A Cheann Comhairle,
The Government is opposing the Motorist Emergency Relief Bill sponsored by Deputy Dooley to provide for quarterly reviews of excise duty and the immediate reduction of 4 cent in excise duties on petrol and auto-diesel. In the context of our current budgetary situation there is simply no scope to reduce the levels of excise duties at this time without providing for alternative revenue raising measures. Such a measure would cost the exchequer €178 million in a full year, when VAT is taken into account. The loss of this Revenue would have a negative impact on the performance of our public finances, which is vital to our economic well-being and to our exiting of the EU/IMF Programme. Ireland has been running very large public finance deficits since 2008 and this has driven up significantly the country’s debt level.
This is the backdrop that frames our budgetary policy at present. We cannot consistently spend more than we collect in revenue each year. It is not sustainable. Conversely, we cannot reduce taxes or excises without introducing additional taxes or charges in other areas to replace the tax foregone. Through the Government’s determination to correct the public finances, enhance economic growth prospects and create jobs, we are beginning to see some positive results.
Our public finances are stabilising, figures released by Eurostat yesterday show our underlying deficit in 2011 at 9.4% of GDP and we are on the right trajectory towards meeting our 8.6% target in 2012 and correcting our excessive deficit by 2015, as we are committed to. A stable tax base is essential to this.
Notwithstanding this, it is the case that there remains a very sizeable deficit in our public finances. This year the limit placed on our General Government deficit is 8.6 per cent of GDP. At Budget time, it was estimated that such a limit equated to a difference of almost €13¾ billion between revenues and expenditure. Clearly this is a very elevated level and one which requires further corrective action.
Last year saw a return to aggregate tax revenue growth for the first time since 2007. Exchequer data for the first three months of this year show a solid start to the year with strong year-on-year growth in taxes. Taxes were also ahead of profile in the first quarter. Given the size of the gap between expenditure and revenues, it is clear that the adjustment process must continue on both sides of the account and the performance of tax revenues in the first quarter of the year is a positive in that context.
The Government would be reluctant to introduce any measures at this point in time which might cost the Exchequer tax revenues. As the Deputy will appreciate, framing a Budget is about making choices and introducing measures that are fair, equitable and robust. In this regard this Government took the decision to not increase income tax, to remove over 330,000 from the Universal Social Charge and to increase mortgage interest relief for homeowner who bought their first home during 2004 – 2008. The Government introduced compensating measures elsewhere in the tax system to finance such measures and our tax forecasts are robust as highlighted in the quarter 1 exchequer returns.
It is estimated that a reduction in excise on petrol and auto-diesel of 4 cent per litre would cost the Exchequer approximately €143 million in a full year and some €94 million this year, if applicable from May. This amounts to €178 million in a full year or €119 million this year when VAT is taken into account. Without compensating adjustment measures elsewhere this would make the achievement of our budgetary targets more challenging.
All of the quantitative fiscal targets set as part of the EU/IMF Programme have so far been achieved and we are making good progress in returning our public finances to sustainability. It is important that we persist on this path and that we continue to meet the targets we have been set.
Clearly the budgetary adjustment process presents challenges for policymakers, but we must remain steadfast in our commitment to meet our budgetary targets. It is very important that we remain on a credible path of budgetary adjustment.
Moving towards a balanced budgetary position is a necessary pre-condition for restoring the economy to sustainable growth and securing our re-entry to the international financial markets to source our own financing.
It is acknowledged that fuels prices are currently high and represent a significant financial burden on families. Indeed, Ireland, as with other countries, has experienced a significant increase in the cost of petrol and auto-diesel in recent years. The increase in fuel prices is an international phenomenon. Fuel prices are driven by a number of factors including the price of oil on international markets, exchange rates, production costs and refining costs. The rise in oil prices over recent periods reflected additional factors such as geopolitical uncertainty in Northern Africa and the Middle East with potential supply disruptions.
For example, the average price of auto-diesel in 2010 was €1.23 per litre compared to today’s average price of €1.61 per litre i.e. a difference of 38 cents per litre. During this period increases in excise in Budget 2011 and in carbon tax in Budget 2012 raised excise on auto-diesel by just over 3.5 cents per litre (VAT inclusive). The increase in the price of auto-diesel therefore is largely due to external factors outside of the Government’s control.
The excise rates (including the carbon charge) in Ireland on motor fuels are 58.8 cent on a litre of petrol and 47.9 cent on a litre of auto-diesel. When VAT is taken into account, the total Exchequer take, as a percentage of the total price, is 53.7% and 48.5% based on current average prices of €1.68 and €1.61 per litre for petrol and auto-diesel respectively. While the tax increases are within the control of the Government, these increases must be seen in the context of very difficult budgetary decisions. Nevertheless, it should be noted that our rates remain lower than many of our main trading partners and significantly lower than our nearest neighbour the UK. Indeed the price of auto-diesel is around 20 cents per litre cheaper in the State compared to the UK while the price of petrol is around 10 cents per litre cheaper.
The Exchequer yield from excise, as excise is set at a nominal amount, does not increase as the price of fuels increase. On the other hand, the yield from VAT per litre of fuel, as VAT is set as a percentage of the price, increases as the price of fuels increase. Accordingly, any increase in the tax take as a consequence of increasing fuel prices is confined to VAT. I should point out at this juncture that Opposition members have been claiming that the VAT gain on increased fuel prices is approximately €60 million extra. I am advised by Revenue that, based on current fuel prices and current demand, the increased VAT take would be more in the order of €15.5 million per annum.
It should also be noted that businesses are of course entitled to reclaim VAT incurred on their business inputs, including VAT incurred on fuel. For example, VAT incurred on auto-diesel and marked gas oil, or green diesel as it commonly known, used in the course of business is a deductible credit for business in the Irish VAT system. VAT on petrol can not be deducted or reclaimed. In relation to auto-diesel for example at current average prices a business can reclaim VAT of just over 30 cent per litre thereby reducing the cost to the business from €1.61 to €1.31 a litre on average.
In general, given the current pressure on the public finances, there is no scope for temporary taxation adjustments, as to do so could lead to significant costs to the Exchequer. The Programme for Government stated there would be no increases in income tax. The Government carefully considered the options open to it given our commitments under the EU/IMF programme. Indirect taxes have a lower impact on economic growth and jobs. Accordingly, revenue raising in Budget 2012 was largely in the areas of indirect taxes – VAT and carbon tax. I wish to point out that the decision to increase the carbon tax by €5 per tonne meant a lower increase across all fuels than if an increase had been applied just to the excise duties on petrol and diesel.
As I’ve already said, the rising cost of fuel is an international phenomenon. In this regard it should be noted that in both 2005 and again in 2008, when oil prices last spiked, former Finance Ministers from Deputy Dooley’s own party subscribed to the agreed approach adopted at Ecofin. The view agreed at that time was, given the impact high oil prices can have on growth rates, that distortionary fiscal and other policy interventions that prevent the necessary adjustments by economic agents should be avoided. On 15 March 2011, the issue of rising fuel prices was briefly discussed by EU Finance Ministers and they reconfirmed the approach taken in 2005 and 2008.
Accordingly, given the kind of adjustment we have to do we cannot start dismantling the budget 3 months into the year with no proposals to get the money elsewhere. For this and all of the reasons outlined above, I oppose the Bill.