In deciding budgetary policy it is necessary to have regard not only to the domestic but also to the external scene. Various international events have occurred recently which are of significance for our economy. The devaluation of sterling last November was one of these. The corresponding devaluation of the Irish pound was decided upon as the course which would favour the expansion of Irish merchandise exports and tourism, and, therefore, the growth of output and employment. The measures taken in Britain to control the expansion of domestic demand may create some difficulty this year in the biggest market for our exports. Measures by the Government of the United States to restrict foreign investment and curb overseas spending could affect the pace of expansion of Irish industry and tourism. The timing and conditions of entry to the EEC of the four applicant countries, including Ireland, remain unresolved. The risk of international reversion to protectionist policies cannot be ignored, though there are, fortunately, signs that many important trading countries wish to preserve and, indeed, extend the liberalisation achieved since the last war.
The uncertainties of the international situation are a source of some anxiety to a small country like ours whose progress depends so much on a continuing expansion of exports. We cannot hope to remain unaffected by developments of major international moment. But this is not to say that we must wait timidly on external events. Instead, we should order our economic affairs as to take advantage of whatever opportunities are open to us at the moment and place ourselves in a position to move forward more rapidly when external conditions improve. The budget has been prepared on that basis, neither ignoring the difficulties of the international situation nor being intimidated by them from seeking the greatest degree of expansion that our circumstances permit.
International monetary co-operation
Improvements in the external balance of the United States and Britain, supported by early adoption of the new international liquidity arrangements, would do much to create a better climate for expansion.
In recent years the international monetary mechanism has been showing signs of considerable strain. It has become increasingly doubtful whether the present main sources of supply of international liquid reserves will continue to be adequate for the requirements of expanding world trade and payments. These sources are, of course, gold, the dollar, the pound sterling and International Monetary Fund drawing rights. There are many indications that a shortage of international liquidity could develop with adverse repercussions on world trade, capital movements and economic growth. In order to avert this, the International Monetary Fund has proposed that existing world reserves should be supplemented by artificially created reserve assets, called special drawing rights, to be administered by the fund.
Each country wishing to participate would be entitled to special drawing rights in proportion to its present quota in the fund. The intention is that it should accept the new rights as an integral part of its reserves and be able to exchange them for an equivalent amount of another country's currency in the event of balance of payments difficulties.
As Governor of the fund for Ireland, I have welcomed the new scheme. For the present haphazard means of providing international liquidity it will substitute a controlled expansion of international liquid reserves based on expert assessment of world requirements. I am having legislation drafted to enable Ireland to participate in the new arrangements.
Review of 1967
Various documents reviewing the economy have been published in recent weeks. These include my own Department's "Review of 1967 and Outlook for 1968", the comments of the NIEC on this review and the annual survey of the Irish economy published by the Organisation for Economic Co-operation and Development. I need not, therefore, at this stage, go into any great detail on the history of the past year.
In my Financial Statement last year I looked forward to conditions of reasonable stability on external account which would enable us to return to the growth rate of over 4 per cent experienced in the early years of the decade. I am glad to say this objective was achieved. It is provisionally estimated that the volume of national production rose by about 4¼ per cent, or rather double the rate achieved in the two preceding years. This compares favourably with estimated rates of 1 per cent in Britain and 2 per cent in the European member countries of OECD.
Other features of the past year were: a significant increase in employment outside agriculture; a sharp advance in both agricultural and industrial exports which between them yielded an extra £40 million; and a balance of payments surplus of £10 million, which, with a net capital inflow of some £30 million, raised the external reserves of the banking system by over £40 million.
The export figures reflect great credit on our exporters, who have kept up the impetus of expansion despite difficult conditions on foreign markets. Imports were abnormally low in 1967 and the steep rise noted in the first two months of this year was a natural swing of the pendulum; though the figure for March was lower, a big increase is to be expected in 1968 to replenish stocks and support the rising scale of output.
Exports to the EEC fell from £26.7 million in 1966 to £24.2 million in 1967 mainly because of the protective effect of the Community's common agricultural policy. Exports of cattle and beef went down by about £4 million. We have also had to contend with the adverse effects of a slower rate of economic growth in that market and with the uncertainty of our future trading relations with the Community. It would be unwise to rely on this uncertainty being dispelled in the next year or so. No one can yet say whether an interim arrangement will be negotiated with the applicants for membership or what significance such an arrangement may have. It would seem that in the year ahead we must look rather to the stimulus of devaluation and the revival of expansionist policies in the Community, aided by the trade-promoting effects of the Kennedy Round tariff cuts, to restore the upward trend in our exports to the EEC. The improvement seems likely to be confined to industrial exports in view of the virtual exclusion from the Community of our main agricultural exports.
Prospects for 1968
Turning to the prospects for 1968, I believe we should be able at least to maintain the 1967 growth rate without undue strain on the balance of payments. But this, as all the reports have warned us, requires that care be taken not to generate too much domestic spending and to keep cost and price increases tightly in check. There will be higher investment expenditure, public and private, in 1968. Incomes are going up. The banks are in a position to expand credit. The volume of consumer demand may be expected to rise more rapidly than in 1967. The scene is set for an increase in domestic spending and it must be our special concern to see that we do not spend more than we can afford.
If, at home, the danger is that demand may become too active, on the external front the risk is different. On balance, the prospect seems less favourable than in 1967. It is true that our exports to certain destinations will enjoy the extra competitive edge given by devaluation. Moreover, cattle and meat exports should benefit from higher average prices in Britain. On the other hand, the volume of cattle and meat exports cannot be expected to increase at anything like the same rate as in 1967 without the undesirable effect of a decline in cattle stocks. The strong deflationary measures taken by the British Government to restrain domestic demand will make it difficult to sustain last year's rate of growth of industrial exports. Although it may not be as spectacular as in 1967, the expansion of exports in 1968 can still be quite satisfactory if the potential advantages of devaluation in the markets of the non-devaluing countries are fully exploited and there is no impairment of our competitive position in other markets. The proposals for incomes restraint announced recently in Britain —involving a ceiling of 3½ per cent on increases—make caution all the more imperative here. Preservation of our competitive position is not only a matter of moderation in income increases but also of raising productivity as fast as possible both through better organisation and though modernisation of plant and equipment. Much more investment will be needed in 1968 to provide for an increase in industrial output of not less than last year's 9 per cent. Much less is now left of the unused capacity which existed at the beginning of 1967.
My assessment, in the light of these prospects, of the part budgetary policy should play in 1968 is that it should favour expansion—particularly of investment—within the limits imposed by the external situation and the reaction on our balance of payments. While we must be on guard throughout the year against too sharp a rise in domestic spending, particularly on consumer goods, we should, I believe, aim at converting into new domestic capital the whole of the expected net capital inflow. There is no need to build up our external reserves any further. This is the thinking which has led me to propose an increase of £25 million in the 1968/69 public capital programme. Assuming income increases are moderate and credit is not unduly expanded, I do not expect a public capital programme of the size and composition announced for the year ahead to cause any greater deficit in the balance of payments than can be financed, in large measure if not fully, by the net capital inflow. The expansionary effect of the Capital Budget is, however, likely to be quite sufficient without injecting any extra stimulus by incurring a deficit in the Current Budget. So my aim will be to maintain the balance on current account which has marked the past two financial years.
The effect of the increased public investment in providing jobs, directly and indirectly, will be all the greater the less is the upward pressure on costs and prices. I must stress that if excessive spending is generated, with unfavourable effects on the balance of payments, the Government will have no option but to neutralise some of the increase in incomes and spending by heavier taxation. Unfortunately, however, such corrective action could solve only one of the problems, namely that of excess demand; it could not of itself do anything to reverse the undue increase in costs and the damage to our export potential. That damage would have already been done and could not be remedied. Adverse repercussions on output and employment would inevitably follow.
Incomes
Industrial earnings have been rising continuously since the Tenth Round in mid-1966. The index of weekly earnings in transportable goods industries increased by over 7 per cent in the period September, 1966, to December, 1967. Service pay, longer holidays and reduced standard working hours spread through industry in 1967.
There has been a movement in a number of industries and individual firms towards the conclusion of agreements for increases in rates of pay phased over a period usually up to the end of 1969. Some of these contain special provisions—such as removal of restrictive practices—aimed at increasing productivity, though it must be recognised that many so-called productivity agreements make little more than token provision for raising productivity. The spreading of increases over a period is in line with the recommendation in Report No. 11 of the NIEC that "money incomes should be adjusted more frequently and in smaller steps rather than infrequently and in larger steps". Also, when adjustment of wages is approached on an industry or firm-by-firm basis it is possible to provide for eliminating restrictive practices and increasing productivity in a manner which would not be feasible when adjustments are made on a national basis.
Whatever the type of agreement, however, the overriding need remains of keeping increases in total incomes close to the rise in national output so that price and cost increases may stay within safe bounds. I would emphasise that the general yardstick for this purpose must be the increase in national output. It would be wrong to look at the likely trend in output in manufacturing industry alone since other sectors are not growing as fast as manufacturing industry. It must not be forgotten, either, that part of the increased output expected in 1968 is already earmarked to meet earlier commitments to workers which are maturing this year.
It must be said that many of the phased agreements made since mid-1967 provide for a rate of increase in pay and other benefits which goes well beyond any likely rate of growth in national output in the period they cover. As the process of pay adjustment has spread throughout the various employments there has been some tendency for the level of demands to rise. It is essential that there should be no further bidding-up in the pattern of pay settlements. We may already have gone beyond the limit of safety, and pressures towards larger pay increases would before long put our growth prospects in jeopardy.
Unnecessary or excessive increases in profits and prices are no less objectionable. The Government have extended for a further period the operation of the Prices Stabilisation Order, 1965, and will watch prices carefully to ensure that there are no unjustified increases in 1968.
Following a recommendation from NIEC in the context of incomes policy, I indicated in last year's Financial Statement that I proposed to introduce legislation this year imposing a general obligation on persons carrying on a trade, profession or any profit-making activity to keep records of their business and professional transactions. The necessary provisions will be included in the Finance Bill.
Industrial relations
An improvement in industrial relations is of the greatest national importance. Recent experience in the Electricity Supply Board can leave no illusions about the dangers inherent in a strike affecting essential services. Apart from the immediate disruption which a strike can cause, the general implications of any tendency towards industrial unrest are grave. If we are serious about achieving full employment, we must realise that industrial unrest could retard our economic development both by its immediate and its long-term effects. Acquiring an international reputation for industrial disputes is a sure way of nullifying the efforts to attract the foreign capital and enterprise so necessary for continued expansion.
As well as putting forward proposals for amending the institutional structure for collective bargaining, the Government have, in the Redundancy Payments and Industrial Training Acts, tried to give the worker greater security and certainty in facing the problems of change. A heavy responsibility rests on both managements and unions to avoid the spread of industrial unrest. This requires from management continuing and effective communication with the workers, quick action to prevent unimportant differences leading to strikes, a full appreciation by all of the need to subordinate sectional demands to the common good, and the patient use of all possible means of conciliation when disputes occur.
Capital Budget
The public capital programme promotes economic growth both through the capital works undertaken by the public authorities themselves and through the financial support given, directly and indirectly, to investment by the private sector. Last year, as a stimulus to the resumption of growth, it was decided to increase capital expenditure by 10 per cent over the level of £98 million at which it had been stabilised in the three preceding years. As the year progressed, further increases were made in the allocations for housing, secondary schools and industrial grants so that expenditure on the programme in 1967-68 amounted, in the event, to £111 million, or 14 per cent more than in the previous year. The programme for the present year, as I have already mentioned, shows an increase of £25 million on this figure.
Domestic resources were adequate in 1967-68 to finance expenditure on the public capital programme and foreign borrowing was not necessary. The co-operation of the banking system is being sought in raising the sum of £33 million estimated to be required for the 1968-69 programme after reckoning the finance otherwise available domestically. It is not considered that the provision by the banking system of finance on this scale for the public sector will have adverse effects on the availability of credit for the private sector for productive purposes. The expansion of the public capital programme in 1968-69 will help to ensure that the country's resources are used for necessary social and economic development at home rather than increasing our external reserves, which are already adequate.
At this time last year I announced that a comprehensive analysis had been initiated of the whole range of expenditures which make up the public capital programme. The appraisal, which will serve as a guide to the best pattern of expenditure, will be completed as rapidly as possible. Because of the wide range of activities to be studied, and the long time-span required to make adjustments in the programme, one should expect a gradual shifting of emphasis, in line with what the appraisal indicates, rather than any sudden or dramatic changes.
Savings
I would like to see a somewhat larger share of personal savings put directly at the disposal of the Government for capital purposes so as to reduce the demand on the banking system for Exchequer financing. With this in mind I have recently strengthened the National Savings Committee and I would like to take this opportunity to express my appreciation of the excellent services given by the Committee on a voluntary basis.
I propose to arrange for the issue of a new type of savings certificate carrying a rate of interest closer to current yields on Government stocks, encashable after a period of notice, and subject, as regards the interest, to income tax. Further details will be announced in a few months' time when the necessary arrangements are completed.
The trustee savings banks have asked to be allowed to augment the facilities they provide for their customers and I welcome this development. I have decided that these banks should be authorised to introduce a new type of account offering the prospect of a rate of interest higher than the present 3½ per cent per annum and that they should be permitted to give adequately secured loans to their depositors. The necessary legislation will be introduced as soon as possible.
Current Budget, 1967/68—Outturn
In drawing up last year's current budget I estimated that the total yield of revenue would be £295.2 million. Mainly because of the acceleration of the rate of economic growth during the past twelve months and the associated rise in incomes and consumer expenditure, actual revenue receipts, at £305.4 million, were £10.2 million higher than had been expected.
Each of the three main revenue heads contributed to this buoyancy. Tax revenue surpassed the expected yield of £238.5 million by almost £9.5 million, while motor vehicle duties and non-tax revenue slightly exceeded the estimated figures.
Current expenditure was £6.4 million above the budget estimate of £299.2 million. Here also, the increase was broadly spread. Agriculture, tourism, education and local government were among the services for which supplementary provision was required.
The outturn, a deficit of only £200,000, was a very close approach to balance and justified the allowance of £4 million I made for errors of estimation when framing the budget.
Current Budget, 1968/69
The white paper published a few days ago shows that the amount of current outlay already proposed for this financial year is £332 million. This represents an increase of £26½ million, or 8½ per cent, on the actual expenditure in 1967/68.
Of this increase, £10 million is attributable to the higher cost of servicing the national debt. £257½ million, or £16 million more than last year, is to be spent on current supply services, as can be seen from the Estimates volume.
I want to emphasise the fact, which is not sufficiently appreciated, that the principal elements of the Government's financial policy for 1968/69 are already contained in the Capital Budget booklet and in the Volume of Estimates published within the last few weeks. Today's budget is concerned mainly with how the total increase should be financed in order to maintain orderly national progress. Today's additions to the expenditure side, while of considerable public interest, are not large by comparison with the total. The main lines of this year's expenditure are already determined.
The votes for Agriculture, Lands, Forestry and the Agricultural Grant provide over £11½ million more than the original votes for those services in 1967/68. This substantial increase reflects the drive being made by the Government to make farming more productive and to raise the incomes of those engaged in it. This is being done by way of subsidies for a wide range of products and general assistance in providing buildings and other facilities. Rates relief is of very real benefit to the small farmer and, at £17.3 million, constitutes a growing item of Central Government expenditure.
The provision for non-capital expenditure on the Education group of votes is £6½ million higher than in last year's Estimates volume.
The Social Welfare and Health votes each show an increase of £2¾ million.
The increases in the Local Government, Industry and Commerce, Transport and Power and Labour group of votes amount to £3 million. Additional sums are being allocated to housing subsidies, water and sewerage schemes, the Institute for Industrial Research and Standards, Córas Tráchtála, the National Productivity Year, tourism, rural electrification and An Chomhairle Oiliúna.
The extra expenditure already included in the Estimates volume is widely spread and indicates the broad range of the Government's efforts to further social and economic development and improve the lot of every section of the community.
Social expenditure
I doubt if sufficient notice is taken of the trend in recent years in social expenditure, that is, current Government outlay on social welfare, education and health. It has more than doubled in the past decade. The amount spent for these purposes in 1958/59 was £47 million; for this financial year £110 million has already been provided.
Social Welfare
In every budget during the past nine years provision has been made for increases in social welfare payments. These far exceeded the rise in the cost of living and significantly improved the real value of the benefits afforded to those who are old, widowed, blind, disabled or unemployed.
The scope of the social welfare services has been extended also. Among the more important improvements were the introduction of contributory old age pensions in 1961; the provision of allowances for children of old age pensioners in 1964; the liberalisation in 1966 of the means test to qualify small-holders in congested districts for unemployment assistance, and in 1967, the introduction of the occupational injuries benefits scheme, the abolition of the employment period orders, the lengthening of the period of eligibility for unemployment benefit and the provision of free transport and free electricity for old age pensioners.
The Exchequer's contribution to the social welfare services this year will be £48 million. When insurance contributions are included, expenditure on these services will be over £80 million in a full year. The Minister for Social Welfare is currently engaged in a comprehensive study of the pattern of future developments.
Much greater attention will have to be given in the future to ensuring that our social services eliminate hardship and want as accurately and effectively as possible. Experience here and in other countries shows that much still needs to be learned before this problem can be solved. Aid does not always get to where it is most needed. For instance, the general scheme of children's allowances costs over £10 million a year but the Government are conscious of the fact that this large sum is not being spent to best advantage. Because all children under 16 years of age qualify for the allowances, many parents receive payments which are not really necessary in their circumstances. This is evidenced by the number of out-of-date payable orders which the Department of Social Welfare receive to be validated. Unnecessary payments reduce the amount available for those whose needs are greater. Moreover, the cost of even small increases in the existing rates is prohibitive because of the wide coverage of the scheme. An examination is now being undertaken to see whether a more selective scheme could be drawn up. The matter is far from simple because of the implications of means tests which are neither popular nor easy to administer and it is unlikely that a revised scheme can be speedily formulated.
Education
Current expenditure on education has doubled during the past five years and trebled during the past decade. This reflects the Government's wish to give every child the highest level of education from which its natural talents will enable it to benefit.
It is intended to introduce new subjects such as civics, art, and physical education in the primary schools. Scientific methods have produced graded programmes making the teaching of Irish more efficient. An extension to St. Patrick's Training College has enabled the supply of male primary teachers to be increased, with a consequential improvement in the pupil-teacher ratio in our national schools. The policy of closing the smaller schools and the free transport arrangements will result in children attending larger and better-equipped schools where a full range of subjects can be taught.
At post-primary level, new curricula for all subjects of the intermediate course have been prepared and issued. An examination of the structure of the leaving certificate has just been completed by an expert committee. With the introduction of school television, incentive payments for science teaching, special training courses for secondary teachers in language teaching and a scheme of equipment grants for science and language laboratories, significant progress is being made in the teaching of modern languages and science. Secondary and vocational schools are cooperating on many fronts to make these subjects available generally and to maximise the use of educational resources.
A new concept—the comprehensive school—offering a complete range of post-primary educational facilities has also been introduced into Irish education. Furthermore, the final stage in the planning of the nine new regional technical colleges has been reached. These will provide courses for technicians at ordinary and higher levels and also a wide range of courses in trade, commerce and industry.
Last year saw the introduction of free post-primary education and free school transport. In addition, textbooks are being supplied free where necessary. As a result of these schemes there has been a remarkable increase in enrolments at secondary and vocational schools in the present school year.
The process of educational reforms is being extended by providing grants to ensure that the cost will not debar pupils of the requisite ability from proceeding to University and other higher centres of study.
These important developments have given rise to urgent demands for more class-rooms, more new schools and better equipment. Annual capital expenditure has increased from £1½ million to an estimated £10¾ million in the past decade. This includes £2½ million for additional accommodation in 140 secondary schools, a further £2½ million for vocational schools and regional colleges of technology, £½ million for comprehensive schools and almost £2¼ million for universities.
Health services
Doubling in the past five years and trebling in the past decade, Government expenditure on the health services has mirrored the trend in expenditure on education. The Exchequer is required by statue to pay 50 per cent of current expenditure by health authorities but it is in fact contributing £2.2 million more than this in 1968-69. In no case is the Exchequer contribution to a health authority less than 54 per cent of its outlay and in many counties, mainly in the west, it exceeds 57 per cent.
The cost of the health services is rising so rapidly that it is necessary to consider alternative methods of finance in order to reduce the amounts now charged on the taxpayer and the rate-payer. A detailed examination is being undertaken of the feasibility of introducing an insurance or contributory scheme to finance at least part of the cost of the services available to the middle-income group. It will extend to the question of eliminating the hospital charges for which middle-income patients are now liable.
Budget plan
For reasons already mentioned the large increase in public capital expenditure must be regarded as sufficiently expansionary in relation to the policy needs of 1968 and the primary objective of to-day's current budget is to provide for a number of socially desirable objectives, while at the same time ensuring that the higher level of expenditure is matched by revenue.
These objectives are:
(1) to improve social welfare benefits so as to offset recent and foreseeable cost-of-living increases and to assure the recipients of a share in the advance in community living standards;
(2) to give further assistance to certain sectors of agriculture;
(3) to make some adjustments in our system of direct taxation so as to afford desirable reliefs and provide increased incentives for industrial expansion;
(4) to grant a moderate increase in public service pensions; and
(5) to make additional provision for the arts.
The white paper shows that the estimates of current expenditure exceed estimated revenue at present rates of taxation by £3.61 million. I propose to increase that opening deficit to £8.6 million by adding £3.12 million for social welfare improvements, £1.2 million for aids to agriculture, £0.37 million for direct tax adjustments, £0.2 million for public service pension increases, and £100,000 for the arts.
Social Welfare increases
Since the increases in social welfare payments in last year's budget took effect, the cost-of-living index has risen by little more than 2 per cent. To honour the undertaking to safeguard social welfare recipients against this rise would require an addition of about 1/- to 1s 6d a week in the basic rates. Bearing in mind, however, the general rise in earnings and the improved economic circumstances, the Government have decided on an exceptional increase this year.
I propose, therefore, to give an increase of 7s 6d a week to all recipients of social welfare payments.
