The Financial Motions on the Order Paper for today are a clear expression of the Government's sense of responsibility for good management of the economy. The Government have faith in the readiness of the Dáil and the people to support a Government which do their duty even in face of the temporary unpopularity this must at times entail. We will deserve best to retain the confidence of the people by showing both courage and responsibility.
Ireland has enjoyed two excellent years. In 1967 the rate of growth was about four per cent and this year it is likely to be between four and a half and five per cent.
Increased industrial production has made a big contribution to national progress in both years. The volume of output of transportable goods industries rose by nine per cent in 1967 and even faster in the first half of 1968. Activity in building and construction has been much greater in both years, while agricultural output, which had fallen between 1964 and 1966, rose by two per cent in 1967 and should show a similar increase this year. An important factor in the increase in national output has been the vigorous expansion of exports. Merchandise exports rose by 16 per cent in 1967 and have maintained the same percentage rise in the first three quarters of 1968.
While the economy shows many satisfactory features which it is important to safeguard, there are clouds on the horizon and these cannot in prudence be ignored. Imports in particular have risen much faster this year than last. In 1967 they increased at the unusually low rate of five per cent and this was one of the causes of the surplus of £15 million in the balance of payments. This year in contrast they rose by 22 per cent in the nine months January-September. Even taking into account an increase in net invisible receipts, the likelihood is that, for the year as a whole, the balance of payments will be in deficit to the extent of £15 million, representing a negative swing of £30 million between last year and this.
The fast rise in imports this year is directly due to a strong upsurge in personal consumption. The retail sales index, turnover tax receipts and registrations of new motor cars, all provide evidence of a significant increase in personal consumption and suggest that the pace of the increase is accelerating. As compared with last year, the volume of retail sales, for example, was up this year by one and a quarter per cent, four and a half per cent and six and a half per cent, in the first quarter, the second quarter, and the month of July, respectively. On this evidence, consumption has been increasing recently much faster than national production.
To go back a further link in the chain of cause and effect, it is clear that the increase in personal consumption stems from the substantial income increases in recent months which have far outpaced the average rise in productivity. Besides the eleventh round increases, which for wage-earners in general have amounted to between 30s and 40s a week, phased over a two-year or shorter period, there have been many cases of increases as a result of service pay awards and other factors, while hours have also been shortened. The phasing of most of the agreements means that there will inevitably be a further large rise in incomes in 1969, with the threat which this poses of a further fillip to consumer demand and a widening of the balance of payments deficit.
There are clear indications that the economy is gathering speed too quickly at present and that if the brake were not applied we would run into trouble in 1969. We need not be concerned about the calendar year 1968, with its prospective balance of payments deficit of £15 million. Even a much larger deficit—of the £30 million order —could be tolerated next year without undue concern, having regard to the normal capital inflow and the high level of external reserves. What must be avoided, however, is a deficit considerably in excess of £30 million and it is because such a deficit is threatened that precautionary action must now be taken. A paper recently published by the Economic and Social Research Institute foreshadowed the possibility of a deficit of over £50 million in 1969 unless policy measures were taken to prevent it. Without being quite so pessimistic, the Government are satisfied, from the analyses and projections presented to them, that the risk of a deficit of well over £30 million is real enough to require that some measures be taken now so that more severe action will not be necessary later. In this way the Government hope it will be possible to maintain growth at a high rate, ensure that the balance of payments deficit does not get out of hand and avoid the serious and prolonged dislocation to which present tendencies, if uncorrected, could lead.
What has to be done is to reduce prospective national expenditure in 1969 by some millions of pounds and to do this with the least adverse effect on production and investment. Spending on consumption has to be curbed and personal saving encouraged. In relation to public expenditure this means that outlay on current services should either be reduced or be paid for out of existing, rather than newly-created, money. Reduction of such expenditure is not possible without a drastic and undesirable reversal of policy: the Government do not consider it necessary or justifiable to cut back on social welfare, education or agriculture, or to refuse, as an employer, to extend to the public service a standard of pay increases comparable with those granted in outside employments. Effectively, therefore, the only course open to the Government is that of seeing that the increase in current expenditure this year beyond budgetary expectations is met, as far as possible, from current revenue rather than by extra borrowing from the banks. Higher taxation and post office charges are necessary for this purpose. Policy aims must also include a less liberal use of credit for consumer purposes and an increase in personal saving.
The general increase in incomes is having its impact on the Exchequer. The cost in 1968/69 of the public service pay increase is estimated at close on £9 million; and price and income supports for agriculture are likely to cost some £6 million more than was foreseen last April.
The excess on agriculture arises mainly on wheat and milk. The over-production of wheat this year in relation to bread and flour needs will involve the Exchequer in making good a loss of up to £1½ million on the disposal of the surplus. The record milk output will draw £4 million more from the Exchequer by way of subsidy than was provided in the Budget last April. The increases in the milk price allowance announced yesterday by the Minister for Agriculture and Fisheries calls for a further £625,000 this year and £1.65 million in a full year.
Since 1962 the milk subsidy, including the quality bonus, has been increased by 7½d. a gallon. Supplies of milk to creameries have risen in the intervening six years by over 60 per cent. The total support provided by the Exchequer has gone up from £3 million to £25 million. This figure of £25 million does not include an Exchequer liability of about £2½ million which will have to be discharged in disposing, as opportunity arises, of surplus butter stocks.
A few facts about milk may help to put the problem in perspective. This year about 520 million gallons of milk will be delivered to creameries. Of this, 200 million gallons will be consumed at home, mainly as butter. All the rest of the milk must be exported in some form, at a loss which increases steeply with the quantity exported. In 1968 about 240 million gallons will be exported mainly to the United Kingdom. The export market price is on average 1s 1d a gallon; the farmer's net return of 2s 2d a gallon comes from this and from an Exchequer subsidy of 1s 1d a gallon. In other words, the Exchequer is supporting these 240 million gallons of milk on the basis of one pound for each pound's worth of milk produced —a high rate of subsidy justifiable only on the basis that the associated production of cattle and beef is of great value to the economy.
The remaining 80 million gallons of current milk production have to be sold outside the UK market. Here the element in the farmers' return supplied by the export market price averages only about 2d a gallon. It costs the country more to produce this milk than the country gets for it abroad and it is scarcely open to question that agricultural resources could be used to better advantage. The world market for dairy products seems likely to remain depressed for years ahead. For this reason it is nationally important that there should be a switch-over, at the margin, from milk to beef production, for which the market prospects are much better. The Government, therefore, decided to confine the extra assistance for milk to farmers whose annual deliveries to creameries do not exceed 7,000 gallons—these include all the smaller farmers—and to introduce a new incentive to encourage production of beef which is not associated with increased output of milk for sale off farms.
The dairy industry is in a position to reduce processing costs by the amalgamation and reorganisation of creameries, for which substantial State grants are available. This will yield higher incomes to farmers without an increase in milk sales. To achieve economies of scale, separating stations should have an annual capacity of 1 million gallons. Operating costs decline from 2¼d a gallon to 1d a gallon as capacity rises from 200,000 to 1 million gallons.
To help those herd owners not in commercial milk production, the Minister for Agriculture and Fisheries has announced the terms of a new beef incentive scheme to be introduced as from 1st April next. The cost in that year is estimated at over £2 million which will be an additional charge on taxation. This scheme should offer a definite incentive to increased beef production through the development of suckling or nurse herds.
The House will recall the statement of the Minister for Finance in his Budget speech that, in the course of the year, some liabilities might arise for which specific provision was not made and which were not covered by the allowance for errors of estimation. The Minister said that, if through increases in incomes and public expenditure, an unfavourable balance of payments were threatened, the Government might have to introduce additional taxes.
In fact, apart from the £15 million of extra expenditure on public service pay and on agriculture, other liabilities have materialised this year; these will absorb most of the allowance for errors of estimation. Fortunately the revenue is fairly buoyant and should bring in £7½ million more than the budgetary estimate. This will reduce the estimated excess of current expenditure over revenue from £18¾ million to £11¼ million.
A deficit of this size, which would become much wider as 1969 progressed, would give a powerful impulse to inflation and must, therefore, be taken in hand right away. So far as taxation is used to withdraw purchasing power, it is my intention that it should do so without affecting the cost of essentials of life and with the maximum impact on the less essential items of expenditure, of which many are imported. The most suitable general tax from this standpoint is the wholesale tax, which does not apply to food, fuel, petrol and oils, clothing, medicines, books, drink, tobacco or items exempt from turnover tax. I propose that the rate of wholesale tax be increased by 5 per cent as from 1st January next. The yield in the final quarter of this year will be only £1¼ million; in a full year it will be £8¾ million. The yield from this tax will be buttressed by raising the rates of duty on tobacco, beer and spirits with effect from midnight tonight.
I propose to increase the main rate of customs duty on leaf tobacco by the equivalent of 3d on a packet of 20 standard-size plain cigarettes, having made allowance for the incidence of turnover tax. The prices of these cigarettes will, however, rise by 4d for 20. The additional 1d represents an increase which the tobacco manufacturers have found to be essential to cover increased costs as a result of the devaluation of sterling in November, 1967. The Minister for Industry and Commerce has accepted the case for this increase. Corresponding increases will apply to other tobacco products including tipped cigarettes, pipe tobaccos, snuffs and cigars. There will be the usual charge on tobacco stocks held by manufacturers at 5 p.m. today.
I also propose to increase the beer duties by the equivalent of 2d a pint and the spirits duties by the equivalent of 2d a glass, making an allowance in each case for the incidence of turnover tax.
The services provided by the Department of Posts and Telegraphs are expected, taking one year with another, to produce the income necessary to cover expenditure, give a reasonable return on capital invested and provide adequately for pension liability and depreciation. This has been the traditional policy of successive Governments in relation to Post Office finances.
Post Office charges have not been increased since 1964. In the past two financial years the commercial accounts of the Department have shown deficits of over £400,000 a year. These deficits were attributable mainly to the effect of wage awards and improvements in conditions in the postal service, where staff and related costs constitute some 77 per cent of total expenditure. The telephone service was, of course, also affected and had, in addition, to pay for the substantial capital investment of recent years.
Because of current increases in wages and salaries the Post Office now faces extra costs which are likely to raise the overall deficit on the services to over £3 million a year. It would clearly not be practicable to eliminate an annual loss of this magnitude without rate increases. Details of the revised charges, which will be brought into operation on 1st January next, will be announced by the Minister for Posts and Telegraphs. I shall refer here only to the principal changes.
There will be increases of 1d each in the 5d rate of letters and in the 3d rate for postcards, printed papers, newspapers, etc. Inland parcel rates will be raised by amounts ranging from 6d to 2s 6d, according to weight. There will also be increases in foreign letter and parcel charges and in poundage for postal orders and money orders.
The minimum rates for inland and cross-Channel telegrams will be raised by 1s 0d.
The telephone rentals for residence and business lines will be increased by £2 a year and the connection charges for exchange lines by £5. The charge for local calls from subscribers' telephones will be increased by 1d, and from coin-box telephones by 2d, but the latter increases will not be put into effect until late next year.
Apart from some adjustment consequent upon the changes in the local fees, trunk call charges will not be increased.
This year's Christmas shopping, posting and telephoning will not be affected by the increases proposed in the wholesale tax and post office charges. Because the greater part of this financial year is already gone and these particular proposals come into effect only on 1st January, the extra revenue accruing to the Exchequer by 31st March from all the changes proposed is not expected to exceed £4.2 million. In a full year the increases in Post Office charges will offset the increased commercial deficit which would otherwise add to the budgetary gap; the tax increases may be counted on to produce £15.4 million. Extra revenue of £4.2 million will not enable us to avoid a deficit in the current budget for 1968-69—the kind of taxation needed to do that would be much too severe and would be quite unjustifiable on economic grounds—but it will be effective during the year 1969 in reducing what would otherwise be a dangerous contribution, by way of budgetary deficit, to an already inflationary situation. It will help to keep the balance of payments deficit within manageable bounds. The estimates of current expenditure in 1969-70 which we have obtained from Departments point to an inevitable increase far exceeding any hope of revenue buoyancy and there is no doubt whatever of the need for every penny of the extra revenue now being raised to meet the extra expenditure to be faced next year under existing commitments and policies. To illustrate the magnitude of this extra non-capital expenditure, I may quote some of the increases over the current year which are looming up—over £9 million on Central Fund services, as much as £8 million for agriculture, £5½ million for education, £2½ million for social welfare and over £2 million for health. It will obviously be necessary to adopt a very severe attitude in 1969 towards new expenditure proposals.
As a further check to consumer spending, the Government have decided to introduce moderate hire-purchase restrictions. Orders effective from midnight tonight have been made under the Hire-Purchase (Amendment) Act, 1960, prescribing minimum deposits and maximum repayment periods for a range of goods. For private cars, motorcycles, scooters, record players, radiograms, tape-recorders and juke boxes the minimum deposit has been fixed at 25 per cent of the cash price. There will be a minimum deposit of 15 per cent on radios and certain items of domestic electrical equipment. The maximum repayment period for all the specified articles has been fixed at 30 months. Conditions of this kind are already applied by many hire-purchase firms in their own interest and the terms fixed by the orders cannot be regarded as severe.
In view of the problems facing the industries concerned, the hire-purchase controls are not being applied to television sets or refrigerators.
As regards bank credit generally, the Government were in agreement with the warning issued by the Central Bank on 30th September last that available credit should be reserved so far as possible for strictly productive purposes. A less liberal attitude to credit for consumer purpose is obviously desirable in present circumstances. The Government regard it as important that adequate financial resources should remain available for the public capital programme and for productive activities in the private sector.
The intake from small savings has been disappointing for some time. In the current year so far there has been a net outflow of £1.6 million from the Saving Banks. This is a disimprovement of £4.7 million as compared with the corresponding period last year. I have, therefore, decided on certain measures to improve the attractiveness of the various savings media available in the public sector.
The rate of interest payable on deposits in the Post Office Savings Bank will be increased from 3½ per cent to four per cent. Taking account of the income tax concession on the first £70 of interest, this will give a gross yield equivalent to six per cent on the first £1,750 invested. The present limit of £5,000 on deposits will be abolished. The amount which may be withdrawn on demand at any of the 1,400 Saving Bank Post Offices will be increased from £10 to £30 and the amount which may be withdrawn by telegraphic advice will be increased from £25 to £100. These improvements will come into effect on 1st January, 1969.
The interest payable on ordinary deposits in the Trustee Savings Banks will be increased to four per cent and the withdrawal facilities will be improved also. The Trustee Savings Banks are being authorised to introduce on 21st November a new type of investment account carrying an interest rate of 6½ per cent. Tax will not be deducted at source, but will be assessed by reference to the income of the recipients. Any person who holds an ordinary deposit of £50 in the Trustee Saving Bank may open this new investment account.
The savings certificates now on issue give a tax-free yield equivalent to eight per cent gross if held to maturity and sales of the certificates continue to be reasonably satisfactory. The only change which I propose to make is to increase the permitted maximum holding from £2,500 to £3,500.
Net receipts from prize bonds are tapering off, mainly through increased withdrawals. In order to encourage bond holders to retain their investment for longer periods there will be special draws for five prizes of £1,000 each in every month in which no draw is held at present. This will begin as soon as the necessary arrangements can be made.
A new type of savings medium, to be called an investment bond, will be put on sale early in 1969. Bonds may be purchased in units of £10 through any bank or post office and will carry interest at the rate of 6½ per cent per annum. Interest will be paid to the purchasers half-yearly, without deduction of tax at source. A bond which is held for five years will receive a special bonus of £3 per cent on repayment.
I hope that these measures will attract and retain more small savings. They are in line with the views and advice of the savings committee and I hope they will further the committee's good work.
It is customary at this time of year to float a national loan which provides a suitable outlet for the investment of longer-term funds. This year's loan will open for subscription on Monday next, 11th November. It will be for £25 million. The issue price will be £97½ per cent and the rate of interest will be 7½ per cent per annum. The stock will be redeemed at per not later than 1993 and may be redeemed at any time from July, 1988. The yield to final redemption is £7 14s 6d per cent, as good as any obtainable from comparable investments at present. The loan will carry all the usual income tax and death duty concessions, and in addition will carry the right of conversion into any other Government issue offered for public subscription within the State during the next three years.
Life assurance companies and other financial institutions have applied for and are being allotted £9.8 million, and Departmental funds are applying for £3.2 million. The remaining £12 million available for public subscription has been underwritten jointly by the associated banks and the Government. If applications for more than £12 million are received from the public, the allocation to Departmental funds will be scaled down.
I must express my appreciation of the record-making support given to this loan by the financial institutions. This augurs well for the success of the issue and is an expression of confidence in the economic and financial security of the State. I am sure that, leaving matters of current political controversy aside, all Deputies in the House will support the loan, which will be used for the financing of the public capital programme.
In bringing these financial proposals before the House at this time, the Government are confident that the House and the people will realise that the proposals are intended and are needed to safeguard our economic progress. I know full well that the increases in taxes and charges will not be welcomed but this Government never flinched from taking unpopular measures when they are necessary.
TABLE explanatory of Supplementary Current Budget, 5 November, 1968.
(Figures in brackets refer to budget presented on 23 April, 1968)
|
Revenue |
Expenditure |
|||||
|
£m. |
£m. |
£m. |
£m. |
|||
|
1. Tax Revenue (excluding Motor Vehicle Duties) |
277.33 |
(270.23) |
1. Central Fund Services (excluding Payments |
|||
|
2. Motor Vehicle Duties |
12.16 |
(12.16) |
to Road Fund) |
65.20 |
(64.00) |
|
|
3. Non-tax Revenue |
50.63 |
(50.30) |
2. Payments to Road Fund |
10.70 |
(10.70) |
|
|
4. AddWholesale Tax |
1.25 |
3. Supply Services (non-capital) |
275.54 |
(261.99) |
||
|
Tobacco |
0.95 |
4. Deduct |
||||
|
Beer |
1.10 |
Allowance for errors |
||||
|
Spirits |
0.40 |
of estimation |
— |
(4.00) |
||
|
Post Office charges |
0.50 |
4.20 |
||||
|
5. Deficit |
7.12 |
|||||
|
Total |
351.44 |
(332.69) |
Total |
351.44 |
(332.69) |
Department of Finance,
5 November, 1968.
