Financial Statement

of the

Minister for Finance

Mr Brian Cowen, T.D.

5 December 2007



Table of Contents

INTRODUCTION

CONTEXT AND AIMS

ECONOMIC AND FISCAL BACKGROUND AND TARGETS

SPENDING POLICY

Public Spending Priorities and Value for Money

INVESTMENT FOR THE FUTURE

National Development Plan

Transport

Water Services Infrastructure

Education Infrastructure

Housing

CLIMATE CHANGE AND ENVIRONMENTAL MATTERS

Carbon Report

Environmental Taxation - VRT

Motor Tax

Other Environmental Tax Measures

Increased Spending on Energy Conservation and Research

Supporting Farming and the Rural Economy

Farm Taxation

Fishing Industry

PROTECTING THE VULNERABLE

Social Welfare

Pensions

Carers

Other Social Welfare Supports

Child Income Support

Other Social Welfare Measures

Health

Medical Card Eligibility

Drugs

Increased Duty on Tobacco

Development Aid

SCIENCE, TECHNOLOGY AND INNOVATION

R&D Tax Credit

REWARDING WORK

Income Tax

Other Tax Credits

HELPING BUSINESSES - TAX MEASURES

Renewal of Section 481 Film Relief

Small and Medium Employers

Payment Cards

SUPPORTING HOME OWNERSHIP

Mortgage Interest Relief

Housing Market

New Stamp Duty Regime

The Rental Sector

CONCLUSION


 Statement of the Minister for Finance

Mr Brian Cowen, T.D.

5 December 2007  

INTRODUCTION

Today, I present my fourth Budget and this Government’s first one against a challenging economic backdrop. Our economy has experienced extraordinary growth for more than a decade. At home and abroad our success has been lauded. That success is down to the commitment and drive of our people. Recent Governments have succeeded in managing the growth of the economy so that it has been sustained for much longer than anticipated.

The global economy is beset by uncertainties, financial markets are highly volatile and the construction sector domestically is experiencing a slowdown. However, we must not lose sight of the fact that the fundamentals of the economy are still good – a point often lost by some. Next year will see our economy growing at a relatively modest pace. In this changed environment of more moderate growth, this Government will manage the resources available so that growth will be sustained into the future. Today’s Budget is important in that context. 

As Minister for Finance, I must place one economic objective ahead of any other – that we do things now that will position our country for sustainable development over the years ahead. This objective does not conflict with our commitment to make Ireland more environmentally friendly. 

CONTEXT AND AIMS

Since becoming Minister for Finance, I have reformed the way the budgetary process is operated to enable better transparency and to improve accountability and scrutiny by the Oireachtas and its relevant Committees. For example, Annual Output Statements were provided by Ministers earlier this year to accompany their Estimates of expenditure and I published the Pre-Budget Outlook in October. That Outlook showed that delivering all that we did this year would mean increasing current expenditure by €2.3 billion in 2008 to almost €51 billion.

Today, I am announcing all new spending and taxation measures in a single unified Budget. This reform allows us to focus on the totality of what Government is spending with taxpayers’ money. By making spending and revenue decisions in a more transparent manner within the overall economic and budgetary parameters, we will ensure that Ireland maintains a sound and sensible fiscal policy, fully in line with the provisions of the EU’s Stability and Growth Pact.

What this means is that the rate of increase on public current expenditure in 2008 has to moderate to take account of the resources available but, even so, I am still providing almost €53 billion, which is a net increase of over €1.7 billion. This includes almost €960 million for welfare supports in 2008, which is just over half of the total additional spending announced today. I am also providing over €8.6 billion in 2008 for investment on the capital side. When I compare that with the resources available to me, I am planning for a General Government Deficit of 0.9 per cent in 2008, which is the appropriate response at this time. This is the context in which my Budget is set. This Budget is focused on the future challenges and addresses them now in a way which is sustainable. 

Investment in a sustainable future is this Government’s top priority. I have consistently stressed the importance of the National Development Plan in the realisation of this goal. In the past, Governments have reacted to economic slowdown by stalling capital investment. I will not do so. On the contrary, I am providing over €8.6 billion for capital investment in 2008.

In the proposals I am announcing today, I will also: 

      Protect the incomes of the vulnerable;

      Promote our environmental goals;

      Support ordinary working people;

      Help home-buyers;

      And boost our economy, while adapting to the reality of more moderate growth into the future.

I will do all this while, at the same time, ensuring that the budgetary outlook remains positive and builds on the improvements in our fiscal position to date.

ECONOMIC AND FISCAL BACKGROUND AND TARGETS

2007 Economy

The pattern of very strong growth, mainly as a result of buoyant domestic demand, has eased as this year has progressed but growth still continues at a rate that is the envy of many other countries. For 2007 as a whole my Department expects GDP growth of around 4¾ per cent is now likely. We estimate that an additional 72,000 jobs will have been created this year and that unemployment will still be amongst the lowest in the EU.

This Budget is being framed against the background of significant uncertainty in the international economic environment.  Since the summer, global financial markets have experienced considerable volatility, and while the impact of such developments on the world economy appears to have been contained so far, we must acknowledge that downside risks remain.

Another issue is the significant appreciation of the euro against the dollar.  This partly reflects financial market developments as well as growing concerns regarding the outlook for the US economy.  This is of particular concern to us given the importance of the US both as an export destination and as a source of inward foreign direct investment. 

Ireland, of course, has deep international links and we are not immune from such developments. As I’ve said before, retaining flexibility and continuing to improve our productivity is the route to enhancing the competitiveness of our economy. The measures which I will outline in this Budget will help to achieve these goals.

In light of all of these adverse international developments, many of my colleagues elsewhere in Europe are revising down their growth forecasts. In these circumstances, our short-term economic prospects are still impressive. 

2008 Economy

Nevertheless for 2008, it is fair to say that the prospects are for somewhat more modest growth than we have become accustomed to. This reflects developments in the international economy that I have just mentioned as well as domestic developments. In relation to the latter, the main factor weighing on overall growth is the prospect of somewhat lower output in the new house building sector. Against this background, my Department is forecasting that:

      GDP will increase by 3 per cent in real terms;

      24,000 new jobs will be created with the total number at work increasing by a little over 1 per cent;

      Inflation will ease and the Harmonised Index of Consumer Prices will average 2.4 per cent.

This economic outlook, while still reasonably impressive, means that it is more vital then ever that we retain our flexibility, act responsibly and continue to raise our productivity.  If we do this it will protect and enhance our competitiveness and employment levels.

Responsible Management

Responsible management of the public finances has been one of the prime drivers of our economic success. Our national debt is now around 25 per cent of GDP, one of the smallest in the developed world. It is right and appropriate that we should run budget surpluses when the economy is performing very well. It is equally right and appropriate that we borrow when the growth outlook is less favourable. However, the move into deficit must involve productive borrowing, borrowing which will strengthen our economy for the long term.

Accordingly, for next year, I have set the following fiscal targets: 

      Growth in total spending of 8.6 per cent to maintain and improve the provision of services and to invest in the future;

      Gross current spending growth of 8.2 per cent;

      Capital spending growth of the order of 12 per cent;

      A General Government Deficit of 0.9 per cent of GDP which is fully consistent with our EU obligations, and

      A Debt to GDP ratio of just under 26 per cent.

These targets are realistic and achievable and are a reflection of the underlying health and strength of our economy.

SPENDING POLICY

Public Spending Priorities and Value for Money

We must maintain the basic correspondence between spending and resources if we are to avoid piling up debt for the future and if we are to continue to afford the massive capital investment that is vital for all our futures.

Obviously the pattern of income and spending can vary from year to year but the overall trend line must be correlated with the resources available. We must get back to lower single digit increases in current spending as quickly and as prudently as possible, particularly in view of my determination to maintain capital investment as set out in the National Development Plan. A measured deceleration is required, not a sudden slamming of brakes, especially when we are entering a period of below trend growth by Irish standards.

My priorities are clear and straight forward:

     To protect the weaker in society through maintaining a high level of social spending;

     To deliver better and more effective public services;

     To seek value for money at all levels of public spending, and

     To continue to invest heavily in public infrastructure.

Our priorities for current spending remain Health, Education and Social Welfare which account for almost 80 per cent of total current spending.

At the core of all this spending must be the search for quality of service and value for money. As the Pre-Budget Estimates showed, we need nearly 5 per cent more in 2008 compared to 2007 just to stay where we are. This requires all Departments to continue to monitor closely and examine carefully how efficiently and effectively resources are being utilised in the provision of all public services and this is what I intend to do using appropriate Value for Money initiatives.

The Government has agreed to an efficiency review of all administrative spending across the whole public service. I have set out in the Summary of Budget Measures my intentions as to how the review should proceed.

INVESTMENT FOR THE FUTURE

National Development Plan

The National Development Plan is an ambitious programme of investment in the future. Nothing on this scale has ever been attempted before in our history. It will transform our country socially and economically and I am determined to roll it out as planned and thereby secure our future.

The National Development Plan is my top priority. Postponing or delaying it would be a major policy error. It would damage activity next year and impair our quality of life in future.

The new Multi-Annual Capital Envelope for each Vote group, which is published today in the Budget documentation, provides for total capital expenditure to be maintained at an average of 6 per cent of GNP during the next five years.

All Departments have had their capital allocations increased from the Pre-Budget Estimates levels by over one billion euro in total.

The main elements of our capital investment programme for 2008 will concentrate on transport, education, housing and environmental services with significant spending in other areas such as health, agriculture and enterprise also.

Transport

I am allocating €2.7 billion for investment in rail and bus services, national and secondary roads, regional airports and ports.

Of this, nearly €1.7 billion will be invested in our national roads network, thus continuing this Government’s unprecedented levels of investment in this key piece of infrastructure. We are building high class roads, which are absolutely integral to economic activity and long-term economic and social prosperity.

During the coming year, this massive investment will deliver significantly on the M50 upgrade as targeted, resulting in four-lanes between the N4 and Ballymount and a transformed and fully functional Red Cow junction. The West-Link Bridge will also have four lanes by the end of next year and we will have barrier-free tolling too.

Elsewhere around the country, 29km of dual carriageway will open between Kilbeggan and Athlone, 37km of dual carriageway will open between Cashel and Mitchelstown, and 19km of dual carriageway will open to bypass Carlow Town. All these are key components of the major interurban routes between Dublin and our main regional cities and the National Roads Authority is working to ensure that they are delivered on time and on budget.

Through a combination of Exchequer and Local Government funding over €600 million will also be provided for regional and local roads. This will continue the commitment which the Government has shown over the last decade to the renewal of this vital network.

I am also investing almost €1 billion in our public transport system. This significant level of investment means that right across the country we will continue to make real improvements. Key projects such as the Cork to Midleton commuter rail line and phase one of the Western Rail Corridor, which will link Ennis to Athenry, are through planning and the year ahead will see them readied for service in 2009. Construction is also due to begin on phase 1 of the Navan rail line, linking Dublin to Dunboyne. Irish Rail will also continue to introduce its fleet of 183 railcars into service across the intercity network.

In Dublin too we will build on the great success of the Luas by adding much needed additional capacity on existing lines. By the summer, the capacity on the Tallaght line will be up 40 per cent and construction work will also continue on the line extensions to the Docklands and Cherrywood in South Dublin.

Water Services Infrastructure

Huge effort and resources have been devoted in recent years in the upgrading of our water services infrastructure. The €4.7 billion for water services in the NDP, of which €471 million is allocated for 2008, is an unprecedented commitment to the provision of the infrastructure needed to support development and economic growth while, at the same time, ensuring environmental sustainability.

We have made huge strides over the past few years in expanding the scale and coverage of water and sanitary services infrastructure across the country. Virtually all major cities and towns now have modern wastewater infrastructure in place and we are pushing ahead with the remaining schemes at top speed. In national terms, some of the more significant achievements include:

      increased compliance with the requirements of the EU Urban Wastewater Treatment Directive from 25 per cent in 2000 to some 92 per cent at present;

      the completion of over 350 schemes, including exceptionally large wastewater projects in Dublin, Cork, Limerick, Wexford, Galway, Drogheda and Dundalk.

Other large water projects in the 2008 programme of works include those at Ballymore Eustace, Limerick City, Donegal Bay, Lower Liffey Valley, Portlaoise, Waterford and Dungarvan, Castlebar and Roscommon.

Education Infrastructure

Total expenditure on education in 2008 will be €9.3 billion including €828 million for capital investment. Over the last three years alone, over €2 billion has been invested in educational infrastructure. With this funding we have delivered 28 new schools, with construction underway at a further 16 new schools. We have delivered 77 large-scale refurbishments or extensions of existing schools, with construction in progress at a further 44 schools. This is in addition to over 1,300 small scale projects delivered in 2006 and over 1,500 in 2007. Construction work this year alone will deliver over 700 classrooms to provide permanent accommodation for over 17,500 pupils. Given that there are 4,000 schools and that 9,000 building projects have been funded in these schools since 2000, the Government is proud that the existing building stock has been substantially renewed.

However, the next challenge, and I believe the first priority for educational expenditure in 2008, must be to provide additional new accommodation to cater for the 13,000 additional children who will be seeking a school place next year. This rate of increase in enrolments poses a major challenge for the education system. Accordingly, I am allocating an additional €95 million in capital funding for the Primary School Building Programme in 2008. This will bring to €594 million the total budget that will be available for infrastructural investment in schools next year.

Other capital funding for education includes €184 million for infrastructural investment at third level and €50 million for various smaller programmes.

Housing

The Government is firmly committed to addressing housing needs and through targeted measures, providing an appropriate accommodation solution for lower income groups and people with special housing needs. I am making available a total housing package of some €1.7 billion in Exchequer resources, which together with non-Exchequer financing will bring the overall housing package to some €2.5 billion. This will support the delivery of the ambitious Towards 2016 commitments entered into with the social partners, with some 9,000 new social housing units to be commenced or acquired in 2008 and the provision of 5,500 new affordable homes. Further households will be assisted through the continued roll-out of the rental accommodation scheme and support for homeless services. All in all, our aim is to address the housing needs of some 20,000 households in 2008.

The funding being provided for housing will support the important quality improvements in social housing, particularly through regeneration programmes successfully underway for example in Ballymun and Fatima Mansions and now being developed in other urban centres. I am particularly impressed by the work of John Fitzgerald and the Limerick Regeneration agencies and I am pleased that today’s package will support their initial work in developing a new vision for the socially disadvantaged areas of Limerick.  

CLIMATE CHANGE AND ENVRONMENTAL MATTERS

Carbon Report

There is growing and incontrovertible evidence of the challenge to us all posed by global warming. The Stern Review together with the recent reports from the UN’s Inter-Governmental Panel on Climate Change illustrates the seriousness of the issue if things do not change. That is why we must act now. That action will require changes in the lifestyles we all lead and the choices we make on whether to consume or conserve resources. This should not be seen as a defensive strategy but as a forward looking, pro-active response to this challenge.

The Programme for Government undertook that I would give a carbon report in this Budget. This is the first such report.

Our current greenhouse gas emissions amount to some 70 million tonnes based on latest data. We will have to reduce that over the period 2008 to 2012 to an annual average of 63 million tonnes to meet our Kyoto commitments. An even greater effort will be needed to achieve up to a 30 per cent cut envisaged by the EU for 2020.

All sections of the economy contribute to carbon emissions. Transport, for example, represents about 20 per cent of emissions. This has been growing quickly due to increasing car use. Energy accounts for 22 per cent, Industry around 17 per cent and Agriculture 28 per cent. Every element in our nation has a part to play. Some have already made significant strides and some are in a position to take more effective action than others. All must contribute as best they can to the necessary reductions.

The Programme for Government also states that the Minister for the Environment, Heritage and Local Government, will follow the carbon report in the Budget with a report providing more detail on the progress being made towards meeting our targets for emission reductions. Minister Gormley will give further information about this report tomorrow.

The Programme for Government commits the Government to seek an all-party approach on climate change targets but in advance of such agreement to target a reduction of 3 per cent per year on average in our greenhouse gas emissions. The target requires everybody to play a part.

The Government too has a role to play. We have put climate change at the heart of decision making by setting up the Cabinet Committee on Climate Change and Energy Security. In previous years I announced tax and spending changes in this area. For example, in 2006, I introduced the favourable tax treatment of bio-fuels. Last year I provided for new grants for growing and harvesting bio-fuels crops and increased funding for an expanded range of energy conservation grants.

This year I am announcing a number of additional spending and tax measures to continue to support the Government’s efforts to meet our greenhouse gas emissions targets.

Environmental Taxation - VRT

As I announced in last year’s Budget Statement, a public consultation process was carried out by my Department in relation to rebalancing VRT to take greater account of CO2 emission levels. There has been broad support for a fundamental reorientation and rebalancing of VRT. I am bringing forward today a series of changes that constitute the most fundamental reform of VRT since its inception in 1993.

The revised VRT system will be enacted in the Finance Bill and will be introduced with effect from 1 July 2008. The main features of the new scheme are:

      The VRT rate applicable to cars registered on or after 1 July 2008 will be determined by the CO2 emission rating of the car and will no longer be related to engine size;

      A seven band CO2 emissions system - A to G – will apply. It will be underpinned by a new CO2 Emissions Labelling System for cars, on the lines of the energy efficiency labels for white goods, to be introduced by the Department of the Environment, Heritage and Local Government;

      Seven VRT rates, ranging from 14 per cent to 36 per cent, depending on the car’s CO2 emission level, will continue to be applied to the Open Market Selling Price of the car.

Let me be clear – this measure is not about penalising people for their reasonable lifestyle choices – it is about providing them with opportunities and incentives. By explicitly linking VRT rates to carbon emissions on the basis of a new and highly transparent labelling system, we are providing individuals and families with the opportunity to make choices to help the environment and with financial incentives to do so.

Of course, the higher emitting cars will pay more, but by making sensible and informed decisions, many families could see their VRT bills reduced.

Since this measure is not aimed at raising money but rather to assist the environment, the intention is that it will be broadly revenue neutral.

I will continue to give recognition to the efforts of vehicle manufacturers to promote new technologies. Existing incentives for certain hybrid electric and flexible fuel cars are being extended to 1 July 2008. Thereafter and in addition to the benefit of the new CO2 based VRT system, I will be providing for a further top-up relief up to €2,500 on the VRT payable on such cars.

In an effort to foster the use of electric cars and electric mopeds I am also introducing an exemption from VRT. This exemption will apply from 1 January 2008.

Further information on the new VRT system and related changes to the car capital allowances scheme are set out in the Summary of Budget Measures and in Annex D.

Motor Tax

Motor tax is an essential contributor to Local Government funding. Motor tax has not been changed since 2004. Since then the CPI has risen by around 15 per cent. It is proposed to increase the existing motor tax rates by 9.5 per cent for cars below 2.5 litres and 11 per cent for larger cars from 1 February 2008. Details are contained in the Summary of Budget Measures.

To complement the changes in the VRT system, the Minister for the Environment, Heritage and Local Government also intends to bring forward proposals that will link motor tax to CO2 emissions for new cars from 1 July 2008. These measures will allow consumers to act in an environmentally responsible way.  

Other Environmental Tax Measures

The Programme for Government has as an objective the introduction of a carbon tax in the lifetime of this Government, on a revenue neutral basis. This will be part of the Terms of Reference of the forthcoming Commission on Taxation. I intend to establish the Commission very shortly and it will begin its work early in the new year.

I also intend to reduce VAT on certain seeds and bulbs for biofuels, and to amend the Business Expansion Scheme so that recycling companies can have easier access to the Business Expansion Scheme. Details of these measures are set out in the Summary of Budget Measures.

In the context of the forthcoming Finance Bill, I will be examining, along with my colleague, Eamon Ryan, TD, the Minister for Communications, Energy and Natural Resources, the feasibility of providing businesses with targeted incentives to support the installation of certain energy efficient equipment also.

Increased Spending on Energy Conservation and Research

Our energy use has grown by 70 per cent in the last 15 years and we are especially reliant on imported Gas and Oil to meet our energy needs. Energy security and climate change are challenges that face all countries and which shape our energy policies.

It is important, therefore, that we balance our objectives of keeping energy costs down, ensuring security of supply and keeping our greenhouse gas emissions to a minimum.

The White Paper - Delivering a Sustainable Energy Future for Ireland, 2007 to 2020, which was published earlier this year, sets out the Government’s strategy for achieving these aims. The Government, through the resources provided in the National Development Plan and through the resources of the State’s commercial energy companies, as well as through policy measures, is committed to meeting the strategy set out in the White Paper.

The Key Goals of the White Paper include energy security, energy diversity and energy reliability.

To help achieve these goals, there will be expenditure of €8.5 billion in the Energy Programme of the National Development Plan. The State Energy Companies will invest over €7 billion of this, mainly in the electricity and gas transmission and distribution networks, in new and modernised power generation and in wind energy projects. Next year these companies will be investing approximately €1.7 billion in these areas.

The Government has created gas and electricity markets that are fully open to competition. From 1st November this year, there is an all-island electricity market, facilitated by the North-South electricity interconnector and other existing and planned interconnectors.

Exchequer investment in energy has increased significantly in recent years- in 2008 at €86 million, it will be over twice the level that it was in 2005. This reflects the increased importance that the Government attaches to the energy sector.

The NDP provides almost €150 million for Energy Research. In this Budget, I am allocating €13.2 million for this purpose, an increase of €7 million on 2007. The additional allocation for 2008 will go in particular towards measures to develop renewable energy from ocean sources. It is an area where we as a country could make a very significant contribution if the research is successful. If the research looks promising, I will consider making considerably more resources available in future years.

The best way to reduce our dependence on imported oil and gas is, of course, through energy conservation. In this Budget, I am allocating an additional €13 million to Energy Conservation. Of this, €5 million will fund a pilot programme of home insulation. In addition, there will be funding for a variety of measures which include the building energy rating scheme and a variety of technologies whose application will ensure that we use energy more efficiently.

Supporting Farming and the Rural Economy

This Government is firmly committed to the rural economy. We plan to build on our investment in rural life.

Farming plays a major role in conserving our environment. It is already contributing significantly through more effective nitrates control and waste management. Thankfully, the economic prospects for farming have improved with increasing producer prices and increased food exports. There are some problem areas such as sugar where special supports are needed. I will be announcing tax changes in a moment to make those supports more effective.

The Farm Waste Management Scheme was put in place to help farmers adjust to the new environmental conditions and standards required by the EU Nitrates Directives and to support the competitiveness of Irish agriculture. In response to the very strong take-up of this scheme, I am now providing for a further increase of €35 million in the 2008 provision, to bring total grant aid next year to almost €150 million. In addition, the Rural Environmental Protection Scheme - REPS 4 - will continue to underpin the Government’s commitment to protection of the rural landscape, increased biodiversity, and improved water quality. In 2008, I am allocating €370 million to REPS 4 to cover grants for approximately 60,000 farmers.

Farm Taxation

I am making a number of changes in the farm taxation area arising from reform of the Common Agricultural Policy and the recent growth in the adoption of innovative farm business structures.

The payments to farmers under the EU Sugar Beet Compensation package include an element for Diversification Aid. I am providing that the income from these Diversification Aid payments will be spread over 6 years for the purpose of calculating income tax liability.  This measure follows on the Finance Act 2007 provision which has already provided for similar treatment of the Restructuring element of the package.  It will cost approximately €9 million in 2008.

The Finance Bill will include a provision to avert a claw-back of income tax, when a farmer who has opted to avail of the special income tax averaging arrangements, subsequently enters a milk production partnership.

I am aware that, on occasions, the break-up of a farm partnership may be necessary because of changing personal circumstances. In order to facilitate developments of this nature, I intend to introduce a new relief from Capital Gains Tax on the dissolution of farm partnerships. The relief will run for a period of 5 years and full details will be contained in the Finance Bill. This measure is estimated to cost around €5 million in 2008 and a full year.

The farmers’ flat rate addition for VAT is being retained at 5.2 per cent for 2008.

The House will recall that in last year’s Finance Act, I extended Stamp Duty relief for farm consolidation. I am pleased to say that I have recently signed the order to commence this relief following the receipt of the necessary EU State Aid approval. I believe that this will provide significant assistance to the farming community in improving the viability of holdings through consolidation.

Fishing Industry

The fishing industry in Ireland is facing major challenges at present. Earlier this year, the Cawley report provided a blueprint for the future of the fishing industry. It confirmed the need for restructuring of the industry including a significant reduction in the number of boats in the white fishing fleet. My colleague, Ms Mary Coughlan TD, Minister for Agriculture, Fisheries and Food successfully secured EU State Aid approval for a decommissioning scheme for fishing vessels. Given the importance of the fishing industry, and the role it plays in our coastal communities, I am allocating €21 million for this scheme to begin next year. I can indicate today that the tax code will be amended to assist in maximising the take-up of the decommissioning payments. Full details will be provided in the Finance Bill.

PROTECTING THE VULNERABLE

Social Welfare

As the economy begins a period of below-trend growth, our first priority as a Government is to ensure that the poor and the vulnerable within our society are protected. This Budget provides significant resources to allow us to address the needs of those most disadvantaged. This approach has enabled us, as a society, to deliver significant improvements for people on low incomes in recent years and this continues to be the best way to deliver future social welfare enhancements in a sustainable way.

The Government is committed to working closely with the Social Partners to achieve even more. We have already met the important thresholds that we set ourselves some time ago. We are determined to consolidate these substantial achievements and to continue to make progress.

In line with this overall approach, the improvements in social welfare benefits and child care payments that I am providing for today will amount to an additional €957 million in 2008 and €980 million in a full year. This is over half of the increase in total current spending compared to the Pre-Budget Outlook.

Pensions

The Government is very conscious of the need to protect and improve the income position of our older people. In recent years, significant social welfare increases for pensioners were delivered and key targets were achieved. Today, the Government will further build on these achievements by increasing the full personal rate of the State (Contributory) Pension by €14 per week and that of the State (Non-Contributory) Pension by €12 per week. This will bring the State (Contributory) Pension to €223.30 per week and the State (Non-Contributory) Pension to €212 per week.

In addition, I am increasing the social insurance qualified adult allowance rate for people of pension age by €27 to bring it to €200 per week. I indicated last year that I intended to bring these qualified adults up to the full personal social welfare non-contributory pension rate. I intend to complete this process next year.

Carers

The Government also recognises the huge contribution to society made by carers and will increase Carer’s Allowance and Carer’s Benefit by €14 per week. I am also raising the income disregard for carers by €25 for a couple to €665. I increased the Respite Care Grant last year from €1,200 to €1,500. This year I am increasing it by a further €200 to €1,700.

Other Social Welfare Supports

All other personal weekly social welfare rates will be increased by €12 per week. This will bring the lowest full adult social welfare rate to €197.80 per week.  

Child Income Support

The Government has significantly increased financial support for children in recent years. It intends to continue to do so by increasing Child Benefit by €6 for the first and second child to €166 per month and by €8 for the third and subsequent children bringing it to €203 per month. It will also increase the Early Childcare Supplement, payable in respect of all children under 6, by €100 – bringing the payment to €1100 per annum.

These increases mean that families with two children under six will receive a tax free payment of €6,148 in 2008.

Other Social Welfare Measures

The Budget Summary contains a range of other social welfare improvements, the full details of which will be announced by the Minister for Social and Family Affairs. I particularly welcome the €2,000 increase in the Widowed Parent Grant to bring it to €6,000 which will come into effect today.

Health

In recent years health has been by far the largest beneficiary of new resources available for public services. The Government is committed to keeping health as a key priority area. It is equally committed to working to protect Ireland’s economic and fiscal situation, as the key prerequisite to providing the funding required to develop and improve health care.

Much of the public debate about health services is focussed on the increased cost involved. While there are valid concerns about the growth of health spending, both nationally and internationally, the proper context for this debate is one which views health spending as delivering benefits as well as accruing costs.   

We are determined to see that the extra budget resources now being made available by the Government to the Health Service Executive secure the optimum improvement in the quality and delivery of health services.

To achieve this objective, the Government will work in partnership to overcome any obstacles to change in the health system and to continue to improve policies and practices in all areas of service delivery. My colleague the Minister for Health and Children and the Health Service Executive will advance this work through the Health Forum established under “Towards 2016”.

Despite budgetary constraints, the Government is providing nearly €16.2 billion for health in 2008, an increase of over €1,100 million on this year’s provision. Of the total €16.2 billion, over €700 million will be for the capital programme.

An additional €276 million over the pre-Budget estimate is being provided for a range of health developments, including further provision for cancer care, the elderly, people with disabilities and children.  Details of these measures will be announced by my colleague, Ms Mary Harney TD, Minister for Health and Children.

Medical Card Eligibility

The question of medical cards for vulnerable families is a priority for this Government. The Programme for Government contains a commitment to double the income eligibility limit for parents of children less than 6 years of age and to treble it for parents of children with an intellectual disability less than 18 years of age. At present, the Department of Health and Children are carrying out a data collection exercise and review of the eligibility criteria for medical cards which are expected to be completed by autumn next year. The Government is committed to making progress in this area as soon as that review is completed.

Drugs

Since the Pre-Budget Outlook I have added €12.5 million to fund the implementation of the recommendations of the National Drug Strategy Rehabilitation Report. This additional funding will allow for the development and strengthening of the local Drugs Task Forces and for the roll-out of services to new commuter-belt towns.

Increased Duty on Tobacco

I am raising from midnight tonight the excise duty on cigarettes by 30 cent per packet of twenty, inclusive of VAT, with pro rata increases on other tobacco products. This increase serves to underline the desire of us all to curtail the consumption of tobacco in the interests of improved public health. I believe this measure should be welcomed generally.

It has also been suggested to me that there might be public health benefits arising from a switch to lower alcohol beverages. This will require some study, and indeed some adjustments by industry – I am giving notice now that I intend to bring forward measures in this area in my next Budget.

Development Aid

In addition to our commitments to the vulnerable here in Ireland, this Government recognises our responsibilities as a rich country to the poorest of the poor in developing countries. I am providing for an additional €84 million in the Vote for International Co-operation in 2008. This will bring our total ODA allocation in 2008 to €914 million, up to 0.54 per cent of GNP. This amount is over three times the amount spent in 2000.

SCIENCE, TECHNOLOGY AND INNOVATION

Significant and sustained investment in Science and Technology and Innovation (STI) is an essential part of the drive to make Ireland a more knowledge-driven economy. Ireland must be at the forefront in generating and using new technology and this requires us to strengthen the national innovation system, in particular, by focused interventions to support the development of our R&D base.

This base has grown very significantly over the last few years with total gross expenditure on Research and Development growing from just over €800 million in 2000 to an estimated €2.3 billion in 2006. While the Government has contributed very significantly to this increase, I am pleased to note that private sector investment has also grown from under €500 million in 2000 to over €1.6 billion in 2006. This investment, by both Government and private companies will help secure the economic future of the country.

In 2008, I am increasing the capital provision by €36.5 million to a total of almost €300 million for continued investment in basic research in Centres for Science and Technology and Engineering, and in Strategic Research Clusters. R&D activity, innovation management, and collaborative effort between industry and the third level sector will attract significant support next year. This will be matched on the current side by an additional €12 million for higher education research, bringing the total STI expenditure on the current side to €133 million in 2008.

R&D Tax Credit

Ireland is now viewed by multi-national companies as a location for R&D activity and the changes I will announce today to the R&D tax credit scheme will help further embed these companies in Ireland around such high value-added activities.

I propose to enhance the R&D tax credit scheme. The base year for expenditure used to calculate expenditure on research and development is being fixed at 2003 for a further 4 years to 2013. The change will provide an additional inventive for increased expenditure on R&D in future years and it will offer more certainty to industry in relation to the tax credit scheme.  This improvement will cost €60 million in a full year and is an essential complementary measure to Government spending on STI.

REWARDING WORK

Income Tax

I now turn to Income Tax.  

In the last decade the income tax system has been made fairer, friendlier, more progressive, and more rewarding for working people. The express purpose of the Programme for Government is to build on and further progress that tax agenda over the next five years.

Today I will take a positive step down that road by presenting to the House the first of five instalments in our income tax agenda. I believe that the various measures proposed constitute a well targeted income tax package that protects and enhances the income position of those in employment and supports those who find themselves in difficult circumstances or on fixed incomes. It will meet the Government’s priority to use tax credits and bands to keep low income earners out of the standard rate band and average earners out of the higher band. The protection of more vulnerable groups must remain my priority in addressing income tax decisions and that is what I am doing.

I am increasing the Personal Tax Credit by €70 for a single person and €140 for a married couple while the Employee Tax Credit will also be increased by €70 per annum. This will keep 32,600 income earners out of the tax net and, for a single person on PAYE, move the entry point to the income tax system from €17,600 to €18,300 per annum. The Employee PRSI and Health Levy entry points are also being increased in line with these changes.

The 20 per cent standard income tax band is being widened by €1,400 per annum to €35,400 single and €44,400 married one earner while the band for married two earner couples will be €70,800. With the projected average industrial wage for 2008 being about €34,000, it means that we will protect people on average earnings from any liability to tax at the higher rate.

Other Tax Credits

With the needs of certain more vulnerable groups in society in mind, I propose to provide further increases in the value of a number of other personal tax credits.  

The tax credit for an incapacitated child will be raised by 22 per cent or €660 per annum to €3,660, the level of the married personal credit, and the home carer tax credit is being increased by almost 17 per cent to €900 per annum.  

The age credit will be increased by €50 to €325 for a single person and by €100 to €650 for a married couple, with the age exemption limits also being increased by €1,000 and €2,000 to €20,000 and €40,000 respectively. I am also providing for significant real increases in the credits for widowed persons and widowed parents.

These are targeted and concrete measures that underline the Government’s resolve to look after the needs and welfare of those most deserving of our support.

Finally, I also intend to increase the allowance for Trade Union subscriptions from €300 to €350 per annum.

The cost of all of these income tax, PRSI and Health Levy measures is estimated to be €432 million in 2008 and around €585 million in a full year. Following the Budget the total number of earners who are outside the tax net in 2008 will be over 878,000.

The increases in credits and bands mean that about four out of every five income earners will continue to pay tax at no more than the standard rate of income tax, and that about two out of every five income earners remain outside the tax net, as outlined in the Summary of Budget Measures.

HELPING BUSINESSES - TAX MEASURES

The capacity of the economy to grow and develop largely rests on the ability of the business sector, both small and large, to prosper. They are the wealth creators and generators of employment in this country.

Today I am pleased to announce the following further tax measures aimed at the business sector.

Renewal of Section 481 Film Relief

I am renewing Section 481 Film Relief until 2012 on the current basis. Any adjustments to the relief will depend on the outcome of a study of the relief that I have had commissioned. Any such changes will be announced in the Finance Bill.

Small and Medium Employers

In term of supporting small and medium enterprises I will introduce the following measures:

   The Small Company tax liability threshold for the payment of preliminary tax on the simpler prior-year basis is to be increased from €150,000 to €200,000;

   The tax liability threshold for new start-up companies at or below which they do not have to pay preliminary tax in their first accounting period will also be increased from €150,000 to €200,000;

   The small business VAT registration thresholds will be further increased from €35,000 per annum for services and €70,000 per annum for goods to €37,500 and €75,000 respectively from 1 May 2008. This measure will take about 2,700 businesses out of the VAT system.

These measures will support business and enterprise and will cost €16.5 million in 2008 and €27 million in a full year.  

Details of certain technical but important VAT simplification measures are set out in the Summary of Budget Measures.

Payment Cards

Modern commercial financial and retail transactions should increasingly be electronically based for reason of efficiency and security. This will benefit not just businesses but also the ordinary person in the street. The Government is willing to make its contribution to the delivery of this desirable policy objective. In this regard, I propose to reduce the stamp duty charge on financial cards as follows:

     A 25 per cent cut in the duty on credit cards reducing the charge from €40 to €30;

     A 50 per cent cut in the duty on combined cards reducing the charge from €20 to €10, and

     A 50 per cent cut in the duty on ATM and debit cards reducing the charge from €10 to €5.

This change will be part-financed by an increase in the duty on cheques from 15 cent to 30 cent per cheque; this is consistent with a shift in the balance of transactions from paper to electronic methods. Overall, the cost of individuals’ access to payment systems will be significantly reduced by these measures.

As a once-off measure, I propose to include provisions in the 2008 Finance Bill to require the financial institutions to make a preliminary payment equal to 80 per cent of the Stamp Duty liability on financial cards for the previous year. This will assist the Budget to the tune of some €60 million in 2008, but will not add to costs for card-holders.

SUPPORTING HOME OWNERSHIP

Mortgage Interest Relief

In the Programme for Government we signalled that the first time buyer – and recent purchasers – would benefit from further increases in the ceiling on mortgage interest relief.

Today, I will honour the Government’s pledge by increasing the ceiling on mortgage interest relief for first time buyers by €2,000 for a single person and €4,000 for a married couple or widowed person to €10,000 and €20,000 respectively. This will increase the maximum monthly relief available by about €33 and €66 respectively, bringing it to €166 per month for a single person and €333 per month for a married couple or widowed person. These moves are appropriate in ensuring additional support for a hard pressed segment of the housing market and should provide the necessary direction and certainty. 

Housing Market

Taxation policy must always take account of market conditions and it should be designed to support, rather than hinder the achievement of policy objectives. This is a matter for consideration by any Finance Minister in respect of every Budget.

Over recent months, the dynamics of the housing market have changed fundamentally. A natural and welcome slowdown in property price inflation has been compounded by higher interest rates, tighter credit control and changing consumer sentiment as well as uncertainty about the global economic outlook and turmoil in international credit markets. I have made it clear on many occasions that any stamp duty reform which I would contemplate would have to be affordable and would have to support, rather than potentially destabilise the market.

There have been any number of proposals mentioned in the past that in my view, have ranged from the illogical to the impractical. They have included proposals that were overly complex and costly, that sought to push an additional stimulus into a market that did not need it at that point, or, proposed to introduce changes over a number of years that would simply have created further uncertainty.

Barring exceptional circumstances, I believe there is only one time when it is appropriate to make significant tax changes and that is when they can be properly integrated into overall fiscal planning at Budget time. Conditions are now such that there is a better balance between seller and buyer in the housing market. Price corrections are taking place. Activity is slowing somewhat and there is some uncertainty as to where prices will settle. The housing market is an important aspect of our overall economy and the sustainability of economic activity can be assisted or impeded by the efficiency of that market. 

What I am not prepared to do is to introduce a set of small changes that would make the system more complex, but do little to improve the functioning of the market. I decided that if this Government were to act, we would introduce something that would represent a step change in the operation of the tax system on residential property transactions. For that reason, I am today announcing fundamental changes to the current system of stamp duty for residential housing. 

New Stamp Duty Regime

Purchases of residences with a value of less than €1 million will be charged to Stamp Duty on the basis that no tax will be payable on the first €125,000 of the consideration, and the balance will be charged at 7 per cent. Only those houses valued in excess of €1 million will pay at a higher rate of 9 per cent on the portion of the price which is in excess of that figure. There will be no losers and no anomalies created by this banding system. It will be extremely simple, and considerably less expensive for both buyers and sellers. More importantly, this regime will also provide for a highly progressive stamp duty system whereby those buying the more expensive houses will always pay a higher effective rate than those buying your average house. This is equity at work.

Because the percentage rates concerned will be paid only on the balance over the relevant threshold, rather than on the whole amount as under the current system, the effective rate paid on most homes will be well below the headline rate. For example, a couple buying a new home for the national average house price of almost €370,000 will pay just over €5,000 less than at present. The effective tax rate falls at all levels - the duty paid on a €350,000 home will fall from 6 per cent under the current Stamp Duty regime to about 4½ per cent under the new system and a €500,000 house will reduce from 7½ per cent to around 5¼ per cent. Indeed, no transaction under €1 million will be charged much more than about 6 per cent duty. This measure will take immediate effect and it will also cover instruments that are due to be presented to the Revenue Commissioners no later than 5 December.

The exemptions that apply in the current system – for example, in relation to first time buyers and buyers of new homes – will be retained. In addition, the current five-year rule, which requires a full claw-back of the stamp duty exemption where the owner-occupier moves out and lets the property, will be reduced to 2 years. This will allow for the retention of an important control in the system, but also better reflect the increased career and residential mobility of our population, and will give potential young house buyers greater flexibility and certainty in their choices.

These progressive reforms will lead to a simplification of the system which will increase the efficiency of the housing market, boost confidence and support employment and overall economic activity. They are the right reforms, introduced for the right reasons at the right time.  

The gross cost of these measures in 2008 is €190 million.

Details are in the Summary of Budget Measures.

The Rental Sector

I also recognise the importance of the rental sector and the cost pressures on those renting. Accordingly, I will be increasing the income tax relief on rent payments by 11 per cent. I also propose to increase the threshold for the rent-a-room scheme from €7,620 to €10,000 to ensure the continued supply of this type of rental accommodation.

CONCLUSION

Budget 2008 has been framed against the most challenging backdrop experienced in a considerable number of years. Growth is moderating, the international financial markets have been turbulent and the global outlook is uncertain. Rather than adopting a conservative, cautious stance, I believe we must respond to the challenge by taking determined action and pushing ahead with renewed vigour.  

Today’s Budget meets the challenge head on.  

      It supports the incomes of the vulnerable.

      It keeps taxes low for working people.

      It helps home buyers and the housing market.

      It protects our environment for the future.

      It keeps the NDP on track.

      It borrows modestly to invest ambitiously.

      It will sustain our development as an economy, as a society, and as a nation.

I commend the Budget to the House.