I am pleased to present my fourth Budget to the House. In doing so I will outline my proposals for the coming year. I will also set out the goals and targets which we will achieve next year in the fifth Budget of this administration - the last before the General Election.
Record of achievement
When this Government took office in June 1997 we set out clearly what we intended to do. Our record since then is one of significant achievement. Because of our policies and performance:
250,000 jobs have been created in the economy and over 100,000 people have been taken off the Live Register. This has brought our unemployment rate from 10 per cent in 1997 to below 4 per cent - a record low,
we have improved our public services with significant investment. Overall spending on the health service has increased by 86 per cent or £2.3 billion and funding for education has increased by 67 per cent or £1.4 billion,
the weekly take home pay of the average single industrial worker has increased by £60, when tax reductions and wage increases are taken into account.
There are many more that I could mention, but by any yardstick this Government's achievements have been impressive.
This Budget will build on that success. It will set the scene for continued progress in achieving a prosperous and fair society.
Budget objectives
This Budget has four basic objectives:
to manage our economy to secure our continued prosperity;
to improve our quality of life;
to promote a fairer society; and
to reward work and enterprise through on-going tax reform.
In meeting these key objectives the Government recognises the role of the Programme for Prosperity and Fairness. This Budget focuses very much on the appropriate response to inflation. In framing my Budget, I have taken the views of the social partners into consideration, particularly their views on inflation, living standards and childcare. The budgetary targets and goals are based on the over-riding need to keep our economy competitive and on the need to ensure that this is reflected in our approach to how we reward ourselves. In particular, the budgetary targets are dependent on the delivery of the commitments, including the industrial peace commitments which were underlined and strengthened in the recent agreement negotiated with the social partners. If this scenario is departed from, our ability to achieve these goals will be jeopardised. The competitiveness upon which our growth is based will disappear and we will be in danger of heading back to the days of significant unemployment and emigration. The Budget depends for its success on respect for, and adherence to, the terms of the PPF.
Economic management to secure continued prosperity
Economic and Budgetary Targets
The first major objective of this Budget is to secure the basis for continued prosperity in the years ahead. We have already seen Irish living standards raised to the EU average. We can make further progress on this through the sensible management of our economy.
The Budget is framed against the prospect of strong, but moderating, economic growth. I expect growth to slow from an estimated 8.6 per cent in GNP terms this year to an average of 6 per cent in 2001 to 2003. Employment should grow by about 2.5 per cent annually, with unemployment declining a little further. Full details of the economic projections underlying the Budget are included in the Stability Programme Update, which I am publishing today.
If these economic prospects are realised, Irish living standards will be towards the top in the EU. Achieving this, however, is conditional on implementing the disciplined approach to wage developments provided for in the PPF, which has just recently been confirmed by the Social Partners.
This strong economic performance means an expected Exchequer Surplus in 2000 of £2,478 million. This is after taking account of an increase of £178 million in the assets of the Capital Services Redemption Account. This surplus will be used to reduce our national debt, thereby cutting the burden of future interest payments and allowing room for lower taxes and better services in years to come. The General Government balance for 2000 as defined for EU purposes will show a surplus of about 4.7 per cent of GDP.
Taking account of the measures I am announcing today, the Budget targets for 2001 are as follows:
a General Government surplus of £3,900 million or 4.3 per cent of GDP;
an Exchequer surplus of £2,538 million, including a release of £400 million from the Capital Services Redemption Account to meet interest costs on the national debt;
a current budget surplus of £6,145 million;
a capital budget deficit of £3,607 million; and
a debt to GDP ratio of 33 per cent.
The increase in 2001, post-Budget, in net current spending as defined in the context of the Government Parties' Action Programme for the Millennium, will be 6.6 per cent. This is the annual average increase in 2001 over the 1997 outturn. This figure includes provision for the agreement between employers and the Irish Congress of Trade Unions on an adjustment to the terms of the Programme for Prosperity and Fairness, and takes account of the £400 million I have referred to earlier. The Government decided that an increase beyond the target 4 per cent limit was justified in order to make more rapid progress in key social spending areas, and to help secure industrial peace. The Government also intends to run significant budgetary surpluses beyond 2001, reflecting economic good sense and our obligations under the Stability and Growth Pact. A General Government surplus of 3.8 per cent of GDP is foreseen in 2002, and 4.6 per cent in 2003 - with the debt ratio falling from about 39 per cent in 2000 to 24 per cent by 2003 and falling also in absolute terms this year and next.
The EU Council of Agriculture Ministers agreed on 4 December a package of measures to deal with BSE, and its impact on the beef market. There is no reliable estimate of what the cost to the Exchequer might be, and I am therefore making no provision for it in my Budget.
We will continue to allocate at least 1 per cent of GNP annually to build up the National Pension Reserve Fund which will be formally established early in the New Year. The decision to establish the Fund represents a sound and far-seeing approach to budgetary planning. The amount in the Fund already stands at over £5 billion. Today's Budget reinforces the basis for economic growth and social progress over the period ahead - by continuing the responsible management of the public finances which has characterised this Government's term of office to date.
Today's Budget also reinforces the basis for progress. It does so by improving the attractiveness of work and enterprise through further reform of the tax system; and by ensuring, through a high priority for investment, that infrastructural pressures do not inhibit growth. However, future prosperity depends to a large extent on the recent commitments entered into by the social partners being honoured. We should not fool ourselves into thinking we can continue on the path of economic and social progress if we lose our disciplined approach.
Public Service Pay
The agreement reached on Monday night between employers, the Government and ICTU provides for a pay adjustment of 2 per cent with effect from 1 April 2001 and a non-pensionable lump sum equal to 1 per cent of annual pay on 1 April 2002. As a result, public service employees will receive on-going pay increases under the PPF amounting to 18 per cent over 33 months, and nearly 22 per cent in the case of those benefiting from the 3 per cent early settlers' agreement, in addition to the once-off lump sum of 1 per cent.
It has also been agreed that one-quarter of whatever increases may be recommended by the Public Service Benchmarking Body, which is to report by 30 June 2002, will be implemented with retrospective effect from 1 December 2001. The balance will be implemented on a phased basis to be agreed between the parties in discussions which are to commence immediately following receipt of the Benchmarking Body's report. This represents a very significant improvement in the arrangements for implementing the outcome of the benchmarking process.
These improvements highlight the benefits which can be achieved by working within the PPF framework. The Government has made it clear that it cannot countenance claims by any single group outside the PPF framework and the benchmarking process for which it provides.
Anti-Inflation Package
This Government is in no doubt that the recent increase in inflation is a key challenge, though largely not of our making. Last summer we announced measures to address domestically-generated inflation. We, like others, expect that the inflation rate will fall next year. This should happen as the effects of recent oil price and exchange rate developments and other once-off factors unwind. However, as indicated to the social partners at that time, I am determined to take some additional specific measures to reduce our inflation rate. That is why today I am announcing a further anti-inflation package. This package consists of:
firstly, direct tax measures to increase participation in the economy,
secondly, cuts in indirect taxes to bring down the CPI the and ease transport costs, and
thirdly, measures to encourage consumers to save rather than to spend.
The estimated inflation rate for 2001 will average 4.5 per cent. Indirect Taxation
To reinforce our commitment to counter inflation, I am announcing a cut in the standard rate of VAT of 1 percentage point, reducing it to 20 per cent from 1 January 2001. This cut in VAT also reflects the valid concerns expressed about this country's competitive position in an age of E-Commerce, where differences in VAT rates between different trading partners will influence how successful we are in exploiting this new means of commerce.
The Government expects to see the VAT reductions passed on to the consumer and not absorbed in higher retail margins. If this does not occur, the wisdom of further VAT cuts will be placed in doubt. We will be monitoring the situation and I hope that consumers will be vigilant in seeing that the VAT reduction is passed on to them.
I am conscious that a cut in VAT would reduce the retail price of cigarettes. I will therefore be adjusting the excise duty on tobacco to offset the VAT reduction and leave retail prices of tobacco unchanged. A number of calls have been made for tobacco to be excluded in calculating our inflation rate. I see merit in this proposition and I have asked my Department to examine the issue further with the Central Statistics Office.
Road Hauliers
I propose to cut the excise duty on auto-diesel by 6 pence per litre to just above the EU minimum rate, giving a VAT inclusive reduction of 7.3 pence per litre from midnight tonight. With the 1 per cent VAT reduction in January this will mean a cumulative tax reduction of 7.8 pence per litre in the New Year on average auto-diesel prices. This will be of significant benefit to the haulage sector and to diesel users generally. The cut will ultimately feed through to the retail prices of all goods and services.
I am anxious to encourage the use of low-sulphur diesel for environmental reasons. While the current excise reduction of 6 pence will apply to all diesel for the present, I propose that in the future this lower rate will apply to low-sulphur diesel only. Such a differentiation in excise rates requires EU approval which my Department will be seeking in the near future.
A number of non-tax measures to help the haulage sector are being undertaken. These include a significant increase of the Department of Public Enterprise's capacity to regulate and develop the road haulage industry. I am also providing additional funding for the Irish Road Haulage Association to enhance its professional service to its members.
Unleaded Petrol
I propose also to cut the excise duty on unleaded petrol by 2 pence per litre from midnight tonight giving an immediate VAT inclusive reduction of 2.4 pence per litre in the price at the pump. With the VAT reduction of 1 per cent in January this will mean an ultimate tax reduction of 3 pence per litre. Hybrid Engine Technology
I am concerned also to encourage the use of the new hybrid engine technology in motor vehicles so as to help reduce emissions and conserve energy. I intend to provide in the Finance Bill that, for a period of two years, purchasers of any new vehicles fitted with hybrid engines would have 50 per cent of the VRT which was paid refunded to them, on application to the Revenue Commissioners.
CPI Impact
The full year cost of all VAT and excise measures is £349 million and, if passed on in full, will reduce the Consumer Price Index by 0.5 per cent.
Savings Measures
Reducing inflation also means influencing the inflationary psychology. We need, therefore, a further weapon in our hands and this involves using the tax system to encourage consumers to save rather than spend, to create real wealth rather than to consume.
I have already acted, to the discomfort of some, by cutting taxes on capital accumulation, by incentivising pension saving both through tax changes and by giving savers a greater choice and control over their nest eggs. Some of these measures were criticised at the time. The rationale behind them is now apparent. In the case of capital gains tax, the rate cut has brought the yield to about £600 million in this year alone - in 1997 the yield was £132 million.
Credit Unions
I was approached by the Irish League of Credit Unions recently regarding the taxation of credit union interest and dividends. The League suggested a basis for a solution which meant that:
all credit union shareholders would have the option of maintaining the current tax status of their shareholdings,
interest on credit union deposits would be subject to DIRT at 20 per cent,
a new option would be provided for credit union shareholders to place shares in special credit union savings accounts which would be subject to DIRT at 20 per cent, and
for members who placed their shares in new medium-term accounts for a minimum period of either three years or five years, a tax exemption would apply to the first £375 or £500 of dividend income per annum, respectively.
The League has written to me stating that it has consulted widely within the movement and it is satisfied that there is a general acceptance of the proposals by the credit union movement. It has asked me to proceed with them in the Budget. Accordingly, I propose to legislate for this arrangement in the Finance Bill. The full details of the credit union scheme are set out in the Summary of Budget Measures.
Other Deposit-Taking Institutions
I believe that the proposal to encourage medium-term savings by allowing a measure of tax free income is a useful one in the current economic climate and I would propose that it be extended to all other relevant deposit-taking institutions. This will be discussed with the institutions concerned before the Finance Bill.
I will also consider suggestions for further savings innovations before the Bill is enacted.
Life Assurance I am also making two changes in the taxation arrangements for life assurance products. Firstly, I am abolishing from 1 January next, the stamp duty of 0.1 per cent on the value of life assurance policies. The annual cost to the Exchequer will be £20 million.
Secondly, I am applying the same rate of tax to both Irish and certain foreign life assurance savings products. Further details are contained in the Summary of Budget Measures.
I will be outlining further general tax changes later in this Statement.