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07-12-1999 Taoiseach speaking on the Budget


This is one of the most ambitious Budgets in the history of the State. With the exception of some heavy smokers, everyone gains. It places a strong emphasis on social inclusion, as well as giving a more substantial reduction in the personal tax burden than it has ever been possible to do before. Many taxpayers on fairly average incomes will be at least £20 to £30 a week better off. The Budget carries forward the process of radical tax reform. But, in mapping out a future modern tax system for those in the workforce, we will have to be attentive to the balance that needs to be preserved between spouses who work outside the home and spouses who bring up children or care for dependants at home. There has to be a sense of fairness, vis-a-vis not just carers in the home but the low-paid and other disadvantaged categories of the population, and it is the responsibility of the Government to ensure over the next period that resources are equitably distributed.

Before discussing some of the issues surrounding the Budget, we need to remind ourselves how this year’s Budget builds on the success of the Irish economy, which has been at the top of the OECD charts through the 1990s. We are at the end of our sixth successive year of phenomenal growth. Unemployment is falling rapidly. In absolute numbers on the live register, below 172,000, we have rolled it back to where it was in November 1982. But, relative to the hugely increased size of the labour force, the percentage unemployed is now down to 5.1% and is likely to fall below 5% next year. Net employment is at its highest level ever and growing rapidly. It was less than 1.1m in 1987. Next year, it will be heading towards 1.7m. There has been a dramatic reduction in the depth of poverty. The result of the buoyancy in growth and employment is that the Government finances are in their healthiest order ever, with the General Government Debt / GDP ratio set to fall to 46% in the year 2000 and rapidly thereafter. We no longer have to borrow even for capital investment. Apart from about £3 billion in EU funding, we are able to fund out of our own resources the major infrastructure programme in the National Development Plan costed at £41 billion, and put money aside for the future funding of pensions.

Last July, the OECD Report on the Irish economy described us ‘as a world leader in a number of aspects of economic performance’, a performance which it described as ‘peerless’, contrasting it with the mid-1980s, when we were ‘the sick man of western Europe’.

None of this has happened of its own accord. The primary credit goes to the working people of this country. But there also had to be a positive policy framework. While there are long-term factors involved, including a consistent industrial policy over a period of 40 years, and free secondary education introduced by Donogh O’Malley in the 1960s, there are more particular explanations for the vastly improved economic performance since 1987 and the phenomenal sustained growth experienced beginning in 1993-4. I would list four factors :

- In 1987, a determined policy of financial stabilisation combined with social partnership against a favourable international background created a new confidence in the economy, and soon had nearly all the indicators pointing in the right direction, setting up a virtuous circle.

- We successfully negotiated substantial Structural and Cohesion funding over a 20 year period, for investment and social inclusion from the EU, with the two Delors packages and more recently Agenda 2000.

- When the public finances improved, we started to reform the tax system and lower the tax burden, while also strengthening the social safety net.

- While we lost the battle on devaluation, we won the war, setting a credible exchange rate heading into EMU, which saw Irish interest rates tumble. The impetus gave us a competitive momentum over a number of years, which was not lost through higher inflation.

- Finally, we have under this Government been able to prolong this unique period of high growth by prudent budgetary policies, limiting the growth of current expenditure, and giving people back more of what they pay in tax, far beyond what most parties envisaged as possible during the General Election of 1997.

The success that enables us to make so many improvements together has come, because as a country we stopped putting the cart before the horse. Only if we drive economic development forward and provide proper work and business incentives, will we generate the funds to tackle more comprehensively social exclusion. It is all about doing things in the right order, and not assuming that economic growth and competitiveness will take care of themselves, while we spend and redistribute the fruits of labour.

By virtually every criterion, the budgetary policies of this Government have been spectacularly successful. When Opposition leaders claim that when they were in government they never had as much money available, that is of course true. But they rarely acknowledge that it was the present Government and other Governments in which Fianna Fáil have participated since 1987 that have had the largest share of responsibility at a political level for creating the extra space and the extra resources.

The social content of the Budget is large. £485 million has been provided for additional social inclusion measures, going well beyond any previous package. Partnership 2000 committed the Government to spend £525m on a full year cost basis over the three year period on social inclusion measures to protect the real value of social welfare payments during the period of the Partnership. We have gone way beyond that. This year’s Budget on its own is only £40m short of that target. The general social welfare increases, averaging 5.5%, should this year keep pace with the increase in average earnings, not just inflation. The old age contributory pension has been increased by £18 under this Government compared to half that amount during the three Rainbow Budgets. It will be well over £100, when we leave office. Those who call the present £7 increase paltry have obviously forgotten the £1.80 given in 1995. Even on child benefit, which was the main focus then, we have done better this year with increases of £8 and £10.

Those organisations who look after the mentally and physically handicapped are very pleased with this year’s Budget. Former Labour Party adviser Fergus Finlay, who has a special interest in the sector, wrote in the Examiner on Thursday that the Minister had done ‘a tremendous day’s work under that heading’. The Director of REHAB has called it ‘a major breakthrough’ and ‘a message of hope for the many thousands of people with disabilities’.

The centrepiece of any Budget are changes in taxation. No one can dispute that the £942m given in tax relief far exceeds any even of the last three Budgets. We have already at the end of 3 years reached the upper range of where we considered we could be, in terms of the overall cost of tax packages at the time of the last General Election.

We have acknowledged the importance of increasing tax-free allowances, which was one of the arguments made at the last election. Our introduction of the tax credit system has ensured that disproportionate benefit no longer leaks up to those on the top of the scale. The tax-free allowances have been increased by £1,800 for a single person, and double that for a married couple over our three Budgets. This compares with a total of £550 or just under a third in the three Rainbow Budgets. The tax free allowance now stands at £4,700, which will take 50,000 out of the tax net. The proposal to introduce a minimum wage was also an initiative of this Government.

Fulfilling the mandate given by the people is an important principle. We promised the electorate that we would cut tax rates, and we have done so, by 4% on each rate or 8% in all since 1997. This compares with a 1% reduction only in the standard rate during the period of the Rainbow Coalition. There is bipartisan agreement across the House on the necessity and desirability of cutting corporation tax rates to 12.5%, which has had a huge spin-off in terms of stimulating business. Corporation tax revenue will have almost doubled from just under £1.7 billion in 1997 to over £3 billion in 2000, in the space of just 3 years. The Minister for Finance read out himself, how revenue from his heavily contested halving of capital gains tax in 1997 has increased from £132m to £343m. How is it, that we are prepared to cut business tax rates, essentially for the sake of the economy, but are resistant to cutting them for the hardworking people on PAYE ?

The most controversial part of the Budget by far has been the plan to implement the other plank of our tax policy, which is to reduce drastically the numbers paying tax at the higher rate to 20% or less, by doubling the band over 3 years and individualising it. We are taking 125,000 out of the top tax rate this coming year. It goes a long way towards acknowledging the additional costs of childcare in families, when both parents work outside the home. It is fundamentally inequitable that many newcomers to the workforce, who are young single people, should have to pay the higher rate of tax at below the average industrial wage. That situation has been condemned for years on all sides of the House, but until this year not much that is effective has been done about it. The present tax system also clearly discourages the married woman in particular from a return to work outside the home, by in most cases imposing over 50% deductions on her pay. If you add to that in many instances the cost of childcare and other costs, it may simply not be worth her while. What we can do to help those at work is severely constrained, if the bands have to be doubled, regardless of circumstance.

The concept of individualisation of tax bands, for which there are strong equity arguments, is contained in the ESRI’s booklet last October on budget options and in an interdepartmental report published last August on the treatment of married, cohabiting and one-parent families under the tax and social welfare systems. The Combat Poverty Agency in a statement issued last Thursday supported individualisation and restriction of the transferability of bands, but urged a series of accompanying measures. I accept the view of the President of Congress that the context of the change is as important as the principle of it.

Fianna Fáil policy in recent years, recognising the huge social changes that have taken place, has been to balance support for the carer in the home and the right to gender equality in the workforce. The present system is weighted against the spouse who chooses to work outside the home. I would point out that the Budget has introduced a much-needed carer’s benefit, but that is just one necessary step. This is only the third of five budgets, and how we achieve the necessary balance over the remainder in broad terms will be a subject of both political discussion in the Government and negotiation with the social partners.

The Fine Gael Party, who have been loudest in their opposition to the change, proposed something with a similar effect in their recent economic policy document. One of its aims was also to reduce the number of persons who pay tax at the higher rate - and I quote - ‘so that women at home are encouraged to rejoin the labour force’. Fine Gael proposed to introduce an earned income tax credit, which would to use their words produce ‘tax reductions at different levels of income for single, married one earner and married two earner taxpayers’. A married couple two earners for example would save substantially more tax than the one earner couple. What is more, in footnotes Fine Gael states that its policies are not negotiable with the social partners, only the timing. I would like to suggest in the light of this document, that the furore created by the Fine Gael leader is arrant bluster and hypocrisy. Fine Gael is overtly trying to push married women at home out into the workforce, whereas the Budget simply sought to remove the positive discouragement to workforce participation contained in our present tax system.

I acknowledge the real concerns that have been expressed in many quarters about the Budget plans in regard to the method chosen to achieve a major widening of the band. The Government have no desire to dictate personal choices to any group of citizens, and least of all to the family. Our objective is, as far as possible, to provide a level playing field, in terms of fundamental fairness, equality of opportunity and personal freedom of choice. But we do also have to respond to social change. If we accept that people should pay tax in their own right, especially above a certain income level, at an effective rate proportionate to their income, it is for further discussion what level of relief is appropriate to take account of any individual or couple’s domestic or family circumstances, and what supportive measures are necessary to support such a change, particularly when it goes further down the road.

In launching the negotiations on a successor to Partnership 2000 I made clear that the Government accepts the analysis in the recent National Economic and Social Council strategy report, which inter alia attaches a high priority to increases in personal allowances and significant priority also to increasing the level at which people become liable for the higher rate, and the need for measures other than the increase in child benefit to address the issue of childcare availability and supply. I underlined my belief that the vision in the NESC report can be made a reality. I equally underlined the Government’s view that implementation requires a realistic approach to the pace at which progress can be made and a sense of balance between the various elements of the vision. The Budget came at an unusual point in the course of the negotiations. The norm has been that budgets have come after the conclusion of the negotiation of particular Agreements and can be clearly seen in perspective. This Budget contains much that has been rightly welcomed, in particular in reversing the discrimination suffered up to now by single workers who entered the higher tax bracket far too soon and by married couples who both work outside the home and whose additional burdens because of that had not been recognised.

Because it is one Budget, it has not been possible to identify clearly or fully the balance that is essential in particular for carers who work at home and to underpin our ongoing commitment to those who are least well off.

I am taking the opportunity today to say that the Government will take steps over the remainder of its term to ensure the necessary balance in the implementation of Government policy. We will be listening carefully to proposals put forward in the negotiations on a successor to Partnership 2000. I use the word consensus deliberately, because significantly different views are held by different social partners. The strength of the social partnership process over the past decade has been the capacity to agree on a shared vision and a consensus on the direction of measures necessary to implement that shared vision.

I will meet the social partners again as soon as possible to explain the Government’s view on how to achieve balance in giving effect to the NESC vision and to listen to their views. If it transpires that the essential balance requires more years to be worked through at the realistic pace I referred to earlier, then the Government will be prepared to work with the social partners to achieve that balance. The Government will also listen to the people, and to reasoned argument put forward by them or on their behalf.