The Central Fund Bill is one of the few occasions on which the Seanad has an opportunity of discussing financial problems and this debate is one in which the financial position of the country can be discussed in a general way. Individual Estimates are not, as I understand, relevant to the discussion, though I do suggest that, owing to the fact that the Estimates do not come before us as they come before the Dáil, a little more latitude should be allowed by the Chair on this matter than is allowed in the Dáil.
In my remarks, I do not intend to address myself to the general economic situation, though it is extremely difficult to disentangle the economic background from the financial superstructure that rests upon it. It is impossible to disentangle issues in agriculture, industry and trade from monetary and financial policy, but, in the few remarks I am going to make to the House, I shall attempt to confine myself to financial aspects of the economic situation which are relevant in this debate. Even in regard to public finance, the scope of this debate is limited. The question of taxation is not for this House. It will arise on the Budget. Therefore, I shall try, as far as I can, to confine my remarks to the financial aspects of the Estimates, in so far as they bear on monetary and financial policies, and shall avoid any question of taxation which we will discuss on the Finance Bill later in the year.
Looking at the Estimates, the first impression one gets from them is, of course, that the Estimate for Supply Services is £110,000,000. The Estimate for last year's Supply Services in the Book of Estimates was £112,600,000, but in the Budget certain adjustments were made in the estimates of expenditure, owing to the discontinuance of the food subsidies. This brought them to £106,200,000. When £2,000,000 had been allowed for social services to compensate for the rise in the price of food, the revised Budget Estimates last year were £108,200,000. Taking that figure, it is obvious that the Estimates for the present year represent an increase of about £1,800,000. I am afraid there is no getting away from the fact that this sum will be added to in the course of the year by Supplementary Estimates. It is inevitable that Supplementary Estimates should arise in the course of the next 12 months. Therefore, I suggest that, when we take Supplementary Estimates into account, we are entitled to assume that expenditure on the supply services in this country will be a good deal more than £110,000,000 in the coming year.
The first impression these figures give me is that the long upward trend in public expenditure still continues. Government expenditure on the Central Fund and supply services has grown from £85,000,000 in the financial year 1950-51 to £135,000,000 in the financial year 1957-58. If the national income had expanded proportionately, these figures would be tolerable, but the fact is that the national income, even in money terms, has not been increasing proportionately. Therefore, Government expenditure on the Central Fund and supply services has been increasing more rapidly than national income, and, while that has been going on, the Government has been extracting from the taxable community a larger fraction of its income every year.
I do not think that anybody will seriously question that Government expenditure has become unduly large, judged by any recognised standards of comparison. The fact is that the national income has not been increasing and the population has been decreasing, a matter which perturbs me. The national expenditure and the national debt have been increasing. I am afraid there is no escaping the conclusion that the financial superstructure in this country is becoming too heavy for the economic foundations which are expected to support it. This is the first conclusion which these Estimates seem to show.
The second conclusion is that the coming year will be a year of deficit in the public finances. Last year, the Government were able to save several million pounds by a reduction in the food subsidies. That saving, which at the time I thought was proper and justified, was based on the report of the Capital Investment Advisory Committee. There is no reason to expect that the Minister, in introducing his Budget next month, will be able to find an equivalent reduction in the Estimates to that which arose out of the reduction of the food subsidies last year, but Supplementary Estimates which arose this year will also arise next year. Therefore, in trying to forecast these Estimates on a realistic basis, I do not see any minuses, but I do see a good many pluses.
Therefore, I do not think it unfair to say that the total expenditure of the Government in the coming financial year will be a good deal more than the £110,000,000 which is in the Book of Estimates. How much more will depend upon the course of events, on world trade conditions, on our conditions and on the measures which the Government will take in regard to their financial policy. If we had any reason to hope that existing taxes would provide a large increase in yield, we could regard this prospect with equanimity, but there is nothing in the taxation picture to suggest that the yields of the existing direct or indirect taxes are going to be much more next year than this.
I am prepared to admit that, owing to the general revival of activity in the country, there may be a slight increase in yield, but I do not think there is any reason to believe that the increase in yield in taxes will be equal to the increase in expenditure. That being so, unless the deficit is to be met by borrowing, a matter to which I shall return, increased taxes will have to be imposed. I do not believe that those increased taxes will be imposed in the Budget because the Budget will be based on the Estimates, as we have them; but as the year goes through and as inevitable, inescapable Supplementary Estimates crop up, increased expenditure will become necessary.
It may be that the Government will feel coerced to introduce a Supplementary Budget in the autumn. In the absence of that, the increased expenditure, which, in my opinion, is quite inevitable, will have to be met from increased borrowing. That brings me to a matter upon which I feel bound to make certain observations which may not be palatable or popular in the country, but on which, at the same time, I feel it my duty to say something.
The public debt in this country has been increasing at an unduly rapid rate during the past ten years. The net public liabilities have increased by £260,000,000. This does not take into account Government guarantees which amount to roughly another £80,000,000. It is our experience, whenever any of us has acted as guarantor for a debt, that guarantees have a way of coming home to roost. Therefore, I think that the only honest method of estimating the liabilities on these guarantees is to assume that most of them will be called upon to be met sooner or later. Therefore, the public debt has increased by something like £300,000,000 in the course of ten years.
In the published accounts, there are assets set against this debt. Some of these assets are valuable assets, but without in any way impugning the honesty of the presentation of the accounts, I suggest that certain of the assets which are set off against the debt are not real assets in any strict accounting sense of the term. The repayments which are due from the local authorities and the Road Fund simply represent a right to impose future taxation. There are no assets there. They are simply rights to tax which can, we hope, in the future be exercised and in that way they may reduce the net Government debt. The increase in the indebtedness of the Government in this country is causing anxiety to many people.
In this connection, I should like to ask the Minister when the Oireachtas is to be shown the reports of the Capital Investment Advisory Committee. We had the first report last year, on which the Budget was based. The Minister stated in the Dáil that another report has been presented. I cannot help feeling that these discussions would be enlightened, if we had these reports before us. For all I know, other reports may have been presented since, but we do know at least that the second report has been presented. I think the Oireachtas is entitled to share with the Minister the benefits of the advice of this highly qualified committee. But, even in the absence of this report, there are certain things about the public debt which I feel can be said without fear of contradiction.
The first thing I want to say about it is in relation to a certain aspect of emigration which is not frequently stressed. The emigration recently has been at such a level as to reduce the population of the country. When the population of a country is falling, the per capita burden of public debt automatically rises; and if the public debt is rising at the same time as the size of the population is falling, the per capita burden of public debt is rising in a double manner.
In all the books on public finance, the example is always given of the load being proportionate to the strength of the shoulders which bear it. The example is given of a boy carrying a certain load, growing up and getting stronger shoulders and the load becomes proportionately less. If a country is growing in wealth and population and national income, it can carry a certain amount of debt which becomes proportionately a lesser load, but in a country with a stagnant national income and a falling population, the analogy, I am sorry to say, is the other one of an ageing person whose shoulders are becoming weaker. The burden of the debt, even if the gross amount of the debt does not increase, is increasing all the time. That is an aspect of the Irish population problem which I have not seen stressed in public controversy. It bears directly on the question of the burden of the debt that, in a country with a falling population, the per capita burden, even with the same amount of debt, is growing.
The Central Fund services in the present year amount to £9 per head of the population. £27,000,000 is the figure in the Central Bank Report for Central Fund services in the present year. As the population is under 3,000,000, that means that every person in the country is contributing, on the average, £9 a year to what is, for the greater part, the service of debt. With the growth in the debt and the fall in population, that figure will automatically increase until it becomes quite a serious burden.
The second thing I want to say about the debt situation is directly related to the first. It is that the increase in that burden will be greater in a period of high interest rates than in a period of low interest rates. Let us be quite clear about it. We are living in a period of high interest rates. Let us not deceive ourselves that the mere fall of 1 per cent. in the Bank of England rate will usher in a period of low long-term interest rates. The Bank of England 7 per cent. rate was a symptom of pressure on sterling on capital account. The current balance of payments in the sterling area was quite healthy all last year. The high rate of interest was meant as a corrective to weakening of confidence in sterling, entirely based on capital account. It was also partly, I think, a reflection of the world shortage of liquidity in international balances. If the liquid reserves of the central banks in the world as a whole had been higher, I think the corrective rate to re-establish confidence in sterling need not perhaps have been as high as 7 per cent.
These are matters which are far outside the debate before the House to-day. The only moral I want to draw from them is this. The recent reduction in the bank rate in England is simply a reflection of the fact that confidence in sterling seems to have grown again. It is quite possible that the bank rate may again be raised in the course of the present year. Anything in the nature of a deterioration in the sterling area balance of payments, anything in the nature of foreign fears regarding the future political stability of Great Britain would bring about an increase in the Bank of England rate. Therefore, the recent reduction in the Bank of England rate is possibly purely a temporary reversible act which certainly should not lull people into the idea that long-period interest rates are falling.
These are matters on which there is room for legitimate difference of opinion. The best opinion in the world to-day is that the long-term rate of interest will remain high. That is based on a number of considerations regarding the capital market all over the world. The long-term rate of interest reflects the relation between the demand for and the supply of capital. At the present time, the demand for capital is quite unusually high. The great investment necessary for raising the standard of living in the undeveloped areas is creating a large demand for capital. New types of techniques in the more advanced countries— automation, nuclear fission, the new inventions—are all creating a great demand for capital. The main industrial countries are still, unfortunately, spending a good deal on defence. Therefore, the demand for capital in the world to-day is unusually high.
At the same time, the supply of capital is not tending to keep pace with the demand. In many of the main industrial countries, high taxation is reducing both the power and the will to save. The Welfare State, in its various manifestations—social services, insurance against the vicissitudes of life—reduces the necessity for people to save voluntarily. Therefore, the demand for capital is rising at a time when the supply is not rising. That, in the ordinary way, would be accompanied by high rates of interest. However, there are other features in the world to-day operating in the same direction. The continuous inflation of the last 20 years has reduced confidence in the future of the value of money. The inflation is by no means confined to the sterling area. The purchasing power of the dollar has been and still is decreasing in spite of an American recession.
When the investing public becomes wise to the fact that their savings are liable to diminish in value, they will require a high rate of interest as a sort of insurance against depreciation. Until there is some sign of a reduction in the inflationary trend, interest rates will be higher than they would otherwise be.
Another factor keeping up interest rates is the very high direct taxation in many of the leading countries. The net return on investments to-day is very much less than the gross return and investors are becoming wise to this at last. They are thinking in terms of what they will really get on investments and not merely of what they will receive subject to handing a great deal back to their Governments by way of taxation.
A further factor which keeps interest rates high is one to which I have already referred in connection with the bank rate and that is the world liquidity situation. It is far outside the scope of this debate, but the fact is that the one commodity which has not been allowed to rise in price in the last 25 years is gold. Gold is still the basis of the reserves in the central banks of the world. That has created a problem which is quite outside the scope of this debate except in so far as it bears on the rate of interest.
I am suggesting that a great many factors at present combine to make interest rates high. It has been suggested that the American recession may reduce interest rates. Possibly it may. However, if it does, it will reduce them from a very high to a high rate. The days of 3 per cent. gross return on long-dated Government securities are gone forever. If rates of interest fall, it will be a fall from 6 to 5½ or possibly to 5 per cent. The relevance of that to this debate is that Governments, in a period of high interest rates, should avoid borrowing, as much as they possibly can and that no Irish Government in the near future can hope to borrow cheaply. Irish savings are very insufficient to meet the demand for capital in the country and foreign borrowing, even if it were possible, is undesirable.
There is a myth in this country that a large number of foreign lenders are willing to lend this country large amounts of money at low rates of interest. There is no foundation for that in fact. The international lending institutions have been charging very high rates of interest recently. The latest loans of the International Finance Corporation have been carrying interest at the rate of 7 per cent. The Irish Government cannot reasonably hope to raise money cheaply abroad even if it was desirable to do so; and, of course, it is highly undesirable, because for the Government to borrow abroad would impose on the country great difficulties in future repayments. The only way in which foreign loans could be repaid is by surpluses in the balance of payments, and we have sufficient difficulty at the moment in attaining a bare balance, without even hoping to attain a surplus.
I do not for a moment suggest that we should not seek foreign equity capital. At the present moment, we should do so; but I shall refrain from dealing with that further here, until we are dealing with the Control of Manufactures Bill, when that subject will be relevant. But I do suggest that for the Irish Government to borrow at fixed interest rates in foreign currencies, even if the loans could be obtained, would be highly imprudent and definitely against the best interests of the country. So that my second reason for criticising anything in the nature of an increase in the public debt is the high rate of interest, the shortage of Irish capital and the difficulties that would be imposed on the balance of payments if we borrowed abroad.
I now want to make the third point, and that is that borrowing at home could impose almost equal difficulties in our balance of payments. The external balance in every country depends on the country keeping a balance in its internal account. In this country in particular a disequilibrium in the balance of payments is a certain sign of internal inflation, and the only way in which internal inflation in this country is at all likely to take place is by deficit financing on the part of the Government.
I do not want to underestimate the importance of the recent improvement in the balance of payments. It reflects great credit on the administrations who have between them succeeded in bringing it about. But at the same time I want to make it perfectly clear that in my opinion we have no cause for complacency. In the present year we have attained a very slight, very sensitive and very precarious surplus. Our international payments are barely in balance and could be very easily unbalanced again. I do not wish to go into details, but everybody knows that the exports and prices of cattle in 1957 were both unusually high, and that the export of live stock at the present moment is only being supported by means of imports from Northern Ireland.
If there is any expansion of industrial activity in this country, which everybody wants, large increases of imports will be imperatively necessary, for this country will always require large imports of raw materials, capital goods and consumer goods on which to base expansion of economic activity. In the long run, the only way in which that large importation can be paid for is by expanding our exports, visible and invisible, of one sort or another. Therefore, it is a matter of extreme public importance that a mere temporary increase in exports such as has luckily occurred in the last year should not be taken as the green light to further expansion of imports, because it may be—I hope it is not so—that the flare up in the exports last year was to some extent really in the nature of a flash in the pan.
Of course, we still are a creditor country. We still could import and pay for the imports by our external reserves, but on that I want to make it perfectly plain that at the present moment every country in the world is trying to get equilibrium in its balance of payments. That is regarded as the first aim of policy in every country. There are some countries such as the United States and Germany which have such surpluses in their balance of payments that they have elbow room for a policy of independent internal reflation without immediate regard to the effect on the balance of payments; but even in those countries, if a reflationary policy were at any time to threaten the equilibrium of the balance of payments, it would, of course, be immediately stopped. Those are the lucky countries, but other countries in the world, without any exception as far as I know, are watching their balance of payments with very great care. They have no elbow room and therefore their internal policy is always directed towards equilibrium in the balance of payments.
In this country the reserves available for the payment of imports tend to be overstated in popular discussion. One hears of vast figures amounting to hundreds of millions of pounds, but one must remember that the greater part of our external reserves are in the possession of private individuals, that they are not available for payments by the Government, by the Central Bank or by the commercial banks and they could very easily, if confidence was reduced, elude the net of the Irish banking system altogether. The reserves in this country in Government accounts and in the banking system have been reduced to a low level. They have been slightly increased as a result of the good trading figures in 1957, and to the extent to which they have been increased there has been an expansion of internal activity.
It cannot be sufficiently stressed that, as long as this country wishes to remain in the sterling area, our external reserves remain the basis of our internal expansion. Any further draining away of our external reserves in order to pay for imports not paid for by exports would have a very bad effect on confidence, on credit and on the capacity of the banking system to accommodate its customers. I, therefore, suggest to the Minister that he should make it object number one of his policy to protect our reserves and to preserve equilibrium in the balance of payments.
As I said, if we had the reports of the Capital Investment Committee, we might receive some guidance on this matter. In the absence of these reports, I should like to refer to the Report of the Banking Commission, which was published exactly 20 years ago and which, curiously enough, seems more topical to-day than it was when it was written. I was a member of that commission and I use its report now as the basis of lectures in my college; and I am always impressed by the fact that that commission's report was written more for the 50's than for the 30's, that the dangers to which the Banking Commission pointed were dangers which are with us to-day. It showed an almost prophetic sense for the dangers of the future.
The Banking Commission stated that the danger to the balance of payments then was not caused by private overexpansion, but by a deterioration of the public finances, and that that deterioration of the public finances was leading to an expansion of imports not matched by an expansion of exports. If that was true in the 30's—as I believe it was—it is a fortiori true to-day. In the 30's, the Government borrowing was quite small, compared with Government borrowing to-day, the external reserves in the banking systems were very large compared with the external reserves to-day. Yet the Banking Commission warned the Minister for Finance of the day—to whom the report was addressed—that the public finances of the country needed to be put in order to avoid a further deterioration in the balance of payments.
For the benefit of Senators who, perhaps, have not read that report recently, I might name the paragraphs. They are numbers 354 and 355. In those paragraphs of the Banking Commission Report, it was insisted that Government borrowing should be confined to productive purposes. If that was true in the 30's, how very much more true is it to-day? By productive purposes is meant something rather narrow. Productive borrowing is borrowing which will create the assets which will repay the loan. The only true productive borrowing is self-sustaining borrowing, where the income of the assets will pay the interest and sinking fund on the loan. Any other definition of productive borrowing is misleading and should be avoided.
In the first place, productive borrowing does not mean borrowing for mere non-recurrent expenditure. We have discussed that here before and I will not refer to it again. I do not find any examples of it in the current Estimates. There was a time in this country when items of current expenditure which were not liable to recur annually were treated as capital expenditure and therefore fit for borrowing. There is nothing productive about that.
Furthermore, productive borrowing does not mean borrowing for the construction of durable consumer goods, of which the principal example is working-class houses. If public borrowing at a period like this is justified for housing which does not pay its own way, I cannot see why it should not be equally justified for furnishing the houses on hire-purchase terms. Durable consumer goods, however desirable they may be, are not productive investment, except in a very strained interpretation of that term.
Thirdly, productive investment is not the construction of mere amenities, however much we would like them and however much we should try to have them if we could afford them. By amenities I mean such things as hospitals and sanatoria—which in the very long run may increase the national dividend but in the short run are productive of dead-weight debt.
Fourthly, productive investment is not investment simply to make work, even if the work leaves behind it some useless, unwanted assets in the form of widened roads or something of that kind which have provided employment and done no other good. Finally, borrowing at a time like this is, above all, not justified to finance a deficit in the current Budget. Financing a deficit in the current Budget by borrowing at the present time would be a directly inflationary measure. The expansion of incomes not matched by an expansion of taxation would exert an immediate pressure on the balance of payments.
If it is assumed, as I ask the Seanad to assume, that equilibrium in the balance of payments is a desirable end, deficit financing based on borrowing would be an immediate threat to the securing of that end. There is another reason why the State should be very conservative in its borrowing in this country. I have already stated that there is a shortage of Irish savings. In recent years, the State has absorbed practically all the available current savings, leaving nothing for private enterprise. Private enterprise has been starved of finance in this country in recent years.
At the present time, many businesses are unable to raise capital in the Irish market simply because of the great demands, the overriding demands, of the Government. The result is that they are borrowing from the banks. Borrowing from the banks is expensive, it is inflationary and it is undesirable. As I said before, the problem would be largely solved by a large infusion of external equity capital—and that I hope to deal with when we are taking the Control of Manufactures Bill—but it certainly will not be solved by Government borrowing.
I wish to conclude by referring to suggestions which were made in the other House, that the future of the country depends on an extension rather than a reduction of Government activities. If what I have said is correct about the inflationary nature of Government non-productive borrowing and the shortage of capital for private enterprise, it must appear that I completely disagree with this contention. People do not realise, perhaps, that we in this country, although still an individualist country, have gone very far along the road to State capitalism, that a larger amount of our economic activity in Ireland is based on Government control or indirect Government control than in most of the countries of western Europe.
I am not quarrelling with that. Many of our enterprises such as Bord na Móna and the E.S.B. must have had Government support; but the suggestion that we lag behind in regard to the sphere of State investment is entirely contrary to the facts. I will not say this country has gone very far on the road to Socialism—I do not mean that—but it has gone very far on the road to State capitalism. The suggestion that the State should absorb more of the scarce capital in this country is simply tolling the bell which will doom private enterprise to a shortage of capital in the future.
The upshot of the remarks which I have made on this Bill is, in the first place, that the long-period trend in our finances is rather disquieting, that debt and expenditure have been growing, that the superstructure has become top-heavy in relation to the foundations. The prospect for the coming financial year is that of a deficit which will have to be met by additional taxation or by additional borrowing. Both these are evil. Additional taxation is burdensome and has a disincentive effect. Additional borrowing, as I have said, is particularly bad at a time when there is a falling population, a stagnant national income, high interest rates, a sensitive balance of payments and a shortage of saving. Therefore, the only conclusion to which I can come is that the Estimates are still unduly high and that further pruning of expenditure should be undertaken in the national interest.
This conclusion I know will be unpopular and unpalatable. If Senators find fault with me, I can only reply first, that it is the duty of economists to tell the truth, that the economist in relation to the country is in some way in the position of a doctor in relation to his patient, and that a good doctor will tell the patient the truth, however unpalatable.
Secondly, I think it is the duty of the Government, as I said last year, to use its political strength in order to do what is right and not what is popular. The present administration has a grave responsibility to future generations. It has a working majority. It probably will not have to face the electorate for a considerable period and therefore it should attempt to do what it knows to be right—to act on informed advice, rather than to do what will merely appear popular to the country.
Thirdly, if the Government does not do its duty, the Irish people can scarcely be blamed if they do not do their duty. What is their duty? I suggest that different virtues and different qualities are necessary in a nation in different phases of its history. In the 18th century in Ireland, I suppose, resistance to persecution and consistency regarding principles were the virtues which the people were supposed to practise. In the 19th century, we had great constitutional agitation. Nationalist parties of one sort or another never flagged in their efforts to secure the independence of the country. In the present century, we have had military manifestations. We have had various types of displays of force which have brought out qualities of courage which were very admirable at the time they were displayed. It may be now that, having secured independence for at least part of the country, the virtues which the Irish nation are expected to display are the less spectacular ones and the more humdrum ones—thrift, self-discipline, living inside our income. It may be that if we do not display them, and live beyond our income, we will go the same path as the individual who squanders his inheritance. A man who squanders his inheritance ceases to be a rich man, and becomes poor. By trying to do too much, by not making provision for the future, he very soon finds himself a prey to his creditors. Nations may be the same.
If this nationlacks self-discipline and thrift, if it squanders its reserves on present enjoyment and does not make sufficient provision for future production, it may find itself on its knees to other countries looking for credit. When that comes, its independence will have gone.
I suggest to the Minister that he has a duty to set an example in this respect. If the Irish Government does not set its house in order, it can scarcely complain if the Irish people do not set their house in order.