is giving back to taxpayers the benefits that have accrued since we had to tighten our belts during the difficult years in the 1970s and 1980s. Fianna Fáil said that it would create the environment in which industry could flourish. We achieved that aim and now, I am happy to say, taxpayers are reaping the rewards for placing their trust in Fianna Fáil.
With regard to capital acquisitions tax the Minister announced in the budget major increases in the tax thresholds for inheritance tax and major reductions in the levels of tax by abolishing the multiple rates and introducing a level rate of tax of 20%. These changes have been confirmed in the Bill and will be a source of enormous relief for families. Improvements are to be made to the basis of aggregation. Previously, penal rates of tax applied to relatively small inheritances and frequently required the disposal of the inheritance to pay tax.
Earlier I listened to what the Governor of the Central Bank had to say about the economy in the context of EMU. He made a number of salutary points which are worth noting. We have to be reasonably careful in managing the economy and if corrective action is not taken at some stage we could be in trouble. Deputy Yates said that we are not conscious that there may be another side to the boom and bloom economy, however, the Minister is well capable of tuning the economy to suit. In his address to the Joint Committee on European Affairs the Governor of the Central Bank said:
Studies undertaken by the Central Bank suggest that, for the medium term, we have the capacity to sustain a growth rate of the order of 4% to 5%. This is about twice the estimated potential growth rate for most European economies. The exceptional growth over and above this for the past few years was made possible by a high degree of slack in the economy and in particular, by a rather low employment rate. This good performance contributed to a welcome increase in living standards and employment. Now, however, there is mounting evidence of overheating in the domestic economy. This is reflected in exceptionally rapid increases in property prices, unprecedented demand for credit, labour shortages, higher inflation in the services sector and chronic congestion in the physical infrastructure.
During the past year, there has been a marked disimprovement in our inflation performance, both in absolute terms and by reference to our main trading partners. In January, the rate of inflation here, as measured by the HICP, the benchmark index for euro area comparisons, was 4.4%. This was two and a half times the rate prevailing in the euro area as a whole. This puts us at the top of the league table. Some of the rise in headline inflation can be ascribed to once-off or temporary factors – such as the rise in excise duty on cigarettes, higher oil prices and weakness in the euro. There is, however, a strong rise in underlying inflation which for the most part reflects the existence of strong demand.
Nobody claims that inflation here must be at precisely the same level as in the euro area generally. It is reasonable to expect some differential at this time in view of our economic conditions but there are obvious limits. The point I want to emphasise is that, if present trends persist, we may have a sharp loss of competitiveness on our hands.
I was glad when the Minister came down heavily on tax evasion. The Committee of Public Accounts by way of the DIRT inquiry has done the country a remarkable service. It has been clearly stated that there will be no hiding place for tax evaders. I have no compunction in saying that tax evasion should be rooted out, whether by big business or multimillionaires. I represent a constituency where social welfare fraud on a small scale has nearly always been part of the culture. I am not trying to condone it, but often people had no option but to hide the fact that they had done some nixers when pursued by the Department of Social, Community and Family Affairs, often for a couple of hundred pounds. It has been decided at long last and not before time that big tax defrauders should be pursued and I compliment the Minister on this.
Child care was a big issue in the run-up to the budget. The £3,000 allowance for stay-at-home spouses who look after children, a handicapped person or an elderly person will equalise the position. It is welcome for that reason. The other initiatives taken on child care area are also welcome. The supply side has to be addressed. The provision under which there will be a 100% tax write-off of the costs incurred in providing new child care facilities and the refurbishment of existing centres is to be applauded. A number of interesting initiatives have been taken. There is a fine crèche facility in DCU which is funded in an innovative way. There is also a fine facility in Coláiste Eanna in Cabra and another in Ballymun. Many more are needed.
The provision relating to gifts to third level institutions is important. Increasingly, there will be a need for third level institutions to plug into the private sector. I am glad that the MIT will be funded to a certain extent through the Ryan Institute. The traditional and new universities have been lobbying for this for a long time. I hope when it moves to the Grangegorman site the Dublin Institute of Technology will benefit from income accrued in this way. I commend the Bill to the House.