That a sum not exceeding £966,700 be granted to defray the charge which will come in course of payment during the year ending on the 31st day of March, 1968, for the Salaries and Expenses of the Office of the Minister for Finance, including the Paymaster-General's Office, and for payment of a Grant-in-Aid.
Most of the services in this Estimate are by now well-established. I would, however, like to say something on two important items which were first introduced by way of Supplementary Estimate in 1966-67.
The first of these relates to western development. In 1966-67 a supplementary provision of £5,000 was taken for Special Aid to Projects in the West. In this year's original Estimate the provision was for £20,000. I announced in my Budget statement, however, that this provision of £20,000 would be increased to £250,000 in order to create a fund, to be known as the Special Regional Development Fund, out of which payments would be made to assist worthwhile projects in the West. I am taking a Supplementary Estimate along with the Main Estimate for this purpose.
The setting up of the Fund has given a great impetus to the efforts of the County Development Teams and the Team Secretaries and will, I hope, go a long way towards furthering the Government's policy of revitalising the West of Ireland.
To date over £125,000 has been committed by way of assistance from the Fund to 11 projects in nine counties. In addition agreement in principle has been given to the issue of over £30,000 in the case of three projects on which further investigation has to be carried out.
The second item to which I would like to refer is the Public Services Organisation Review Group.
This group was set up in September, 1966, with the following terms of reference:—
Having regard to the growing responsibilities of Government, to examine and report on the organisation of the Departments of State at the higher levels, including the appropriate distribution of functions as between both Departments themselves and Departments and other bodies.
The Chairman of the Group is Mr. Liam St. J. Devlin. The other Irish members are persons prominent in business and the public services. A member with special experience in the organisation field has generously been made available by the Norwegian Government.
The Group began their activities in October, 1966, and have been very active since that date. To help them in their deliberations they have, with my approval, engaged the services of an international firm of management consultants. The main charge against this provision is the cost of these consultants. I hope to have the report of the Group next year.
As Deputies know, it has been arranged that devaluation and its effects will be discussed in this debate and I now turn to this subject.
On 18 November the British Government announced the devaluation of the pound sterling by 14.3 per cent. Under the Currency Act, 1927, the Irish pound is statutorily linked to sterling and a devaluation of sterling is automatically followed by a devaluation of the Irish pound unless amending legislation is passed. Such legislation could, of course, be enacted at very short notice but the Government deliberately made no proposal to this effect. Having weighed all the pros and cons of alternative courses of action, they had decided that it would be seriously disadvantageous to the economy to disturb the existing parity with sterling. The Irish pound was consequently also devalued by 14.3 per cent on 18 November.
Some people profess to interpret the fact that our currency was devalued at the same time as sterling as meaning that we are utterly dependent in monetary and economic affairs on Britain. This idea, of course, does not stand up to objective examination. The decision to devalue was a free choice of the Government after a careful consideration of the various alternative courses of action. It was a business decision based solely on an assessment of how our national advantage would best be served. A number of other countries, including some who are not members of the sterling area, such as Israel, Denmark and Spain, also decided that it was in their best interests to follow the British devaluation and I do not think any one accuses them of lacking monetary or economic independence. On the occasion of the last sterling devaluation in 1949 the present Opposition were in office and they decided not to establish a different rate of exchange with sterling. They considered that the course of least disadvantage was to maintain parity. We have taken the same decision on this occasion.
Anyone who now wishes to criticise the Government's action in devaluing should bear in mind that they could have raised the question of a change in our exchange arrangements well in advance. The possibility of a devaluation of the pound sterling has never been very far from the surface in recent years. On 13th July, 1965, the Taoiseach, when Minister for Finance, in answer to a question by Deputy Cosgrave (Dáil Debates, Cols. 1008 and 1009) intimated that if the pound sterling was devalued the Irish pound would be devalued as well. Nobody asked for reconsideration of this reply.
The idea that we should have given ourselves a competitive advantagevis-á-vis the British and other devaluing countries by devaluing by a greater amount than these countries has nothing to recommend it. Since all imports would be dearer, and not just those from non-devaluing countries, such a step would have led to substantially higher prices and costs than are likely to result from the moderate devaluation which has actually occurred. A higher rate of devaluation than that of Britain would tend to raise doubts in the minds of foreign investors about the basic soundness of the economy and cause fears of further devaluations. The consequent loss of confidence would be a serious blow in view of our dependence on the capital inflow for the financing of an important part of our development needs.
In any case, since we are in balance of payments surplus at the moment a drastic step of this kind would be unnecessary. It would, apart from anything else, be impossible to justify to the International Monetary Fund whose Articles of Agreement provide that a member shall not propose a change in the par value of its currency except to correct a fundamental disequilibrium in the balance of payments. In view of our close economic ties with Britain, the Fund have accepted a devaluation of sterling as adequate justification for a corresponding devaluation of the Irish pound. They could scarcely be expected to accept in our present circumstances the need for a greater devaluation than that of sterling.
Not to have devalued at all—which is the only other possibility—would have been an indefensible decision in view of the close trading relationship between Britain and ourselves. It would have meant, in effect, the imposition of a tariff of 16.7 per cent on all our exports to Britain. The result may be gauged from our experience of the harmful effect on our industrial exports of the levy of 15 per cent imposed by the British authorities in November, 1964. The higher cost of holidays in Ireland would have had detrimental effects on our tourist trade. Adherence to the former exchange value would have raised barriers against the export expansion on which we rely for disposal of most of the increased production needed to provide new jobs and higher living standards.
It is too early to weigh up exactly the impact of devaluation on our economy. Certain disadvantages obviously follow from it—in particular, all purchases from the non-devaluing countries now cost more—but there are some compensating benefits. The extent of the price and cost repercussions of devaluation will be mainly determined by the amount of goods which we continue to import from non-devaluing countries, although there will also be a small indirect effect resulting from purchases of goods from Britain and other devaluing countries which have utilised raw materials from non-devaluing sources.
In the first eight months of 1967 merchandise imports from non-devaluing countries amounted to £115 million or about 45 per cent of total imports. If imports of all goods and services are taken, the proportion is about 35 per cent. In view of the price differential which now exists, it is clear that a demand for a certain amount of these imports will be diverted to Britain and other devaluing countries. To some extent also, demand may be met from Irish sources where the Irish goods are now cheaper than the imported articles. Even where goods continue to be imported from countries that have not devalued it is by no means certain that the suppliers will continue to market at full pre-devaluation prices. They may have to absorb some of the price rise themselves in order to hold their positions. The net result is likely to be a more moderate rise in the value of imports from non-devaluing sources than the pattern of existing trade would suggest.
On the other side of the external trade accounts, there should be considerable gains as a result of the devaluation, particularly as we still have unused capacity which will enable us to increase production quickly to take advantage of the improved opportunities. Of our total exports 20 per cent go to non-devaluing countries, particularly the United States and the EEC. The volume of manufactures exported to these countries is growing. Provided our industrialists are prepared to seize the opportunities offered and our additional competitiveness is not eroded by domestically initiated cost increases, the next year should see substantial increases in exports to these markets. Besides the actual direct gain to the balance of payments resulting from such an increase, this trend will also have the advantage of diversifying our exports.
Besides an expansion in merchandise export trade with non-devaluing countries, there can be an increase in exports to devaluing countries, particularly Britain, provided Irish goods retain a competitive advantage as against goods from non-devaluing countries. In addition, tourist receipts should be significantly increased. The American and Continental tourist markets have been showing a very good response recently to our promotional work in these areas. They should now receive a further stimulus. Tourists from these areas will now find costs in Ireland more attractive in terms of their own currencies and British tourists will find Ireland cheaper than the Continent.
Striking a balance between the effects of devaluation on the import and export sides of the external accounts, one can say that there need be no substantial alteration in the balance of payments position as a result of devaluation. Even if some disimprovement takes place, this can be faced since we are at present in surplus.
Among the principal commodities which we import from non-devaluing countries are crude and partly-refined petroleum, wheat (imports of which vary according to our own harvest experience), coal, fertilisers and certain animal feeding stuffs, tea, tobacco, certain fresh and dried fruits, wines and brandy and various raw materials. In some of these cases, such as tobacco and oil, the greater part of the retail price is accounted for by taxation, the basic import cost being relatively low. When allowance is made for purchases at pre-devaluation rates, it should be quite a while before prices of some commodities have to be raised because of devaluation. The position in the case of all the major commodities is under close examination. The circumstances vary from case to case and I cannot usefully do more at present than to reiterate the policy statement already made by the Minister for Industry and Commerce and to emphasise the moderate extent of the overall effect on the price level which devaluation of itself can be expected to have.
The Minister for Industry and Commerce has stated that he will require to be satisfied under existing price control arrangements that any proposed price increase is not intended to be applied until it is clear that devaluation is, in fact, affecting current costs. He has made it clear that he does not consider that there is any justification for increased prices where the goods themselves, or the raw materials for them, had been paid for at pre-devaluation rates. Importers will be expected to take all steps open to them to avoid or mitigate the effects of devaluation, such as switching to other sources of supply.
As to the overall effect of devaluation on the price level, it is reasonable to calculate that it should not be more than about two per cent. Imports from the non-devaluing countries represent about 14 per cent of GNP. If we continue to import the same amount from these countries and prices rose by the full amount of the devaluation, the price rise in respect of these imports would be 16.7 per cent and the consequential general price increase would be 2.3 per cent.
However, this calculation assumes that the entire effect of the rise in price of imports would be concentrated on domestically-used goods whereas a proportion of imports is later exported in some form. While allowance for this factor reduces the general price increase, this reduction is offset by the likelihood of some increase in the cost of goods imported from Britain owing to the effect of devaluation on Britain's own purchases of raw materials, oil, etc. On the other hand, there will be some switching of purchases from the non-devaluing countries to cheaper sources of supply and, moreover, the non-devaluing countries will not in all cases be in a position to allow the prices of their goods to rise, in terms of pounds, by the full amount of the devaluation.
To sum up then, the direct effect of devaluation on our general price level may be expected to be of the order of two per cent and this will appear only gradually according as stocks have to be replaced. The effect on the consumer price index, which covers a narrower range of goods, may be somewhat different but cannot be other than moderate.
In view of the moderate effect which devaluation is likely to have on prices and the spread of the increase over a period, there is no ground for suggestions that there should be immediate compensation to recipients of social welfare. It can be taken that, should there be significant price increases from whatever cause, the Government will give careful consideration to the position of the Social Welfare recipients. The Government have a good record in this respect. Improvements in social welfare in the past have by no means been confined to compensation for the rise in the cost of living.
On the question of demands for income increases at this juncture, whether or not they are associated with apprehensions about the effects of devaluation on living costs, I would like to explain the position as I see it.
The Government's general attitude to income increases has often been stated. The Government favour a progressive increase in workers' real incomes according as national production rises and Government policy is directed towards raising national production — and with it individual productivity—as fast as possible.
So long as the international trend is for money incomes to rise faster than productivity, a rising price level in the world is inescapable. The Government, in common with other Governments in Western Europe and North America, want to restore price stability so that money will hold its value but this cannot be done unless the rising trend in incomes is more closely aligned with improvements in productivity. When money increases are backed by a corresponding rise in output, they yield genuine improvements in living standards, whereas artificial and swollen increases are inevitably cut down to size by a rise in living costs.
If in Ireland prices and costs rise faster than in competitor countries, we harm our export trade and make it easier for foreigners to take even the home trade from Irish manufacturers. In other words, those who insist on excessive increases in incomes are damaging the country's prospects and condemning more of their fellow countrymen to unemployment or emigration.
Industrial workers in general have recently been making a big contribution to increased industrial output and this has been matched by improvements in their real earnings and conditions. Allowing for the 3.8 per cent increase which has occurred in consumer prices, the real earnings of industrial workers rose by 6 per cent in the first half of 1967 as compared with the same period of 1966. This is higher than the rate of increase in national output as a whole. Apart from actual increases in pay additional to the £1 a week increase of last year, there have been reductions in working hours, longer holidays with pay have been granted, service pay has become more general, and pensions schemes have been negotiated in a number of industries. All these have given a real increase in the reward for work.
New arrangements for training have been introduced under the Industrial Training Act of this year and the Redundancy Payments Bill recently passed by the Dáil offers further protection to industrial workers. It is estimated that about 250,000 workers have obtained reductions in working time averaging two hours a week and that a similar number will benefit progressively from longer holidays until, in three years' time, paid holidays will extend to three weeks.
I want to make clear that the Government are glad to see improvements occur and wish to see the trend continue according as the national economy progresses. But some words of warning against undue expectations are necessary, particularly in the light of the implications of devaluation.
Devaluation means that our domestic money has lost a certain amount of purchasing power over the products of the countries which have not devalued. We have to produce more to earn the same amount of these foreign currencies as before. We are, of course, helped by the fact that there will be a bigger foreign demand for our products, now that they are cheaper in foreign money, but it remains true that we must produce more to earn even the same foreign income as before and more still to increase our earnings of foreign exchange. Productivity efficiency is, therefore, more important than ever and no less essential is the preservation of the relative cheapness and attractiveness of our products in order that we may be able to sell more of them abroad. In Britain, the Government have emphasised that cost increases due to devaluation must not be used as a justification for wage increases and the British TUC have said that "they will not regard increases in prices arising from the reduced external purchasing power of the pound as constituting in themselves justification for increases in wages".
For us, however, the essential thing is to preserve and, if possible, improve our competitiveness. This means that any income increases during the year ahead must at least be covered by increased productivity. We must do everything possible to keep our unit costs from rising. It is, indeed, only by holding them behind British costs that we have a good prospect of continuing to do well in industrial exports to Britain during this period of severe restriction of the British economy. This is also the key to success in exploiting, for the benefit of employment in Ireland, the opportunity we now have of increasing our merchandise exports to, and our tourist income from, Continental Europe and North America. I would hope that no section of the community would be so impatient or so selfish as to imperil what is so obviously in the national interest. Instead, let us concentrate on improving our incomes through increased productivity, so that the advances in income made possible by a continuing upward trend in production will hold their worth and be consistent with a general expansion of employment.
There have been suggestions that devaluation, together with the effect of the higher interest rates resulting from the increase in British Bank Rate, will depress the economy. I do not accept that view. The growth rate at the moment is in the region of four per cent. This rate of expansion is substantially export-led. In the first six months of 1967, industrial exports were 28 per cent higher than in the first six months of 1966. Provided we keep our costs stable—covering any income increase by at least equivalent increases in productivity—devaluation will provide a further boost to exports and therefore to industrial expansion. Diversion of demand from foreign sources to cheaper domestic suppliers should also provide some stimulus to domestic production.
The measures introduced along with devaluation in Britain are likely to have a restrictive effect. They may postpone the upward trend in consumption which had been visualised for the British economy over the forthcoming months. While this is regrettable from our point of view, it is not a reason for dejection. It has been our experience, particularly emphasised this year, that growth of our exports and production is not closely related to the trend in Britain. In the first half of this year, despite static conditions in Britain, with both "squeeze" and "freeze" in operation, our industrial exports rose substantially while our overall growth rate recovered to four per cent.
Granted that the British market may continue depressed in the short-term, Continental and American markets are likely to be much more buoyant over the next year than at present. A growth rate of almost four per cent is projected for European OECD countries for 1968, compared with two per cent in 1967, while the United States growth rate should be five per cent, compared with 2½ per cent in 1967. It is precisely in these expanding markets that devaluation will give us a substantial cost advantage—and it is up to us not to throw it away. The consequent rise in exports and production should compensate for any temporary loss of momentum in sales to Britain.
There is one further point about the situation in Britain which I think should be stressed. The sterling devaluation and Britain's deflationary measures are intended to transform a chronic balance of payments deficit into a surplus and thus allow her to resume stable growth. We have a pronounced interest in the success of this objective. As long as Britain remains in large deficit on her external account our external trading position will continue to have an element of uncertainty in it. A strong Britain and a strong pound mean a strong market for our goods.
About 90 per cent of Irish official external reserves are held in sterling. In view of the large proportion of our trade which is with Britain and other devaluing countries it is the sterling value of the reserves which is of most account; the reduction in their value in terms of non-devaluing currencies is an unwelcome but inevitable result of devaluation. So also is the increased liability in Irish currency related to our dollar and deutschemark indebtedness.
A beneficial side-effect of devaluation will arise in regard to the capital inflow. Investment from Continental Europe and the United States should be stimulated both because of the lower cost, as a result of the devaluation, of setting up new factories and of the new opportunities for industrial exports which have been created.
To allay doubts raised in the minds of the public by Opposition spokesmen, I wish to make it clear that there is no intention whatsoever of our copying the British credit squeeze and other deflationary measures in this country. Our internal and external circumstances are much different from those of Britain at present and the Government do not consider that deflationary action is needed. In this the Government are, of course, exercising their freedom to formulate financial and economic policies most suitable to this country's needs.
In order to ensure that our savings, in the form of bank deposits, will continue to be available to finance domestic development needs, it has been necessary to raise our interest rates. Here also there is no question of slavishly following the British example. Some increase is necessary but it has been kept to the minimum and, indeed, overdraft rates here, while unfortunately high, have been kept at a full one per cent below those in Northern Ireland and Britain.
We hope that the increase in interest rates will soon be reversed. The present level of Bank rate in Britain is necessarily of a temporary character, designed to safeguard the new exchange rate by attracting short-term funds back to Britain. We can expect that it will be reduced in the near future to a more normal level.
I think I have covered the questions which Deputies have asked about devaluation and its effects. If other points are raised by Deputies, I shall deal with these in replying to the debate.
As Deputies are aware, I issued a booklet on decimal currency in June last inviting views as to the choice of system for this country. I had a good response to this invitation. A number of important representative organisations have recommended that we should adopt the same system here as in Britain and Northern Ireland while others favour one or other of the alternative systems. Similarly there is a variety of views in the replies received from firms and individuals. It was to be expected that there would be a conflict of opinion on this controversial subject. I am at present considering the replies and I hope to be in a position to make a recommendation to the Government early in the new year.
Finally, I wish to refer to decentralisation. The House is already aware from the Taoiseach's announcement on 16th November, 1967, that it has been decided that the headquarters work of the Department of Education be transferred to Athlone and that of the Department of Lands to Castlebar.
This decision was taken in the wider context of the Government's policy for regional development. The decentralisation of the administration, commerce and industry of the country to the greatest extent possible has always been an essential part of the programme of the present Government and their predecessors. The Government are determined to do whatever is feasible to redress the imbalance of population in the country. They are particularly concerned to revitalise the west of Ireland by action on a wide and imaginative scale.
It will take a number of years to give effect to the Government's decision, which will involve the erection of modern office blocks in Athlone and Castlebar and will also give rise to many other problems. These will include human problems which the Government intend to have treated with the utmost understanding and consideration. The staffing of the new offices will be effected as far as possible on a voluntary basis.
I have already met representatives of the staff organisations and I will be available for further meetings, if necessary. Detailed consideration of the whole matter has commenced at the General Council under the scheme of conciliation and arbitration for the civil service.
This is an important national project and it is vital in the national interest that it should succeed. There will be difficulties but I am confident that, with the co-operation of all the interests concerned, they will be overcome.