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Statement on the 2004 Budget, Dáil Eireann

 

This is a budget for a strongly growing Irish economy. With our massive decentralisation programme, the Government are going to see that that growth is properly distributed round the country.

The benefits of the budget changes are concentrated on people and families in the lower income groups, whether at work or in receipt of welfare payments and pensions from the State. This is without argument a socially progressive budget, and exposes once again the hollow ideological myth that this is a right-wing Government who care only for the better off.

There is strong evidence of a pick-up in the international economy, especially in the United States, which now exercises a huge influence on our economic fortunes. This recovery is taking place against the background of historically low interest rates.

We have come through the international downturn of the last 3 years in remarkably good shape.

  • Employment here has continued to grow, even if much more slowly. It  is estimated that there will be an additional net 17,000 jobs this year, which should increase by 23,000 more in 2004. Unemployment hovers round a quite remarkable 4.5% - 5%.

  • Inflation, is expected to average no more than 2.5% in 2004, and should fall below 2% for part of it.  We are well in line with the rest of Europe. The indirect tax increases in the Budget add minimally to inflation, 0.4% next year, or less than half the previous Budget.

  • Our public finances are the envy of Europe. We have the second lowest General Government debt/GDP ratio apart from Luxembourg, and borrowing will not exceed 1.1% of GDP in 2004,or about one third of the permissible Growth and Stability Pact ceiling. The Exchequer returns for end-November were better than expected, and it now appears that the General Government Balance in 2003 will come in at under €600m, which is nearly €300m less than forecast.  While there are always swings and roundabouts in terms of revenue receipts under different headings, tax receipts overall this year will come in some €100m ahead of budget. This reflects a fair degree of resilience in the Irish economy, but also the particular success of some of the Ministers provisions last year, especially in relation to capital gains tax.

The truest line in the Minister for Finances speech is the one where he says: Borrowing is the real stealth tax. Those who propose a much higher level of borrowing can have no real long-term commitment to maintaining the low tax rates that we have achieved in this country. They are the key to full employment and competitiveness. 

It would not be in our national interest to press up against the Growth and Stability Pact ceiling of 3% GDP or to breach it. 

As a small country, it is not in our interest to have any doubts hanging over the soundness of our economic management. We would of course still be interested in altering the treatment of the more costly long-term Public Private Partnership projects,which at present are compressed by the European Statistics Office into a single years expenditure for General Government borrowing purposes. That is one aspect at present that is a significant constraint.  Eurostat rules could also be a lot clearer but that is being worked upon.

Up to 1987, a third of all tax revenue went in debt servicing. Is it any wonder that tax rates then were crippling, with very little money available to improve services or infrastructure or relieve poverty?  In 2004, little more than7% of tax revenue and 7% of net current expenditure will be required to service our debt. That is a huge sea-change.

In 1997, the annual cost of debt servicing peaked in absolute money terms at €3.5 billion. Next year, it will be only €2.4 billion. Our financial indebtedness, which six years ago was still above the EU average under the Rainbow Coalition, has improved hugely since, with the General Government Debt halved as a percentage of GDP.

What all this means is that we can look forward to entering a period of resumed economic growth, carrying no additional baggage in terms of debt to hamper our progress. Even with the scaling down of EU receipts and a tighter budgetary situation, we are still able to sustain the hugely increased level of current expenditure on services and of capital spending on infrastructure that we achieved during the Celtic Tiger years. In the past, more difficult economic circumstances would have brought about sharp retrenchment with a negative impact across the board. What is remarkable about the last two years is how small the adjustments have been compared to previously.

Budget 2004 is a budget of hope. But it is also based on economic reality, and it reflects some basic facts:

  • Firstly, Ireland is part of a monetary union where monetary policy is focused on ensuring low-inflation and where exchange rates are effectively outside of our domestic control;

  • Secondly, international competition is exerting downward pressures on goods prices and is likely to continue to do so;

  • Thirdly, we are one of the most open economies in the world;

  • Finally, international competition for jobs and investment is becoming more intense all the time.

Everybody today accepts the vital importance of bringing our infrastructure up to the best European standards. What this requires is not a short extra spurt followed by a hard slamming on of the brakes, as happened in the past, but a consistent high level of expenditure that ensures we get the best value for money. It is a crucial difference between Ireland and Europe's longer developed economies that we have to spend a substantially higher proportion of our national wealth on infrastructure. The Government have committed themselves to capital investment of €33.6 billion over the next five years,of which a conservative €2.4 billion will come from PPPs. The 10% leeway, which  Departments can carry over,means that the exact timing of payments will not act as a distraction.  It is steady, consistent investment that will gradually enable us to overcome step by step our infrastructure deficit.  While we may be conscious of how much there is to be done, our neighbours in Northern Ireland are impressed at how much we are now able to do, once again a quite different situation from the past.  

It is in the nature of capital investment that there is some time lag before we see the full benefits. Indeed, there is often considerable interim disruption. The motorway from Dublin to Dundalk is now complete, and is a huge boost to the Dublin-Belfast corridor, which also has an excellent train service. Next week, the Kildare by-pass will open. The week after that, a significant increase in public transport capacity will be reflected in the new train timetable. Within two years, we will have the Port Tunnel and the Dublin motorway ring road completed.

May I remind those commentators and public representatives who are constantly on the ideological war path against this Government,that a high level of public expenditure on investment is the hallmark of an enlightened and progressive Government. It was certainly never a defining characteristic of right-wing governments, outside of defence. Exchequer capital expenditure next year will be nearly three times that in 1997. It is the two Fianna Fáil and Progressive Democrat Governments that have given major priority to the radical improvements we so clearly require.

Schools are as much a vital part of our infrastructure as roads. The Book of Estimates increased expenditure on sub-standard national school buildings, of which there are many, by €23m to €190m. I am glad that in the Budget we have been able to allocate a further €30 million to both the primary and secondary sector, making an additional €55mil together next year compared to 2003. Our children deserve nothing less. 

Our critics inside and outside of the House divide into two camps. There are those in Fine Gael who claim that we are and have been spending too much. The Labour Party and most of the Independents argue on the other hand that we have been spending too little.

The gradual slow down in the public spending profile has actually had remarkably beneficial effects. A sharp downturn in the Irish economy began in the second quarter of 2001. 

The rate of public expenditure increase in 2001 and 2002, including the substantial increase in public service numbers,exerted a counter-cyclical effect, as noted by the IMF and OECD in their reports earlier this year, and helped ensure a soft landing.  Equally, in their view, the reins were tightened at the right time this year.  The bottom line is that after three years of downturn, and as we approach a likely upturn,  we are in a surprisingly strong economic and fiscal position. That should not be a matter of criticism, but of praise, and in fact is.

I would like to quote again what the IMF said last August:

Directors commended the Irish authorities for their exemplary track record of sound economic policies which have resulted in a dynamic, open and robust economy - with growth noticeably above the EU average over the last decade - and resilience to extra shocks.

You cannot get much higher praise than that from a notoriously tough-minded international body like the IMF, which is well known for taking no prisoners. I would have to say their words carry more weight with me than all the criticisms put together of opposition finance spokespersons.

The estimates provide for the payment of benchmarking, which will cost €305m this year.  The principle of the exercise has been praised by the OECD, who have said we should do more of it.  It has already delivered in 2002 the best year of industrial peace for many decades, and freed us at last from the bane of relativities.  The Verification Bodies are active.  I cannot take seriously the notion that Fine Gael would actually repudiate its obligations, if it were in Government,or that it would ever be allowed by the Labour Party to do so. I remember, when Deputy John Bruton opposed the Programme for Competitiveness and Work in 1994, but jumped to attention pretty quickly, once he became Taoiseach. Of course, the same thing would happen again under any other Fine Gael leader, and no one should be under the slightest illusion about that.

Social partnership has served this country well for 16 years. It is a unique and crucial part of our recent economic and social development. Partnership has helped provide stability as well as a consistent and coherent policy framework. It allows us work together to solve problems. I believe in social partnership. I remain committed to social partnership, and I believe that this Budget will help to underpin its continuing success.

Low inflation of 2.5% in 2003 will provide the backdrop,together with benchmarking and the tax provisions of this Budget,to the second half of the public service pay agreement, which remains to be negotiated as  part of the current partnership programme. 

The need to remain competitive is a widely acknowledged concern,given present circumstances, and there is a perception of some slippage that will need to be corrected, if it is not to have serious consequences.

The pension arrangements for new entrants to the public service are an issue it is wise and prudent to address, long before it becomes acute. Many of the difficulties facing some of the major Continental economies today is because they have put off the evil day and let that problem become worse and worse. The prospect of more flexible retirement conditions will, I am sure, be a welcome prospect to todays entrants into the public service, but it may also be vitally necessary, if more generous social provisions for retirement are to be sustainable in the long run.

A major plank of the budget, which also directly affects the public service, is decentralisation to 53 towns and cities. Decentralisation is or ought to be welcomed throughout Ireland, relieving some of the huge pressure on Dublin, and spreading the wealth to other parts of the country. Decentralisation is not just directed to hubs and gateways, but also to many substantial towns in the hinterland that have attractive but under utilised amenities and in most cases good infrastructure and access. Many such towns will greatly benefit from the tremendous fillip that decentralisation can give them. 

There is no town without councillors from many parties and none, and in nearly every case the campaign for decentralisation has been a combined community effort with all-party support. Nevertheless, as government parties, we are fulfilling with great satisfaction a major and long-standing promise. This will be an ongoing policy, in relation to the setting of future Government offices or services, and we have by no means exhausted all the possibilities. Even in the present round, not all of the locations have yet been decided on. In general principle, new agencies will be directed outside Dublin. This policy is based on solid experience.

Earlier rounds of decentralisation, including when I was Minister for Finance in the early 1990s and which involved 4000 jobs, were a great success. This is a more fundamental shift.  Modern communications make it unnecessary to have all Departments working in Dublin. The move will be voluntary and there will be just as good career possibilities for those who move out of Dublin as for those who stay, and in many cases a better quality of life. There are savings as well as costs involved from the point of view of Government. The success of the programme will require the cooperation of the public service and its union representatives, and we look forward to progressive implementation supervised by an Implementation Committee reporting to a Cabinet Sub-Committee.

Arguments are often made that we have by European standards a low rate of public expenditure relative to GNP, and that is why our public services are deficient in many respects. On the contrary, my belief is that the way we have managed our economy has maximised the amount we have available to spend, which has increased by huge amounts in virtually every sector.  It was convincingly demonstrated at the Kenmare Economic Workshop, that, when all relevant aspects  were taken into account, our level of public spending was fully up to the European average. Those aspects include much less defence spending, less debt service, a favourable demographic and dependency profile, and of course a low level of unemployment.

The objectives of this budget, as set out by the Minister for Finance, are entirely in line with the priorities in our Programme for Government. They are also fully in line with the objectives we agreed with the social partners in Sustaining Progress.  There we agreed that the central macro-economic objective was to consolidate recent progress, achieve a medium-term growth rate to sustain high levels of employment and facilitate the evolution of a more equal society.  This is to be done by securing low inflation, sustainable public finances, and social economic and environmental sustainability. 

We have reflected these priorities under Sustaining Progress, in particular, in the commitment to fairness in the budget provisions. This is particularly clear from the focus of our resources, on those on the minimum wage, which itself is to be substantially increased next February; on reducing the relative burden of income tax on those on average incomes and below; and on improving the income position of elderly tax payers. The reform that introduced tax credits back in 1998 enables us to target tax concessions far more effectively than before, where the most benefit frequently went to the top of the chain. The tax tables in yesterdays budget booklet show an exemplary profile in terms of equity. What the Labour Party seem to want could in fact invert that profile.

In line with our commitments in Sustaining Progress, this Budget makes substantial and tangible progress in ensuring that people have resources and opportunities to live life with dignity and have access to the quality public services that underpin life chances and experiences.

In line with this commitment, the Government has already agreed to increase the national minimum wage to €7.00 per hour, with effect from 1 February 2004.   Budget 2004 ensures that the position we first achieved in 2002 - where 90% of the minimum wage annualised was made exempt from taxation - is maintained in 2004 for the much higher figure. That is a very big achievement, requiring substantial resources.  

The increase in the Employee Credit, or PAYE Credit as it is also known, in the Budget means that from January next a single PAYE worker will not pay tax on income under €246 per week, equivalent to €12,800 per year.  To put the figures in context, when the Government entered office in 1997, the first €98 of weekly income only was tax free. We have raised the entry point to taxation by over 150% since 1997,  more than five times inflation over the period.

Budget 2004 also raises the Age Exemption limits, under which those aged 65 and over are exempt from taxation, for the third year in a row. For 2004, the limits are €15,500 in the case of a single or widowed person and €31,000 in the case of a married couple where one is or both are aged 65 or over. There presents a total increase over 3 years of almost 44%, four times inflation in the same period.  In this way, we are more than helping to protect the real value of incomes for pensioners on lower incomes.

As a result of these changes, in 2004, 35% of all those on the tax record will pay no tax at all.

Since 1997, average tax rates have fallen for all categories of taxpayer, including those on lower incomes. After Budget 2004, for a person on the Average Industrial Wage, the average tax rate will be 10 percentage points lower than it was in 1997.  

As a result of Budget 2004, the percentage of the income tax yield coming from those earning the Average Industrial Wage or less is 6%, compared to over 14% in 1997. This is a 57% reduction. This is the answer to our critics, and the comparison does not reflect well on the Labour Party record in Government in particular.  The EU Commission has on previous occasions commented that our tax system treats those on low incomes more favourably than any other EU country.

It would naturally have been desirable, if it could have been easily done, to extend also the standard rate band. We will hope to catch up on that, when circumstances improve further, and we have more latitude.

Low direct tax rates, both in personal and corporate taxes, have been a key factor in generating growth and employment. The long-standing Government policy of low corporation tax rates has been vital in attracting foreign direct investment in the manufacturing area. It has also been a big element in making the IFSC in the Dublin docklands area a major success story, with direct employment of almost 11,000 jobs, and also contributing substantial government revenue. It is very important for Ireland to remain competitive in attracting highly mobile foreign direct investment and to develop high quality jobs in multinational domestic sectors. We know the importance of using tax effectively as an economic instrument, and thus the importance of retaining national control in this area. The recent dispute between the EU Commission and France and Germany over the Stability Pact was not just about big versus small countries. It was also about all EU Governments having the right, within limits, to determine their own budgetary decisions.

Our 2004 Budget contains several initiatives in the tax area of great importance to business investment in this country. First, there is a proposed new tax credit to encourage companies to increase their expenditure on qualifying R&D activities, which will help to move Irish manufacturing employment up the value chain.   Secondly, a special exemption is being introduced in the capital gains code for where a holding company disposes of a shareholding in a subsidiary company. This relief exists in several other EU countries, and the aim behind its introduction here is to encourage multinational corporations to locate their regional headquarters and holding companies in Ireland, which should be a particular benefit to the IFSC. We will then be virtually the only EU country to have both low corporation tax rates and company holding relief. Thirdly, the BES and Seed Capital schemes, an important source of finance for small and start-up companies, is being renewed for another 3 years to end 2006.

The extension of these two schemes for a further three years,and the increased company limit of €1 million, will continue o help these types of businesses bridge the financial gap that they are experiencing.


Social Welfare Improvements

The social welfare improvements in this years budget will cost €630 million in a full year, a substantial increase of €100 million on last years budget package. This should correct the misrepresentation that has been peddled about social welfare cutbacks.  The €630 million figure for this year stands in favourable comparison to the €273 million in the Rainbow Coalitions last Budget (1997).

In Budget 2004, the personal rate of Disability/Unemployment Benefit are increased by €10 to €134.80. In their last Budget, the Rainbow parties increased this by only €3.81 to €85.73


Other key positives in Budget 2004 include :

  • Family Income Supplement income thresholds increased by €28 per week with a €7 increase in the minimum payment; 

  • Increase in the Respite Care Grant to €835 per annum from June  2004; and

  • Increase in the Widowed Parent Grant to €2,700 from Budget Day.


Old Age Pensions

All of our budgets since 1997 have been characterised by measures designed to improve the position of older people in our society in regard to pensions. After the large increases of the early 1980s, their relative position had fallen back, and needed a sustained boost to lift them above the poverty level once again. 

At the 1997 election, we promised to increase all old age pensions to at least €127 (£100) per week over the last Governments term. We more than delivered on this commitment. At the 2002 election, we promised to increase the State pension to €200 per week.  Budget 2004 puts us well on track to deliver on this commitment.  It provides for a €10 per week increase in the full personal rate of old age and related pension. 

People with short political memories will not forget that over the three budgets of the Rainbow Coalition, the Labour Party Minister for Finance, and the Democratic Left Minister for Social Welfare gave pensioners an average increase of €2.95. In contrast, the average increase to pensioners under Charlie McCreevys budgets now stands at a massive €9.75. 

In monetary terms, the statistics are even more stark.  The effect of the increases under Fianna Fáil is that the rate of Old-Age Contributory Pension will now stand at €167.30 per week. This is a monumental increase on the €99 per week which was the payable rate on the day the much vaunted champions of social justice in Fine Gael and Labour left office. 

Other Pension increases are for example the over 66 Widow(er)s Contributory Pension and Deserted Wifes Benefit increased by €11.50 per week. 

In Budget 2004, all other personal weekly rates increased by €10 per week.  This benefits nearly 1 million people who claim a weekly social welfare payment, extending to 1½ million when their dependents are included. I am particularly happy that this substantial increase will apply in full to over 400,000 on the lower rates of weekly social welfare payment; an increase over three times the expected rate of inflation. That includes those in receipt of unemployment benefit and assistance, disability benefit and allowance, pre-retirement allowance, one parent family payments, carers benefit and allowance and supplementary welfare allowance. 

We are committed to making substantial improvements in the income position of those on the lower social welfare rates, in line with our policy under Sustaining Progress of achieving the income adequacy targets under the National Anti-Poverty Strategy. 


Child Benefit 

Building on the massive increases we have devoted to Child Benefit, this year we are announcing an additional €80 million in a full year to increase this vital support further. Child Benefit rates will increase by €6 per month for the first and second child.  It will be increased by €8 per month for the third and subsequent children. 

To appreciate the scale of Child Benefit increases under this Government, it is worth emphasising that when we returned to government in June 1997, child benefit was payable at a rate of €38.09 per month for the first and second children and at €49.52 for the third and subsequent children. 

The increases and the greater priority Fianna Fail has attached to child benefit means following Budget 2004 child benefit will now be payable at a rate of €131.60 for the first and second child, and €165.30 for the third and subsequent children.  This means that the rate of child benefit payment has increased by 3.5 times the figure it was on the day we first took office. 

This has been a good Budget for agriculture and rural Ireland,also taking into account the book of Estimates. A lot more money has been provided for REPS and farm forestry. There is now also income tax relief for farm leasing, and a number of farm-related schemes are being extended. The new Rural Social Scheme will add 2,500 to the jobs provided under the continuing Community Employment and related schemes. There were fears that, regardless of the social value of the schemes to the community, and the role that it provided to older people with limited alternative skills, they were going to be drastically scaled down or phased out, because of expert reports. On the contrary, their important role is fully recognised and protected by the Government.

The extension of film relief for an additional 4 years with a strong caution about the avoidance of abuse is a further positive initiative in the Budget. We are not in the business of driving high-risk, high-profile mobile investment out of the country, particularly in areas where we have demonstrated we have a comparative advantage and can perform to world-class standards.

In conclusion, I am very satisfied that the 2004 Budget fulfils our responsibilities, and will set the country a further step along the road to secure greater prosperity, greater social inclusion and a more even distribution of our economic gains between all segments of our society. 

Our Programme for Government states, and we believe, that this generation has a unique opportunity to build a fair society, of equal opportunity and of sustained prosperity.  

We recognise the need to invest in modernised public services,to develop our infrastructure and to help those who are least well off. We pledged that in 2007, Ireland will be a country transformed from the Ireland we found ten years before. 

Today, I renew that pledge with even greater conviction. And I renew it with confidence.