Statement by the Taoiseach, Mr. Bertie Ahern T.D., on the 2008 Budget, Dáil ÉireannThursday, 6 December 2007 at 11.00 a.m.

The confidence of the Irish people in the capacity of this Government to manage our way through difficult conditions has been been fully vindicated by the terms of the Budget introduced by Brian Cowen, T.D., Tánaiste and Minister for Finance. The role of the Budget in a modern economy is only in part about the specific measures announced on Budget Day. Its more important role is to signal the strategic direction which policy is taking and thereby to send a clear signal to citizens and to stakeholders about how current challenges will be met.

This is a Budget that will sustain progress in the Irish economy through more difficult international conditions. Our ability to produce an innovative, progressive and socially caring budget at this time reflects well on the strength and resilience of our economy which we have built up over many years.

Today, we have the resources and the flexibility to respond constructively to less favourable conditions, in a way that would be the envy of our predecessors in the 1980s and of many of our European partners now. The Budget is prudent, and stays well within the margins of safety, but expresses the Government’s determination, not just to hold what we have, but to maintain forward momentum.

The message is loud and clear from this Budget: we will maintain our focus on deepening the competitiveness of the economy so that we more that match most of our competitors; we will continue to prioritise the needs of the disadvantaged and those who need our support within the resources that are available; and we will continue to create an environment where working people are rewarded for their efforts, while enterprises are encouraged to invest through a strong and consistent pro-enterprise tax system.

These strategic priorities have to be pursued in a realistic fashion, year by year. Our great strength as a society is our capacity to respond rapidly to changing circumstances. That is what is facing us at the present time. As a very open economy, we are directly and rapidly affected by changes in the external environment, such as the dramatic developments in international financial markets, the related sharp reduction in the value of the dollar, the changes in the environment for corporate investment globally and the international trend in consumer and business confidence. Some of the pre-Budget commentary appeared to suggest that the Government should somehow be able to control these forces, others suggested that we should implement all of our specific policy commitments at once, irrespective of the economic and fiscal context. Some, indeed, have warned us that we will be criticised either for taking account of these fiscal realities or for not taking account of them! At least, we know where we stand with those people!

We have continued to make substantial economic advances this year, and we look forward to further positive growth, including growth in employment, even if somewhat slower, next year. In 2007, growth will be well over 4%. Next year, we expect it to be around 3%. About 72,000 net new jobs have been created this year, bringing total employment to around 2.1 million. This compares to less than 1.1m at work 20 years ago. Next year, we still expect to create net 24,000 new jobs.

Growth in current expenditure will be a healthy 8%, and in capital expenditure 12%, while General Government Borrowing remains under 1%. Very few of our EU partners have the financial scope to bring in such a positive budget in the current climate. In the circumstances, the Government is acting with great responsibility in adopting a fiscal policy which envisages a General Government Deficit of 0.9% as a percentage of GDP. This is a prudent course to adopt, within the parameters of our European commitments under the Growth and Stability Pact, especially given the significant provision for capital spending and the responsible measures being taken to contain current spending to an increase of 8.2% over the current year, which is nevertheless a measured deceleration compared to recent years.

Some of the outside commentary of recent weeks might have led people to believe that there would be a quite different sort of budget. We have no recession. There are no cutbacks of any significance. There are no stealth taxes.

This Budget is for a country that is continuing to do remarkably well. Despite this, many people are anxious to emphasise only the negative side, the problems and challenging structural deficiencies, which the Government are addressing. Many of the critics inside and outside of this House are not willing even to acknowledge, let alone praise, the amount of progress being made on so many fronts, of which the public are very aware.

The strategic priorities of this Budget will come as no surprise. That is because they are consistent with the policy of Government over the last ten years. Not only that, they are consistent with the strategic direction for the medium- to long-term that we have set out with the social partners in the framework agreement, Towards 2016. The reality is that we cannot achieve all our goals in one year, or even in a short run of years. The changes which have brought us thus far, and the further changes which are required to meet our economic and social objectives in full, require the consistent pursuit of policy goals over a long period, during which short-term challenges have to be faced and dealt with, while keeping a clear focus on the underlying direction in which we wish to travel.

In politicial terms, we have made a good start on implementing our promises. Of course, the Fianna Fáil election programme and the agreed Programme for Government are for five years, not for one. Taking into account adverse developments since mid-year, we are running a small and manageable deficit of under 1% of GDP, which, taking one year with another, is not too far removed from keeping the budget in broad balance. We said we would invest 5.4% of GNP in public infrastructure. Instead, we are actually raising it to an average of 6% over the next five years.

We said we would increase tax bands and credits in line with wage inflation. We have done so. We immediately abolished stamp duty for first-time buyers in June, and have improved mortgage interest relief for first time buyers in this Budget, increasing it by €2,000 for a single person and €4,000 for a married couple.

We have gone beyond that, and reformed and simplified stamp duty on residential homes.

In the absence of a general property tax, stamp duty is an important source of revenue to fund essential public services, and raises about €3 billion annually. The existing step changes in stamp duty undoubtedly create anomalies, which there was little opportunity to modify, when the market was already overheating.

A rationalisation of the system on houses is clearly warranted, at what is now a good moment. A correction in the housing market was sooner or later inevitable, given the very high level of house building and historically low interest rates. It will be beneficial in bringing home purchase more within the reach of younger couples.

One of the issues in previous partnership discussions was the high cost of housing, especially in the capital. The stamp duty changes will restore confidence and stability.

The message from this Budget is indeed one of confidence: confidence that our long-term goals are attainable. Confidence that our strategy is the right one. Confidence that we have delivered over recent years, and that we will continue to deliver. Confidence that the underlying strength of the economy enables us to increase spending, for both investment and current purposes, at significantly faster rates than most of our partner countries. Confidence that we can anticipate employment growth, low unemployment rates, increases in real living standards, improvements in physical infrastructure and human capital, where we are doing more than almost all of our trading partners. All this is while maintaining a prudent fiscal position, including record low levels of national debt, and facing fully up to our responsibilities to build a more environmentally sustainable economy and society.

The Budget sends a clear message that our delivery under all of these headings will continue. The dislocation caused by the international economic turbulence will be limited, and will not deflect us from the strategic course on which we have embarked:

workers whose real incomes are protected by the Budget;

businesses whose commitment to development through moving up the value chain by a greater reliance on R&D;

towns and regions who are planning for a new and strengthened role under our commitment to regional balance;

educational institutions that seek to meet the needs of the students of today and tomorrow;

families with caring responsibilities, and

communities that are seeking to look after their older people, their children and those with disabilities;

can all see that their needs and efforts are being supported by the Government through the very balanced and progressive measures contained in the Budget.

This is a Budget strong on equity. The gains in tax relief are again concentrated at the lower end. We have succeeded in maintaining the position that only about one-fifth of income earners are on the top rate of tax. Two-fifths pay the standard rate, and another two-fifths are outside the tax net altogether. As has been observed by the EU Commission many times, we have the most favourable tax system for low earners in the EU.

Tables in the budget booklet also show how in the past ten years effective rates of taxation have declined on annual earnings in percentage terms and on all levels of income. For example, a married couple on a joint income of €60,000 with two children now pay only 12% of their income in tax, whereas, 10 years ago, it would have been three times that amount at 36%. This is an enormous improvement for those on lower pay, that those opposite are incapable of acknowledging.

On the personal tax side, we have honoured our commitments to the social partners that net income gains will be preserved. Increases in bands and credits will ensure that four out of five income earners, including all those on average industrial earnings, pay no more than the standard rate of tax, while those on the increased minimum wage will continue to remain outside the tax net. Average industrial earnings have gone up by over €14,600 since 1997, but, compared to then, tax on these higher earnings has been cut by over €430. Since 1997, those on average industrial earnings have seen their take -home pay increase by 41%. Our consistent approach to income tax policy is to make work pay.

These changes maintain the strong, progressive character of tax policy over recent years. With these changes in place, the top 1% of income earners will pay 25% of all income tax, compared to the 15% they paid ten years ago, while those on average earnings or below, who make up about 55 % of all income earners, will pay only 4% of all income tax, down from the 14% paid ten years ago.

It is right that we should provide clear incentives within the tax code to underpin economic activity on a sustainable basis. For that reason, I greatly welcome the further enhancements of the tax credits for R&D expenditure. It is vital that our enterprise sector, both indigenous and overseas, should be constantly attuned to innovation and development. The Government is continuing to increase its own investment in third and fourth level education and the research efforts associated with it. It is equally important the enterprise sector should continue to increase its investment, and the Budget gives it further encouragement to do so. Tax changes affecting agriculture will also benefit that sector of the economy.

The changes in stamp duty on residential property bring to an end the period of uncertainty created by others about how stamp duty might evolve and might impact upon future transactions. Of course, the Government has a primary concern to support first-time buyers who are largely exempt from stamp duty. The increases in mortgage interest relief which the Minister for Finance had flagged and which have now been implemented, will ensure that most new buyers are effectively insulated from the negative impact on affordability of trends in market interest rates.

The changes in the stamp duty will encourage those who have perhaps been holding back from appropriate changes in their housing to reflect, for example, the stage of the lifecycle which they have reached. The six rates have been reduced to two, and there will be a very substantial reduction in liability, for example, of €11,000 on a house costing €450,000.

Furthermore, young families moving into somewhat larger accommodation, or older people trading down to more manageable property will now have confidence about the stamp duty implications, which in most cases will now be more positive than they would otherwise have faced. This will provide greater confidence across the housing market and will help stabilise housing output at levels appropriate to our underlying need, and at price levels which are realistic and sustainable. For those engaging in property transactions at the high end, I believe it is appropriate that they should contribute through stamp duty a proportionately higher share of the yield from property, but everyone will benefit to some degree from these changes.

In other areas of the construction industry, there will be strong satisfaction at the clear commitment of this Government to maintain record investment levels in physical infrastructure. The National Development Plan is central to our economic Strategy. It has the capacity to raise our performance. In other times, a reflex response to periods of economic difficulty was often to cut capital expenditure, as a less painful option. We are not merely maintaining it. We are stepping it up.

We have made rapid progress over recent years in rolling out our high-quality roads programme, in developing public transport capacity and quality across the various modes of travel, and we have provided record improvements in water services required by our growing population. That trend will continue and indeed accelerate, with an overall increase of 12% in capital spending over the current year. The Tánaiste is right to maintain this focus on the investment which will produce the basis for our continued prosperity, while enhancing the social infrastructure, such as output of social housing in line with our commitments under Towards 2016.

The road improvements, the removal of serious bottlenecks and the achievement of faster and more consistent journey times are appreciated by the public and are essential to all elements of industry and commerce. They are making many different parts of the country more accessible and therefore easier to live and work from. Extra funding is being provided to maintain momentum.

Commuting, especially, at peak times, needs improved and expanded public transport capacity. Up till 1997, there was limited EU, but no domestic Exchequer, investment in public transport. That situation was transformed from the late 1990s by this Government, and in 2008 investment will be increased to close to €1 billion.

I have a particular commitment to those who are least well-off in our society. Nearly €1 billion has been allocated to support those in need.

The Government over recent Budgets has provided record rates of increase in the principal social welfare rates, especially the lowest rates. This is in accordance with our National Anti-Poverty Strategy and our agreement with the social partners. I am pleased to say that the focus of the social welfare increases in the current Budget has been to increase the rates for those dependent on social welfare. Despite the pressure on resources, the increases of €14 and €12 per week in the main rates are in line with what is required to maintain the relative value of payments, and entail increases very significantly ahead of inflation. They put us well on target to achieve a pension of €300 a week by 2012 in line with the commitments in the Programme for Government.

These real increases are particularly welcome in the case of older people. There is across society a strong conviction that those who have worked hard all of their lives, reared families, paid taxes and built up the foundations on which our current prosperity rests, should benefit from our policy decisions. The increase of €14 per week is in line with the commitments in the Programme for Government. I am particularly pleased, however, at the increase in the Qualified Adult Allowance for pensioners, which means that couples over sixty-six in receipt of the Contributory Old Age Pension and Dependent Allowance will have an increase of €41 per week or 11%. Equality will be achieved in next year’s Budget.

Support for families with children is also most welcome, with increases across the full range of supports, including a 10% increase in the childcare payment for children under six. This support is a quantum leap ahead of what it was ten years ago.

Increases in the Health Vote include in particular additional resources for cancer services. The very substantial increases in expenditure on health services only make sense in a situation where we can be reasonably sure that they will be applied to best effect. For that reason, I greatly welcome the steps being taken under the Health Forum, established at the initiative of the Irish Congress of Trade Unions, to bring all of the energies of the social partnership process to bear on developing a world-class public health system that we all desire. I appreciate that the changes which may be required to get from where we are to such a preferred model will not be easy. However, I want to express the Government’s absolute commitment to delivering a world-class service, and therefore to supporting, in whatever way is appropriate, the change agenda which will come from the Forum.

I would like to welcome very strongly the provisions in the Budget in support of the agenda for environmental sustainability. This is no longer a policy option. Well before the present Government was formed, I signalled my conviction that the question of climate change, and the environmental challenge more generally, had to be at the centre of the policy-making agenda. Last year, the Minister for Finance made important changes in the supports available for more sustainable energy, including domestic heating systems. He flagged then his intention to do more, especially to align vehicle taxation more closely with environmental policy objectives. I strongly welcome the measures which he has announced. They will encourage people to act responsibly when making decisions about car purchase. It is a strategy which is entirely in line with making the cost of pollution more transparent, and to be borne by those who choose to generate it. With these and other measures, the Budget sends a clear signal about the direction of change, which is now urgent, if the scale of the global challenge is to be met.

The Government are following through on the commitment to bring our Overseas Development Assistance up to the UN target of 0.7% of GDP. We will be raising our oversees development contribution to €914 million or 0.54% of GDP in 2008. Staying on target, besides being the right thing to do, increases our influence and standing with a lot of the world’s poorer countries.

I would like to finish with reference to a particular change announced by the Tánaiste which is especially welcome. That is the reduction in stamp duty on payment cards and the parallel increase in duty on cheques. For some time now, my own Department has been leading a cross- Departmental and cross-sectoral debate about the development of a better payments system, which would be both more efficient and more appropriate to a knowledge economy. Yesterday’s announcements will bring us closer to the day when payments are made more safely and more efficiently, and with significant savings as a result, for customers and traders alike.

All budgets signal longer-term strategic studies and reviews. A quarter of a century after the Commission on Taxation, which was a catalyst for many significant changes, it is time to take a new look at our taxation system. This will include the question of how best to implement a carbon tax on a revenue-neutral basis.

We are also undertaking a review of administrative efficiency in all areas of the Public Service. This will complement the comprehensive review of the Irish public service by the OECD which I announced earlier this year, and which will be finalised early in the New Year. It will also complement the programme of external review of the capacity of Departments and Offices which I initiated this year.

I note with some gratification that Ireland rated highly in an international business tax survey. The Minister indicated that he was also looking at uses of the tax system to encourage lower alcohol beverages which is, as important to public health, as discouraging smoking. In the shorter term, the Minister is also looking in the context of the Finance Bill at the Section 481 film incentives, a sector where international tax competition is fierce.

By honouring our commitments to the people, by keeping faith with the social partners, by signalling our clear intent to deliver fully on the Programme for Government, by exercising responsible choices for today with an eye on the needs of tomorrow, and by demonstrating that one can combine a drive for continued prosperity with both environmental sustainability and social equity, the Government has shown why we continue to earn the confidence of the people in our handling of the economy. I am happy to commend Budget 2008 to the House.

ENDS