I cannot, however, do very much with the extremely limited means available to me in spite of the increase in taxes. The £¼ million, which is all I have available, will, however, finance an increase of 5/- a week, from 1st November next, for persons with no means, in non-contributory old age, blind and widows' pensions and in the personal and adult dependant rates of unemployment assistance. It will also cover a similar increase from that date in the infectious diseases and disabled persons maintenance allowances administered by the Department of Health.
Small Western Farms
In recent years, particularly since the Report of the Inter-Departmental Committee on Small Western Farms was published in 1962, the Government have introduced or improved a number of special schemes designed to raise farm and non-farm incomes in the West. The measures taken include strengthening the powers of the Land Commission to increase the size of farms, a 50 per cent increase in the agricultural advisory services, the selection of 12 pilot areas for special development, an increase in land project grants, the provision of unsecured loans for small farmers and the introduction of grants for hill farming. The easing of the social welfare regulations has greatly increased the amount of assistance for small farmers who can now increase their farm output without jeopardising their eligibility for such assistance.
Industrial growth in the West has, of course, benefited since 1952 from higher grants and the recent decision to make Galway city a development centre is clearly of great significance for the West. Additional funds have been made available to Gaeltarra Éireann and its financial obligations have been reduced. Grants are given for the establishment of hotels, holiday camps and other forms of tourist accommodation. Special steps are being taken to develop farm-house accommodation for tourists. Nearly one half of new forestry plantings are in the West, and energetic measures have been taken to promote sea and inland fisheries.
The time has come to draw all these measures together into a comprehensive programme to exploit the possibilities in each western county. For this purpose the Government reconstituted last year the County Development Teams under the chairmanship of the county manager, the other members being the chairman of the county council and leading officials in the county. At the request of the county managers I have agreed to provide a full-time official in each western county for this work. The teams, which are aided by Government and State sponsored bodies, have instructions from the Government to work closely with all voluntary bodies in their areas. I believe that, with the help of local leadership and using all the public services in each county, an effective programme of action can be organised.
As a further indication of the Government's intention to be flexible and helpful in dealing with the development needs of the West, it has been decided, even in the difficult circumstances of this year, to arrange to vote a sum of £100,000 which could be drawn upon for special schemes for small western farms.
Farm Incomes
During last month the Minister for Agriculture and Fisheries carried out the annual review of the position and prospects of agriculture with the National Farmers' Association and the Government have had the result of this review before them when considering the budgetary situation. Although there has been a great increase in recent years in State aid for agriculture, agricultural incomes in general remain lower than incomes in other sectors of the economy. The Government have undertaken to do all they can to narrow the gap. The benefits secured by the recent Anglo-Irish Trade Agreement should make a significant contribution. The review of the prospects for 1966 suggests that global and per caput farm income should, at any rate, increase sufficiently to maintain the relative income position of farmers in the economy, provided the growth of money incomes in the non-agricultural sector is moderate, as the Government consider it must be. Should, however, the income position of farmers deteriorate during the year the Government will review the situation in the light of all the circumstances prevailing. The Government would have liked to take further positive steps to improve the farmers' position but the serious deficit situation and the necessity for controlling the wages/prices spiral have prevented them from doing so. Apart from the special allocation for small western farms and the reduced tractor tax, a number of matters discussed during the agricultural review are being attended to and the decisions will be announced by the Minister for Agriculture and Fisheries in the course of the budget debate.
Special Import Levy
The special import levy imposed last November was due to expire on 31st March but, as the balance of payments is still excessively in deficit, the Government have decided that it would be premature to allow the levy to lapse on that date. They have decided to continue it in operation in its present form until 30th June, 1966. The position will then be reviewed. While the Government have never envisaged the levy as other than a temporary measure, and with to dispense with it at an early date, it is doubtful whether it will be possible to remove it altogether until later in the year.
Effect of British Corporation Tax.
In my Budget Speech last year I referred to the new United Kingdom Corporation Tax and indicated that official discussions would be held as soon as possible on the effect of this tax on our double taxation arrangements with the United Kingdom. It appears as a result of the discussions that a revision of those arrangements may not be necessary, for the time being at any rate.
The Corporation Tax will apply to the United Kingdom profits of Irish companies and I propose to give full relief in respect of this tax by allowing, as a credit against Irish Income Tax, the amount which cannot under existing law be allowed by way of credit against Irish Corporation Profits Tax. I propose that the extra cost to the Exchequer of granting this relief will be recovered by an appropriate increase in the rate of our Corporation Profits Tax. This increase, in the case of companies effectively liable to Income Tax in Ireland, will be negatived by allowing Corporation Profits Tax as a deduction from profits for Income Tax purposes. So far as United Kingdom companies are concerned the amount paid in Corporation Profits Tax will be allowable as a credit against Corporation Tax under existing arrangements. Thus the increase in the rate of Irish Corporation Profits Tax will not affect the net tax liability of companies operating here.
In brief, the aim of these adjustments is to obviate any worsening of the position of British companies operating here or of Irish companies operating in Britain as a result of the new British Corporation Tax.
Since the rate at which the Corporation Tax will be introduced is not yet known it is not possible at this stage to say precisely what will be the amount of the proposed increase in the rate of Irish Corporation Profits Tax but the necessary provision will be made in the Finance Bill.
Apart from the charge of Corporation Tax on the profits of United Kingdom companies, United Kingdom Income Tax will also be deductible by these companies on payment of dividends. The existing procedure under which United Kingdom Income Tax is repayable will continue in force in the case of Irish residents holding investments in the United Kingdom.
Tax Burden
The new taxes proposed in this budget will add £12½ million to an already high figure but, at the same time, will be not much more than one-quarter of the expected value increase in gross national product. There is a universal dislike of taxation but the reason it has to increase is that expenditure on public services has been mounting here, as in most countries, to give effect to accepted social and economic policies. The proportion of the gross national product which taxation of all kinds, central and local, represents has not risen greatly over the last decade. It was 22.4 per cent in 1956/57 and will, I estimate, be 24.6 per cent in 1966/67. There are many countries in which the percentage is higher.
Savings
I hope the effect of the increased taxation in this budget will be to reduce less-essential consumer expenditure rather than savings because the decline in savings last year has had a direct bearing on our economic difficulties. It was suggested by the National Industrial Economic Council in their November report that the possible explanation of the fall in savings is that, in face of rising prices, there has been an attempt to maintain real consumption at the level it reached following the general increase in money incomes in the first quarter of 1964.
There have been suggestions in other quarters that a substantial increase in the interest rates payable on deposits in the Post Office Savings Bank and the Trustee Savings Banks would lead to a worthwhile addition to the amounts available for capital development from these sources. This may be true. There is considerable doubt, however, whether this would mean an effective addition to the general pool of savings or merely result in a switching from one savings medium to another. I should stress here that the various savings media operated under the auspices of the State are complementary to each other. They are not in competition. The Post Office Savings Bank and the Trustee Savings Banks provide a service for small savers who want to have security for their capital as well as having their money at call. Savings certificates, on the other hand, are designed for those who are prepared to leave their money on deposit for medium or long periods. The investment is assured of a high tax-free return if the certificate is held for its full life. A smaller return is available if the certificate is cashed before maturity. In the case of prize bonds the investor is prepared to forego interest altogether in the hope of obtaining a large prize at one of the half-yearly draws.
In considering whether interest rates should be increased, the cost-benefit equation, as I might put it, is of prime importance. As I pointed out in reply to recent Parliamentary Questions, an increase of one per cent per annum in the interest rate on deposits in the Post Office Savings Bank and the Trustee Savings Banks would cost £1¼ million per annum without any corresponding certainty of an overall addition to the pool of savings. Having regard to the demand nature of these deposits, the rate of interest payable does not seem unreasonable when account is taken of the fact that the first £50 per annum of such interest is free of tax. What this means for husband and wife is that between them they can have up to £4,000 on deposit in Savings Banks, or indeed, in the Commercial Banks, without having to pay any income tax on the interest.
Deputies are aware that in July of last year I set up a representative Working Party to consider what steps can be taken to increase savings generally. I hope to have their report soon. If, as a result of the deliberations of this body, a scheme can be worked out by which overall savings can be increased even at some extra cost to the State, I will give it earnest consideration.
In the meantime, however, one savings medium which can be improved with reasonable hope of an overall increase in saving, and without undue risk of switching from other media, is savings certificates. The present issue was introduced in 1956. It gives a tax-free yield at maturity in 6 years of 4? per cent. I now propose to withdraw this issue and to replace it with one having a life of 8 years. Interest at the end of the first year will be at the rate of 3? per cent and will increase each year until it becomes 5¼ per cent, tax-free, when the certificate is held for the full 8 years. For a holder liable to income tax at the new standard rate this is equivalent to a gross yield of over 8 per cent. A unit certificate costing £1 will at the end of 8 years be valued at 30/-. The present issue will be withdrawn on Saturday next and the new certificates will be available for purchase as from Monday next, the 14th March. I am hopeful that this new issue will help to give an impetus to the savings campaign.
Prices
I am convinced that nothing could be more conducive to a renewed interest in saving than a slower rate of increase in prices. I hesitate to say "price stability" because, in the strict sense, this is something which has eluded most countries since 1939. Everywhere people have grown accustomed to a rising price level and are probably prepared to tolerate a small annual increase. But continued increases as big as the 5 per cent we experienced in Ireland last year are not tolerable: they are evidence of an inflationary trend which is socially undesirable and economically dangerous. I have looked at our comparative position, as shown by OECD statistics, and I find that the annual average percentage increase in consumer prices over the period 1960 to 1965 was 4 per cent, which gave Ireland the doubtful honour of sharing, with Austria and Norway, the fifth highest place in the OECD table. Our average was raised by the fact that we experienced increases in prices in 1964 and 1965 which were considerably higher than in most other OECD countries. The causes—excessive increases in money incomes, in credit and in public expenditure and loss of output through industrial disputes — have been pinpointed by the NIEC or other commentators.
It is the Government's aim to keep prices under stricter control—not by an intensification of legal and administrative regulation but by more fundamental and effective means, namely, by keeping inflation under control, which means bringing money incomes and public and private spending more closely into line with the growth of national production. The more intense competition, which the progressive freeing of trade with Britain will bring, will operate to prevent profiteering. Consumer prices have been virtually steady since May last. The prices of a small range of less essential goods will be affected by the necessary increases in taxation I have just announced. There may be some pressure to increase prices in particular concerns to meet current wage demands but it is the Government's view that increased costs of this kind must be met in the first instance from increased productivity or from profits; only in exceptional cases and to the minimum degree will price increases be permitted. There are many enterprises in which substantial profits are being made or in which productivity is rising at more than the average rate; in these, charges could be reduced and this would help to maintain the overall stability so necessary both to encourage personal savings and to facilitate expansion of exports.
Incomes
On incomes, the long debate in this House a few weeks ago provided an opportunity of stating fully the Government's policy, which in all essentials coincides with the views of the NIEC. In particular, emphasis was laid on the need to keep money income increases in line with the growth of national production so as to avoid further price and cost increases, diminished competitiveness and intensified balance of payments difficulties.
The NIEC has since considered the estimate of increased national production and other relevant forecasts provided for it by my Department. The Council has, in effect, accepted the main forecast which was that, if the total wage and salary bill were to rise by not more than 5 per cent, consisting of an average increase in earnings of 3 per cent, an allowance of 1 per cent for "drift" and an allowance of 1 per cent for increased employment, national output could rise by 3¾ per cent, the rise in prices might be 1¾ per cent, most of which is unavoidable, and the balance of payments deficit could be reduced to about £28 million. This forecast, if realised, would constitute a non-inflationary pattern of economic activity for 1966 and would lay the foundation for faster growth, more in line with the Second Programme targets, in 1967. The assumed average increase in earnings of 3 per cent would cover not only increases in basic wage and salary rates but also the cost of any additional "fringe" benefits or reductions in hours of work.
The Council also examined the economic effects of a higher increase in total wages and salaries and concluded that both prices and the balance of payments deficit would be increased substantially. Indeed, the Council warned that the rate of deterioration in the economic prospects for 1966, as compared with the Department of Finance projections, might tend to accelerate according as the difference widened between the rate of increase in aggregate money incomes and the rate of increase in national production. The Council repeated the recommendation in its November report on the economic situation to the effect that the Government would need to take fiscal or monetary action to limit the rise in demand caused by an excessive increase in money incomes. But as the Council recognises, and as I explained in the Dáil, fiscal or monetary action after the event is at best only of limited utility and itself carries certain dangers.
The Government have, therefore, issued a statement confirming their view that it would be harmful to the national economy if the average increase in personal incomes over the coming year were to exceed 3 per cent. As I have already indicated several times in this House, within a total increase in incomes consistent with this average the Government would favour special consideration being given to lower-paid employees. They are urging, in fact, that, to make this possible, no increases should be sought or expected this year in the higher ranges of income, from £1,200 up. The Government will follow this line in dealing with pay claims in the public sector.
In the statement issued last evening the Government have also emphasised that, in negotiations for wage and salary increases and improvements in earnings, the foremost consideration in the minds of negotiators and arbitrators should be what the economy can afford without raising prices or endangering employment and production.
I cannot overstress the importance to Ireland's economic future of heeding the advice of the NIEC on incomes. We know from our own experience in the years 1958 to 1961 how great is the stimulus to real economic progress, without price inflation or balance of payments difficulties, when money incomes stay close to the rate of growth of national production. We know also from more recent experience how great is the dislocation of progress, accompanied by price and cost increases and balance of payments trouble, when money incomes run ahead of national production.
