Financial Statement of the Minister for Finance Mr. Charlie McCreevy, T.D.

4 December 2002

 

INTRODUCTION

BUDGET OBJECTIVES

Economic Outlook

Budgetary Projections

Position in 2004 & 2005

Public Service Pay

PUBLIC SPENDING

Additional Spending

Public Services

Infrastructure – Capital Spending

PUBLIC PRIVATE PARTNERSHIPS

Social Welfare

Dormant Accounts Fund

Old Age Pensions

Widows and Widowers

Child Benefit

Other Social Welfare Measures

TAXATION

PERSONAL TAXATION

Employee Tax Credit

Age Exemption Limits

Mortgage Interest Relief

Numbers in Tax Net

Employee Pension Contributions

Benefit-in-kind

INDIRECT TAXES

VAT

Excise Duty

VRT

CPI Effects

CARBON ENERGY TAX

BUSINESS TAXES

Financial Institutions

Capital Allowances for Plant & Machinery, including Motor Vehicles

Payment of Corporation Tax

STAMP DUTY

Non-Residential Property

Other Stamp Duty Changes

Young Trained Farmers’ Exemption

CAPITAL GAINS TAX

Payment Dates

Roll-over Relief and Loan Notes

Indexation for CGT

RELIEFS AND TAX INCENTIVES

General

Deadlines for Certain Tax Incentives Schemes

Capital Allowances for Hotels and Holiday Homes

Closing Tax Loopholes

CONCLUSION

STATEMENT OF THE MINISTER FOR FINANCE

MR CHARLIE McCREEVY, T.D.

4 DECEMBER 2002

 

INTRODUCTION

Over the last five years, the Budgets which I introduced helped to secure the most sustained period of investment and growth in the history of our country.

The over-riding objective of this Budget is to consolidate those gains which we delivered in recent years and to provide the foundation for future growth.

Our policies have ensured the end of the era of mass unemployment and emigration.  We implemented a major step-up in the funding of our public services to help them to catch up and develop.  We also introduced major tax and social welfare packages to the benefit of all in our society.

To those who want to know where the resources generated in recent years have gone, the answer is clear.  They are providing more health services, higher pensions, smaller class sizes and improving the living standards of both tax-payers and social welfare recipients alike.

Today’s Budget has been framed in very different circumstances from those of previous years.  On Budget Day last year, I published detailed projections for 2003 and 2004 which signalled projected deficits for each of those years.  Since then, the situation has become more difficult because of the unexpected continued weakness of the international economy.  In exactly the same way as every other Government in Europe, we are now faced with clear budgetary pressures.

In the past, we in this country chose to ignore the unfavourable economic reality and went ahead with policies we couldn’t afford.  All that those policies delivered, however, was rising budget deficits and higher unemployment.  They provided no solution to our economic problems.

There are those who want us to forget the lessons of the past.  They want me to announce major spending increases, irrespective of the economic situation.  However, my view is that the responsible policy is to take a moderate route and to take the necessary decisions now so that we ensure growth in the medium term.

That is why my Budget has been developed within a three-year framework.

 

BUDGET OBJECTIVES

This Budget has three key objectives:

Ø        protecting the weaker sections of society,

Ø        investing in the future, to position ourselves for a return to better growth levels, and

Ø        securing stable public finances to safeguard the gains we have already made.

These are three core objectives to achieve the vision for Irish society which the Government and the social partners share.  They are also central to the conclusions reached by the National Economic and Social Council in its recent strategy report.

These are sound and achievable goals.  They are right in themselves and right for the times we are now facing.  They lay the foundations for renewed economic and budgetary progress by setting the fiscal framework for the next three years.  They also put in place a framework within which discussions on a successor to the PPF can be based.  Social partnership has played a key role in the story of our success so far.  The Government is keen that it should continue to play the same role in this more difficult environment.  The Government will be fair in determining where the pluses and minuses fall.  The aim is to support those areas of critical importance to overall economic and social progress.  In the new situation, we also need to be more flexible and innovative in how we generate, allocate and manage resources. 

Economic Outlook

At this time last year, I underlined the unusual degree of uncertainty surrounding the economic outlook. The pick-up then expected in the major world economies in the second half of 2002 did not happen.  As a result, our growth in GNP terms, at an estimated 1.8 per cent this year, has been well below target.  As in other countries, the slower than expected growth has had an adverse impact on our budgetary position.

The short-term prospects for the international economy are not good. This year’s Budget is being presented in the middle of a substantial international economic slowdown. The best that can be expected now is a global upturn in the second half of 2003.  Next year, the Euro area economy is expected to grow by 1.8 per cent and that of the United States by 2.3 per cent. 

Ireland is part of a common currency area where average inflation is not far above 2 per cent.  We must get our inflation rate down close to that level as soon as possible, otherwise we risk losing out on jobs. 

We have lost competitiveness in the last few years.  Our priority must be to halt this slide and regain our position.  Competitiveness creates jobs and wealth, and generates the resources needed to build the sort of society we all want.

There are significant downside risks to all economic projections at this time. 

The difficulties in the Middle East, the continued question marks about a recovery in the information and communication technology sector and possible sharp exchange rate movements are but some of the more obvious ones.

Growth in Ireland next year will be modest.  The range of commentators’ forecasts for 2003 is far narrower than last year, centering around 3 and 4 per cent GDP growth.  At this stage my estimate for GDP growth next year is 3½ per cent, with prospects improving as we move into 2004 and 2005.  GNP growth next year is projected at 2¼ per cent.  We cannot now expect to be approaching our potential GDP growth rate until sometime in 2004 at the earliest. 

Employment is expected to grow next year by 11,000, with unemployment at around 5¼ per cent.  On the assumption of unchanged interest and exchange rates, and taking account of changes in this Budget, consumer price inflation will be 4.8 per cent and, depending on wage cost factors, should be on a downward trend.   If we get our cost base under control, we can expect to see inflation come down significantly by 2005.

Full details of the economic projections underlying the Budget are included in the EU Stability Programme Up-date published with the Budget today.  This Up-date will be assessed by the European Commission in the New Year in accordance with the Stability and Growth Pact and the accounting norms applied by Eurostat, the Commission’s statistical agency.

Budgetary Projections

The 2003 Budgetary targets are subject to the same risks I outlined earlier.  These targets are as follows:

Ø        an increase in gross spending on public services of 5.7 per cent, bringing it to a total of €38,015 million,

Ø        a current Budget surplus of €3,685 million,

Ø        a capital Budget deficit of €5,554 million,

Ø        an Exchequer deficit of €1,869 million, including a release of €250 million from the Capital Services Redemption Account to meet interest costs on the national debt,

Ø        a General Government deficit of €885 million or 0.7 per cent of GDP, and

Ø        a debt ratio of 34 per cent of GDP, the second lowest in the EU.

Position in 2004 and 2005

In present circumstances, we have no choice but to move our expenditure, pay and cost levels onto a lower growth trajectory.  Even by doing that we are facing the prospect of having to borrow more than €3 billion in 2004 and again in 2005.  The position is that in 2004 and 2005 we will face a large and continuing Exchequer borrowing requirement and a General Government deficit of around 1.2 per cent of GDP, which will require us to continue to take the necessary corrective action. 

Public Service Pay

As the House knows, talks on a new national pay agreement and on the implementation of the recommendations of the Public Service Benchmarking Body are currently underway.  Any such agreement would have to deal with the issues highlighted in the Benchmarking Body’s Report, including the need for real change.  If there is a new agreement, one cost that will arise is in respect of the first phase increase under benchmarking.  Under the terms of the Programme for Prosperity and Fairness, this would be due to be paid with effect from 1 December 2001.  The cost of this to the end of 2003, including arrears, is €565 million and I am providing for same.

There are a number of other pay and pay-related issues which are currently being dealt with in various processes.  I do not intend to prejudge the outcome of any of these individual issues, but I consider it sensible to make a global provision of €50 million in respect of the totality of these.

The growth in the public service pay-bill has to be contained.  One factor in achieving this is restraint in relation to the level of pay increases and the Government is making its position clear in the national pay talks.  The other main factor driving the rise in the pay-bill is the growth in public service numbers.  These have risen by about 50,000 over the last five years.  As a first step, the Government has decided that numbers employed across all sectors of the public service are to be capped at their present authorised levels with immediate effect.  In addition, the Government has decided that there will be a reduction of 5,000 in those numbers over the next three years.

PUBLIC SPENDING

This Government is committed to spending such public resources as can be made available to provide for the welfare of our people. We have shown that commitment in the past and we will continue to do so in the future.

When we had the extra resources, we used them to provide much-needed additional public services, and rightly so.

We have achieved a lot in this respect since 1997, as the increase in spending between 1997 and 2003 shows.

In that period, total gross spending, capital and current, will have increased from under €19 billion to over €38 billion, an increase of 102 per cent.

In that time:

Ø        Total health spending will have risen by €5.2 billion to €8.9 billion

Ø        Total education spending will have risen by €2.5 billion to €5.6 billion

Ø        Social Welfare spending will have increased by €4.5 billion to €10.2 billion

Ø        Spending on infrastructure will have increased by €2 billion to nearly €5.6 billion.

The Government is continuing to provide substantial funding in 2003 for these key priority areas.  As everyone knows, we must keep our spending consistent with the available resources.  There is a limited pool of such resources.  This means that we must prioritise, and if one sector receives more, others must receive less. 

The Report of the Independent Estimates Review Committee, which I am publishing today, was of considerable assistance to the Government in prioritising our spending choices for 2003.  Ultimately, however, the decisions underpinning the expenditure Estimates were, of course, taken by the Government. 

The Committee highlighted the limitations associated with a one-year focus on expenditure planning.  It recommended that a further review of expenditure should be undertaken by my Department immediately after Budget 2003 with a focus on expenditure in 2004 and 2005.  I agree fully with this recommendation and my Department will initiate such a review in January 2003.

Additional Spending

I expect voted public expenditure to come in on, or close to, target in 2002.  Including the social welfare package, I am today providing an additional €1.3 billion in gross spending in 2003. Taking account of the spending set out in the Estimates last month, this means that total gross spending on public services next year will be €2 billion above the estimated 2002 outturn, an increase of 5.7 per cent.

This means that this Government will since 1997 have more than doubled total gross expenditure on public services to €38,015 million.

Public Services

Whatever deficiencies exist in relation to the quality and quantity of our public services, money alone is clearly not the answer.  There is scope for securing better value for money through more effective control and management of public expenditure.  Every euro saved is a euro available to spend on hospital patients, our children’s education and our roads. 

The Government has recently agreed a number of improvements to the financial management systems which will be introduced from the beginning of 2003.  Briefly:-

Ø              In order to facilitate a more informed assessment of emerging spending trends, we will publish the monthly spending profiles which are submitted by Departments at the start of the year We will also publish corresponding information from the Revenue Commissioners on monthly tax revenue profiles for 2003.

Ø              Ministers and their Management Committees will be required to manage strictly within the allocations given to them.

Ø              I will continue to submit monthly expenditure management reports to Government, reporting on overall spending and revenue trends. 

Ø              Improvements will be made in risk assessment measures and in contingency planning to cater for unforeseen pressures which may emerge as the year progresses.

Ø              Spending on demand-led schemes will be managed effectively, as is required in all other spending programmes.

Ø              I am introducing revised arrangements for managing capital spending.

Ø              Finally, the financial management system will provide incentives for Departments to improve efficiency and cost-effectiveness.  For example, where Departments secure savings as a result of specific efficiency measures or steps they have taken to curtail a programme, these savings should, as a general rule, be available for other high priority programmes within the same Department.

These measures will encourage public service managers to achieve greater efficiency in the management of public expenditure, to the benefit of all.

Infrastructure  - Capital Spending

Our economy has developed substantially in recent years.  The number at work has increased by more than 370,000 over the last five years.  Our infrastructure needs to catch up.  In the National Development Plan, we outlined our vision for the development of the infrastructure required by a modern, dynamic society.  We are already making good progress on this.  Our existing public spending rate on capital, at 5 per cent of GNP, is nearly double that of the EU generally.

This Government has accorded top priority to investment in economic and social infrastructure.  We have more than delivered on our financial commitments to this priority in the National Development Plan.  In the first three years of the Plan the Exchequer has invested almost €9 billion in this area which is nearly €1 billion more than the original commitment.  This represents a massive acceleration over pre-Plan levels of investment.  Unfortunately, cost increases have impacted adversely on output and timescale, but the Plan is continuing to fund projects of unprecedented size, especially in the key area of transport.

The Government remains committed to the infrastructure investment strategy in the Plan and, indeed, we welcome the continuing broad political and social partner endorsement of this strategy. 

In recognition of the key importance of the NDP National Roads Programme, I am today allocating an additional €209 million to that Programme for 2003.    This means that next year the Exchequer will be investing €1.25 billion in the Roads Programme.

The Government is also anxious to explore more radical and innovative approaches to the funding and delivery of the Roads Programme including, in particular, the scope for greater private sector investment and potential ways of remunerating this investment.  A Working Group, chaired by the Department of Transport, has been established to examine all options in this regard and to report to the Cabinet Committee on Infrastructure by 31 January 2003.  I propose to examine the scope for introducing a multi-annual funding envelope for the Roads Programme in the light of that report.

PUBLIC PRIVATE PARTNERSHIPS

To help ensure that public infrastructure projects are financed in a cost effective manner, I have brought forward legislation to establish the National Development Finance Agency, under the aegis of the NTMA.  The new body will advise State authorities in relation to the optimal financing mechanisms for infrastructure projects and ensure that private sector finance is used where it is most effective.  I hope to have the Agency operational early in the New Year and this will help to promote the Public Private Partnership concept.

PPPs are making a significant contribution to delivering priority infrastructure projects under the NDP.  A milestone in their development will be passed in the near future when the first motorway PPP contract is signed.  The various PPP national roads projects will incorporate substantial private finance and real tolls will generate a stream of revenue that will contribute to meeting the cost of this vital infrastructure.  Public Private Partnerships are also being developed in other sectors including education, the LUAS operator and in environmental services.

SOCIAL INCLUSION

One of the key objectives of this Budget is protecting the weaker sections of society.  We committed ourselves in the agreed Programme for Government to implementing a wide range of social inclusion policies aimed at supporting the most vulnerable in society.  Specifically, we are committed within the lifetime of this Government to reducing consistent poverty to below 2 per cent of households and to progressing the revised National Anti-Poverty Strategy, with its ambitious targets, across a broad range of areas. Since this Government first came into office in 1997 we have significantly reduced consistent poverty and improved living standards – to the benefit of all groups in society. Today’s Budget will consolidate the progress that has been made over the past several years.

This year the greater pressures on public finances will obviously affect my spending proposals, but nevertheless, I aim, with this Social Inclusion package, to direct resources to those most in need. 

Social Welfare

Today’s social welfare improvements will cost €530 million in a full year.  This will bring the gross allocation for the Department of Social and Family Affairs next year to €10.2 billion.  As a result of the improvements I will announce today, social welfare expenditure in 2003 will be €4.5 billion higher than it was in 1997, an increase of nearly 80%. 

Even in these more difficult circumstances the cost of the social welfare increases this year will be twice what it was in 1997.

Dormant Accounts Fund

The social inclusion area will also benefit next year from the first disbursement of funds from the Dormant Accounts Fund.  This Fund will be established using unclaimed dormant account monies from financial institutions.  The funds disbursed will be spent on charitable and community projects, with a particular focus on children with learning disabilities.

Old Age Pensions

Today I am increasing the full personal rate of old age and related pensions by €10 per week.   This will bring the Old Age Contributory Pension to €157.30 per week and the Old Age Non-Contributory Pension to €144 per week.  This is a first step towards the Programme for Government commitment to increase the State pension to €200 per week. The rate of payment for Old Age pensioners will, by 2003, have increased by 59 per cent over the rate payable in 1997. This is well ahead of inflation and represents an enormous improvement in the living standards of our older citizens.

Widows and Widowers

In line with the targeted increases provided in my last two Budgets, today I am providing a further special increase in the weekly rate of the Widows and Widowers Contributory Pension for those aged 66 and over to bring the rate of payment closer to that of the Old Age Contributory Pension. Accordingly, the weekly rate of payment in 2003 for the Widows and Widowers Contributory Pension will rise by €11, bringing the payment rate to €155.80 per week, and to €162.20 per week for those aged 80 or over.

Child Benefit

In Budget 2001, I announced the Government’s intention to allocate over €1.27 billion in increased Child Benefit over a three year period.  As I said at the time, our central objective is to support parents in whatever choices they make in looking after their children. Child Benefit is an important financial support for families with dependent children and a key instrument for tackling child poverty.  We achieved two-thirds of the planned increase in the last two Budgets.

However, in the current budgetary circumstances it is not possible to complete the Government’s plans this year.  I am now announcing an additional €105 million in a full year to increase Child Benefit further.  This will see Child Benefit rates increase by €8 per month for first and second children to €125.60, and by €10 per month for third and subsequent children bringing the new rate to €157.30.  I intend to complete the planned increase in Child Benefit in 2004 and 2005.

Other Social Welfare Measures

The Summary of Budget Measures contains a range of other social welfare improvements, the full details of which will be announced by the Minister for Social and Family Affairs.

These measures include:

·          An increase of a minimum of €6 per week in the full-rate social welfare payments other than those to which I have already referred. Proportionate increases will be paid for all persons in receipt of reduced rates. 

·          An increase of €17 per week in the Family Income Supplement income thresholds;

·          An increase in the weekly income disregards for means assessment of the Carer’s Allowance scheme;

·          A doubling of the Hearing Aid Grant, payable under the Medical Appliance Scheme, to €700;

·          An increase of €30 in the rate of the Back to School Clothing and Footwear Allowance paid in respect of each child aged 12 years or more, bringing it to €150;

·          An extension of the Free Telephone Allowance to persons aged 70 or over who reside in Nursing Homes and have their own telephone account; and

·          A further increase in the annual Respite Care Grant provided to carers, bringing it to €735 per annum.

The effective payment dates for all increases in 2003 will be the same as this year.

TAXATION

Many factors combined to produce the high rate of economic growth in the past ten years.  Some of these were not permanent – such as the strong labour force growth.  Others should have a longer-lasting effect, such as our investment in education. 

One factor in our economic success has undoubtedly been the lowering of the direct tax burden on enterprise and labour which this Government brought about.  This lower direct tax environment is as much an investment in our future as the resources we are putting into building up human and physical capital.

Demands have been made for income tax rates to be increased, or for the reductions in corporation tax already provided for, to be delayed or postponed.  The Government is convinced that this would be a short-sighted and misplaced policy.  It would put in doubt our ability to regain our medium-term growth potential and handicap our development agencies in attracting and retaining foreign direct investment.  I do not plan to adopt this course.

PERSONAL TAXATION

The reform of the direct tax system and the reduction in the personal tax burden, which this Government delivered in the last three Budgets, was substantial by any standards.  In these Budgets we have more than delivered on our commitment in relation to net take-home pay in the Programme for Prosperity and Fairness.  The figures are there to demonstrate this. 

This year I propose to make only a limited number of changes to the personal tax system.  These measures, which will have a total cost of €186 million in a full year, are as follows.

Employee Tax Credit

I am increasing the employee Tax Credit, formerly known as the PAYE allowance, by €140 from €660 to €800 per annum.  This will increase the entry point to the income tax system from €209 per week to €223 per week for employees, which is 90 per cent of the current minimum wage.

Age Exemption Limits

I also propose to increase the annual income tax exemption limits for those aged 65 and over from €13,000 single and €26,000 married to €15,000 single and €30,000 married, respectively. 

Mortgage Interest Relief

The Government is also increasing the mortgage tax relief available to first-time buyers. 

The current annual ceiling on the amount of interest that can be allowed will be raised by over one-quarter from €3,175 single and €6,350 married to €4,000 and €8,000, respectively.  In addition, the period for which the relief is available will be extended from the current five years to seven years in all. 

45,000 first-time buyers will benefit from these changes.

Numbers in Tax Net

These increases in tax credits, exemption limits and mortgage interest relief combined will take 37,400 taxpayers out of the tax net.  One-third of these taxpayers are aged 65 or over.

Employee Pension Contributions

As part of the process of increasing the equity of tax reliefs, I am introducing an annual cap on the pension contributions made by employees, as already applies for the self-employed.

Benefit-in-kind

When an employer remunerates an employee by way of benefit-in-kind, this falls outside of the PRSI and Health Levy nets for both employer and employee.  I propose to apply the PAYE, PRSI and health levy systems directly to such benefits from 1 January 2004.  This will raise up to €83 million in a full year.

INDIRECT TAXES

It is usual in each Budget to seek a contribution to the funding of the Exchequer from indirect taxes.  This Budget is no different.  Accordingly, I propose to increase VAT and Excise Duty.

VAT

The 12½ per cent lower rate of VAT will be increased to 13½ per cent.  This measure will take effect from 1 January 2003. 

Excise Duty

I propose to increase the VAT-inclusive excise duty on cigarettes and other tobacco products by the equivalent of 50 cent per packet of twenty cigarettes.  I am also increasing the VAT-inclusive excise duty on spirits by 20 cent per  standard measure.

 The VAT-inclusive excise duty rate on spirit-based ready-to-drink products or ‘alcopops’ is being raised by 35 cent per bottle, to align the rate with that on spirits. 

The VAT-inclusive excise duty on diesel will be increased by 3 cent per litre. 

These excise duty increases are to take effect from midnight tonight.

VRT

I propose to make a small but significant change to VRT bands.  At present, a VRT rate of 25 per cent applies to cars with engine sizes from 1401cc to 2,000cc and a rate of 30 per cent applies for cars of 2,001cc and over.  From 1 January 2003, the 30 per cent rate will apply to all cars of 1901cc and over. 

CPI Effects

These increases in indirect taxes will raise €535 million in a full year and will add 0.85 per cent to the Consumer Price Index.

CARBON ENERGY TAX

We have international obligations under the Kyoto Protocol to reduce greenhouse gas emissions.  For this reason, the Government has asked the relevant Departments to advance the plans for a general carbon energy tax, with a view to introducing this from the end of 2004.  Given the many implications of such a tax, both environmental and economic, there will be full consultations with interested parties on the design of the tax and a reasonable period is being allowed for its effective introduction. 

BUSINESS TAXES

The business tax environment here has been a notable contributor to our economic success in the past.  This has been due not just to the tax regime itself, but also to a stable policy environment.  I intend to continue to pursue that approach, but nonetheless I feel that it is appropriate in present circumstances to seek an equitable balance in raising revenue from all sectors of the community.  I see this as a fair and reasonable demand in view of the prosperity secured by many parts of business and commerce during the past few years.

Financial Institutions

The Government proposes to raise a revenue contribution from the financial sector of €100 million per annum for three years.  This will be done by means of a levy on financial institutions, calculated by reference to the amount of tax payable by them in 2001 on deposit interest.  Full details of this measure will be set out in the Finance Bill.  The financial sector has proved its dynamism and business ability when given the chance.  It is not unreasonable to see some of their good fortune applied to assisting the public finances.

Capital Allowances for Plant & Machinery, including Motor Vehicles

At present, capital allowances for plant and machinery, including motor vehicles, allow a write-off for tax purposes over a five year period.  I propose to extend this period to eight years as and from today.  This will involve a cash-flow gain to the Exchequer in each of the next seven years, ranging from €20 million in 2003 to nearly €315 million at the maximum in 2007.  This is a base-broadening move and helps to maintain low corporation tax rates.

Payment of Corporation Tax

I propose to simplify the current corporation tax pay and file arrangements by ensuring that a company must pay the balance of tax it owes within nine months of the end of the accounting period in question.  This will reduce the number of necessary contacts with Revenue and will raise a once-off €16 million in 2003.

STAMP DUTY

Non–Residential Property

No changes have been made to the rates of stamp duty on commercial property since 1990.  I propose to increase from today the current rates of stamp duty on non-residential property and to amend the valuation bands to which they apply.  The full details of the changes are set out in the Summary of Budget Measures.  

They involve the introduction of additional rates of 7 to 9 per cent depending on the value of the property concerned.  This change will raise €158 million in a full year.

Other Stamp Duty Changes

I am increasing the stamp duty on cheques from 8 cent to 15 cent per cheque, and the stamp duty on credit cards from €19 to €40 per annum.  I also propose to increase the stamp duty on ATM cards from €6.25 to €10 per annum and to introduce a stamp duty of €10 per annum on laser cards.  The stamp duty on combined ATM and laser cards will be €20 per annum.  These changes take effect from midnight tonight and will raise €52 million in a full year. 

Young Trained Farmers’ Exemption

In the stamp duty area I am also continuing for a further three years the existing exemption for the transfer of land to young trained farmers. 

CAPITAL GAINS TAX

Payment Dates

At present, capital gains tax is payable on a preceding-year basis.  The Finance Bill will provide that in future a preliminary tax payment will be made by 31 October each year in respect of gains made up to 30 September in that tax year.  Tax due on gains made over the remainder of that tax year will be paid by the following 31 January.  This will result in an estimated once-off gain of €250 million for the Exchequer in 2003.  In making this move we will be putting CGT on a similar footing to other tax charges.

Roll-over Relief and Loan Notes

It is proposed that no roll-over relief will be allowed for any purpose on capital gains arising from disposals on and from today.   Also, it will no longer be possible to defer capital gains tax on share disposals by taking the proceeds in the form of loan notes.

Indexation for CGT

In addition, indexation of the base for computation of capital gains will only be allowed to be calculated up to 31 December 2002. 

All of these reliefs and allowances made sense when the CGT rates were 40 per cent and 60 per cent.  These base-broadening changes will bring in about €20 million in 2003 and about €100 million in a full year. 

RELIEFS AND TAX INCENTIVES

General

Reliefs narrow the tax base.  A widened tax base is the price that must be paid to keep tax rates low. In my view it is a price worth paying.  All tax reliefs therefore must be subject to on-going review. 

The business sector and investors have been much assisted by schemes of special tax reliefs.  These have played an important role in many areas and in the development of certain business sectors. 

I am a supporter of properly-focussed, clearly-defined, specific reliefs which can encourage the development of goods and services, including public services, which might otherwise not be provided, or where provided, are too little or too late.   I have, accordingly, in the past introduced several reliefs.  On the other hand, I have also substantially capped certain reliefs and taken strong action in relation to various tax avoidance schemes.  I am continuing this approach by closing a number of loopholes today, as I will explain later.

A study by the Revenue Commissioners indicates that capital allowances on buildings continue to be the chief instrument used by high-income earners to reduce their taxable income by substantial amounts.  I acted on similar research in the 1998 Budget by capping the amount of capital allowances on buildings that could be set-off against non-rental income.

While later research indicates an increase in the effective tax rate of high earners, some of them continue to achieve substantial reductions in their tax liability as a result of reliefs.  I will be placing a copy of this latest research in the Dáil Library, as I did with the previous study.

Having examined the position, I have decided to make the following changes to a number of reliefs in this year’s Budget. 

Deadlines for Certain Tax Incentives Schemes

A series of tax incentive schemes, many of them involving capital allowances, have been extended in the past for a number of years and several are due to expire on 31 December 2004.  The list is set out in the Summary of Budget Measures and includes Urban Renewal, Rural Renewal and Car Parks reliefs.  These schemes were introduced over the years to provide a development incentive for the areas or activities in question.  All of these schemes, without exception, are to end on 31 December 2004.  As part of this process, I am bringing forward to 31 December 2004 both the termination date for film relief from 5 April 2005 and that for student accommodation relief from 30 September 2005.  Given the current and prospective budgetary position, the existing demand for property investment and the desire to improve equity in the tax system, there is no justification for a continuation of these reliefs beyond 2004.

Capital Allowances for Hotels and Holiday Homes

In order to assist in broadening the tax base I am also reducing the special capital allowance for hotels.  They are currently written-off over 7 years and I am changing this to 25 years, the same period as applies to general industrial buildings.  I am also abolishing capital allowances for holiday homes.

Closing Tax Loopholes

I have no doubt that one effect of terminating existing tax reliefs will be to sharpen the creative wits of tax avoidance experts.  The Summary of Budget Measures gives details of the anti-avoidance measures in capital gains tax and income tax which I am taking, with effect from today.  These measures will protect the revenue base going forward. 

One particular change will ensure that those going temporarily off-shore to avoid capital gains tax liability will no longer be able to use the loophole in question.  I will continue to act quickly to close down tax avoidance schemes as they come to my attention.

 

CONCLUSION

Today’s Budget has been planned within a three-year framework.

In the 1970s and 1980s our country ended up in an unsustainable situation because of the wrong budgetary policies.  Governments refused to respond to challenges as they arose.  They chose short-term solutions which caused long-term problems.

This Government will not make the same mistake.

I believe that the people know and understand the need for the policies I have announced today.

This Budget is a prudent and planned response to the impact of the continued international downturn on our public finances. 

Today I have:

Ø              Provided a stable framework for our public finances going forward,

Ø              Strengthened our productive capacity, which is critical for future growth,

Ø              Ensured that the business sector makes an appropriate contribution to the public finances, and

Ø              Safeguarded the position of those on social welfare and those on low incomes.

This is a Budget rooted in a vision of an Ireland which values stability as the necessary base for advancing the welfare of all its people.

It is a Budget which avoids the mistakes of the past and provides the foundation for renewed growth and development. 

This is a balanced and fair Budget, which responds properly to the international downturn by preventing the huge deficits of the past, but also by making sure that important areas like social welfare pensions and health are prioritised in difficult times. 

This is a Budget which will protect our long-term future and secure the welfare of all sections of our society.

I commend the Budget to the House.