On the 16th of this month I announced certain measures which the Government had decided to take in relation to prices and incomes up to the end of 1971. To-day I will be putting before the House some Financial Resolutions to complement those measures in bringing under control the inflationary forces which show no sign of easing of their own accord — rather the reverse. This inflation is clearly manifesting itself in symptoms which are plain to all — money incomes far outpacing national production, rapidly rising prices, an increase in consumption of imported goods and a continued serious deficit position in our balance of payments. This steadily worsening situation could not be allowed to continue and the Government had to face up to the task of formulating a programme of restraint which has, understandably, aroused opposition in some quarters. The Government are convinced of the necessity for prompt and effective action to safeguard the economic future of the nation and we will not be deterred by any unpopularity which our policy may encounter.
Incomes
The forces which are generating inflationary pressures are of long standing. Total domestic income rose by 10½ per cent in 1968 and by 11 per cent in 1969. The acceleration in the rate of growth of employee income in the non-agricultural sector was much greater — 13½ per cent in 1969 against 10½ per cent in 1968. By far the greater part of this increase came from increased earnings, as distinct from increased employment. In regard to the likely development of incomes in 1970, it is provisionally reckoned that total domestic income will rise by about 11 per cent, with non-agricultural employee income increasing by as much as 13-14 per cent. This trend of income increase is far in excess of the real growth of national production which is likely to be of the order of 2 per cent in 1970.
Consumer prices
Over the decade 1958-67 consumer prices rose on average by about 3 per cent. Following increases, in accordance with this pattern of 3 per cent in 1966 and in 1967, the index rose by almost 5 per cent in 1968. In 1969 the inflationary momentum gathered further pace and a rise of 7½ per cent was recorded. This exceptionally high increase has been exceeded in the current year — the latest index for mid-August shows a rise of 8.4 per cent as compared with a year ago.
The rise of 7½ per cent in our consumer prices in 1969 compares with increases in the same year of 2.6 per cent in Italy, 2.7 per cent in Germany, 5.4 per cent in the United States and 5.5 per cent in the United Kingdom. While prices and costs have been rising sharply this year in the United Kingdom and other industrial countries, we continue to outpace most countries in our rate of cost and price inflation. For example, our rise of 8.4 per cent in consumer prices in the 12 months to August last compares with a rise of 6.7 per cent in the United Kingdom over the same period. In fact, our price rise in this period was greater than the price rise in all the advanced countries of Europe. Indeed, only two European countries have had greater price increases than Ireland this year.
Consumer spending
Consumer spending last year was very buoyant, rising by almost 12 per cent in money terms and by nearly 4 per cent in volume. This rise in consumption was reflected in a big increase in imports of goods ready for consumption which contributed to the record deficit of £69 million on current external account.
In the early months of this year the momentum of consumer spending, helped by pre-budgetary purchases, gathered pace. In March and April the retail sales index, which provides an indication of the trend of consumption, rose by no less than 16 per cent in money terms and by 9 per cent in volume. The pace slackened considerably in the following months and, for a while, actually fell in volume, largely as a result of the disruption caused by the cement and bank disputes. The indications since July are that, with the settlement of the cement strike and the revival of activity in the building industry, consumer demand is again becoming strong. In August and September imports of consumption goods ready for use are provisionally estimated to have risen by 10-15 per cent as compared with the corresponding months of 1969.
Balance of payments
Our exceptionally large deficit in the balance of payments last year was due to a rapid increase in merchandise imports which was not offset by growth in merchandise exports. Earnings from tourism were not sufficient to bridge the steadily growing gap between exports and imports. This gap more than doubled between the two years 1967 and 1969, rising from £107 million to £218 million.
The trade return for the first nine months of 1970 shows no real improvement in the position. The import excess over the whole period was marginally less by £3 million but this was due to distorting movements in imports of ships and aircraft. If these commodities are excluded, the import excess rose by £7 million.
The troubles in the north and our rapidly increasing prices must have deflected many tourists from our shores this year, and it is unlikely that our tourist receipts will show much increase. Some improvement in invisible receipts under other heads is expected but the overall position is likely to be a deficit not far short of £60 million.
Competitiveness
In 1969 unit wage costs in Irish industry increased by over 10 per cent, a rate which was more than double that in British industry. No firm figures for 1970 are available as yet but it is possible that these costs will show a further increase of 10 per cent. While this rate is only slightly higher than that expected for British industry in 1970, it represents, nevertheless, a further deterioration in our competitive position.
Effects of inflation
While higher prices for imports have been to some extent responsible for these adverse economic trends, the main cause has been excessive income increases. Increases in incomes in excess of the growth of national productivity cause prices to rise by roughly the amount of the excess. This price inflation has many undesirable — and, indeed, dangerous — consequences both for the individual and for the economy. It creates a vicious circle of price rise — income increase — price rise. It encourages people to spend instead of saving. With low savings, there is low investment and fewer job opportunities are created. Consumption is encouraged thereby enlarging our import bill. Price inflation also erodes the competitiveness of our goods both on the domestic and foreign markets thereby reducing exports and further increasing imports and unemployment. It discourages tourists, whose spending is particularly important for the less developed areas, from coming here.
These are not theoretical deductions of what might happen if prices rise excessively. We are at present experiencing many of the adverse consequences I have mentioned. Thus, over the past year, industrial production has slackened significantly. While strikes accounted for some of this, the fall in industrial production in the second quarter of 1970 is a matter of serious concern; excluding seasonal adjustments, this was the first fall since the second quarter of 1966. Unemployment has increased. Consumer imports are mounting and the external deficit is at an unacceptably high level. Tourism is in danger of losing its momentum.
It was to mitigate these consequences that controls in income increases were recently announced and that this Suppelmentary Budget is being introduced. These measures may cause some hardship, but if they had not been introduced, the hardships which we would have had to face would have been far greater and more enduring. As an economy we do not live in isolation. We must pay our way even at the cost of some restrictions. If these are not applied when, as at present, the occasion demands it, large-scale unemployment and emigration would ultimately ensue. We would, in fact, be throwing away the fruits of social and economic development which we have so painstakingly gathered over the last decade or so.
Real Incomes
We cannot enjoy a standard of living higher than that which our national output justifies. If we continue to insist that we can, the realities of economic life soon show us our mistake. Past trends in real and money incomes are sufficient to bring this home to us. Over the last decade, total money incomes have increased by almost 120 per cent. Over the same period, real incomes rose by nearly 50 per cent. The disparity between these two sets of figures goes far to explain the increase in prices of 48 per cent over the period in question. The growth in national output over the decade was almost 50 per cent. This is similar to the rise in real incomes over the period, a factor which illustrates the close relationship between real income and national output.
To bring the matter closer to home — wages of industrial workers rose by 42 per cent between 1965 and 1969. In real terms the increase was 19 per cent, the amount by which the national output rose over the same period.
We must dispel the illusion that rising money incomes represent rising living standards. They do not. It is the rise in national output that is the true and only real measure of the increase in the standard of living.
Income restraint
There is, therefore, no truth in the assertion that the recently announced restraints on income increases will erode workers' living standards. The increase in these living standards in recent years has been but a fraction of the increase in nominal incomes. The Government's proposals will narrow this gap while ensuring that real standards will increase on a sounder and more desirable basis than before. The Government are fully aware that these restraints on incomes will be unwelcome to many because they have disappointed those who think that their money incomes can continue to grow rapidly, irrespective of the rate of expansion of our national output. These people are ignoring the experience of recent years which has made it clear beyond any doubt that, when money incomes rise faster than output, part of the increase will inevitably be negatived by rising prices. However, many people show an extraordinary reluctance to face this elementary truth. They concentrate on raising the nominal value of their income without regard to its real value to them, and also without regard to the suffering their action imposes on some of their unprotected fellow-citizens, or to the grave injury they inflict on the national economy.
Timing of Government Intervention
The Government would have much preferred that a programme of voluntary restraint on incomes would have been agreed between employers and employees, when it was so obvious that this was vital to our national wellbeing. We did not intervene until it was quite clear that agreement would not be reached and until claims had been made for some 13th round pay increases which must have startled many ardent trade unionists both in this country and abroad. Wildly unreasonable though these demands were, we know from experience that they would have set the pattern for 13th round claims generally and, because the country simply could not afford them, they would have disrupted national activity on a wide scale and for a long time, before being settled, inevitably, at a level that could not be justified by reference to the growth in national output. No responsible Government could have delayed action any longer or have refrained from the measures which we propose to adopt. We have a duty to safeguard the national economy and to protect the weaker sections of the community from the consequences of the selfish actions of their better placed fellows. We do not intend to fail in that duty however unpleasant it may be.
Those who oppose these measures must reckon with the fact that, if no action is taken, prices could well rise next year by as much as 10 per cent. Since prices have already risen sharply in 1969 and 1970, a further and even greater price rise in 1971 would aggravate the serious social and economic problems which rising prices have already generated. Failure to act now would, in addition, mean that the external deficit would be much greater than even the record 1969 level. Corrective measures to avoid price increases and external deficits of this order are clearly unavoidable in the national interest.
Legislation on prices and incomes
It would be inappropriate for me to anticipate the specific proposals which will be contained in the forthcoming legislation on prices and incomes. There are, however, a few general comments which I would like to make at the present stage.
As I have mentioned, the final stage of the Employer/Labour Conference discussions took place in an atmosphere where truly staggering claims were being put forward and where it appeared that expectations had been aroused of increases in excess of 12th round settlements. The Government were, therefore, forced to review the situation in the light of these developments. The Government's initial proposal was to spread the burden evenly over all incomes and to apply in 1971 a uniform increase of 6 per cent, with adjustments, to all employees. They came to this conclusion with extreme reluctance as they were aware that it would limit the increases payable in 1971 to amounts below what would have applied in certain instances if the second phase of 12th round agreements had been allowed to run its normal course. They felt, however, that the balance of advantage lay in treating all employees on a common basis.
It has now become clear, however, from the public reaction, that adherence to this approach might well jeopardise the general acceptability of the proposals. The Government have accordingly reconsidered the matter and, as I announced yesterday, have decided that the restrictions should not apply to the increases due under the second phase of 12th round agreements in 1971. Subject to this modification, the new legislation will incorporate the measures announced on 16th October.
I have dealt at some length with wages and salaries because they constitute 60 per cent of all incomes and because, in the economy as a whole, they dominate the cost element in production. Restraint on incomes is not, however, being confined to pay. It is being applied right across the board to dividends, rents and fees for professional and other services, as the Government feel that it is essential that the curbs should apply to incomes generally. At the same time, complementary action is being taken to extend and strengthen price control.
I have no doubt that on reflection our people will realise that, in our present difficult economic circumstances, no more equitable solution could be devised. It has the real merit that whatever they receive in 1971 is more likely to retain its real value than it would if the Government were to avoid decisive action.
Government expenditure
The controls on incomes and prices are primarily designed to prevent the unjustifiable increases in nominal money incomes and costs which would have been experienced next year if present trends had been allowed to continue without interruption. But the existing pressure of demand needs to be reduced also. Excessive demand in both the public and the private sectors must be attacked without delay. The inflationary effects of a likely deficit on Government current account must be minimised and the over-rapid expansion of public expenditure moderated.
The sharp rise in pay rates and in prices experienced over the last six months or so has, of course, increased public expenditure, a large part of which consists of remuneration for the public service. It will be recalled that a similar increase in the last financial year was matched by a corresponding rise in revenue, over and above the budget estimate. As a substantial allowance was made for revenue buoyancy in this year's budget, there is no evidence that last year's pattern will be repeated. Present indications suggest that current outgoings could be some £23 million over the budgetary level while revenue will show only a small rise. This means that there would probably be a deficit of the order of £21 million on current account if no action were taken to reduce it. To meet a deficit of this size by borrowing would be inappropriate and indeed, indefensible, in view of the inflationary pressures affecting the economy generally. We have, therefore, been carrying out a vigorous and searching review of all heads of current spending in order to bridge the budgetary gap as far as possible from the expenditure side. It is regrettable that, at this stage of the financial year, the scope for economies is quite limited. Most items are, by now, fully committed and virtually incapable of being cut. We have, however, instructed all Departments and agencies that economies must be achieved wherever possible, even at the expense of dislocation and possible suspension of some services. We have decided to secure economies of over £7 million and to hold current spending within a total of just over £491 million. These reductions do not preclude the possibility of some further assistance for agriculture this year. The Government are considering representations made by farming organisations and a decision will be taken when their examination of the matter has been completed.
Capital spending also is being subjected to a critical review and, while reductions at short notice are not easily achievable, we hope to bring the capital programme below the total of £194.5 million contemplated in the budget.
The principal non-capital items exceeding the budget provisions are as follows:
|
£m. |
|
|
Public service remuneration |
8.2 |
|
Additional assistance to CIE |
3.6 |
|
Social Welfare |
3.6 |
|
Health |
2.8 |
|
Defence |
1.6 |
When this year's budget was being prepared, a provision of £10 million was made to cover the current year's pay increases for the public service. This figure was based on a realistic assessment of the kind of pay round the economy could reasonably support. In the event the 12th round for the public service was fixed at a level higher than provided for, and grade claims required more money than expected. The modified pay restrictions now proposed, while reducing the bill, could not head off a net excess of about £8.2 million over the budget provision. This excess is spread across all heads of the public service — teachers, gardaí, Army, the Exchequer element in local authority staff costs as well as the central civil service.
Despite the recent fares increase, CIE continues to experience serious financial difficulties attributable mainly to high pay awards for large numbers of employees. CIE could not meet the escalating pay bill from revenue at the old rates; the company was obliged to raise its fares but there were obvious limitations to this and, as a result, a substantial part of the extra cost must be met by the Exchequer.
The big increase in expenditure on the Social Welfare vote is mainly related to the prevailing state of the economy. There has been a sizeable and persistent rise in the numbers unemployed — a factor which should give pause to those advancing extravagant pay claims, because it may well be an early manifestation of the much greater fall in employment which unchecked inflation could bring about.
There are a number of reasons for the excess looming on the Defence vote. These include the extension of the Cyprus mandate, the cost of additional security measures, provision for fishery protection vessels and a short-fall in receipts from the UN. The large excess on the Health vote is mainly caused by price and other cost increases reflecting general inflationary pressures.
The Exchequer cannot escape these extra liabilities, and in so far as they cannot be met either by offsetting economies or by the revenue provided in the budget, it is necessary to consider raising part of the money from additional taxation. Otherwise, the entire deficit would have to be paid from borrowing which would, of course, aggravate the inflation from which the economy is suffering.
Fiscal measures
Ideally, in circumstances of such inflation, fiscal policy should aim at producing a current budget surplus, thereby drawing off purchasing power and dampening demand. But at this stage of the financial year, and given the size of the likely excess of expenditure over revenue, it is unrealistic to think of producing a surplus. Further reductions in expenditure beyond those indicated are impossible without severe hardship and widespread disruption of services. The increase in the tax burden which would be required to produce the requisite revenue in the remaining five months of the financial year would be quite severe. My purpose, therefore, is to minimise the likely deficit by the greatest possible reduction in spending and by a number of tax measures which I consider likely to have desirable effects in moderating present inflationary tendencies.
Prospects for 1971-72
At this stage in the present financial year it is necessary to have regard to the economic situation which is likely to confront us next year and to select a fiscal programme suitable to that situation. As part of revised arrangements for a more orderly consideration of budgetary matters, preliminary estimates of expenditure and revenue in 1971-72 were made several months ago and the Government have had them under examination for quite some time. The total figure of expenditure showed an alarming increase over the current year, due principally to the steep upward trend in pay and prices. Our primary aim has been to cut back this figure so as to reduce the pressure on demand and to bring the total as close as possible to estimated revenue at existing rates. By considering next year's expenditure well in advance of the usual time, I hope to introduce more flexibility and to minimise the constraints imposed by commitments.
It would, of course, be inadvisable to take final decisions at this stage on next year's expenditure as developments over the coming months must be taken into account but, subject to that reservation, the work of settling the broad outlines has nearly been completed. The utmost economy in Government spending will be imposed even though this may involve reductions in certain services and the deferment of many improvements which would be desirable if the general economic and financial situation were easier.
Budgetary policy
Up to now, budgetary policy has aimed at balancing current expenditure and current revenue rather than deliberately producing a surplus or a deficit. Over most of the last decade, a deliberate policy of deficit budgeting would have been contrary to the requirements of our general economic situation, but some economists would argue that, in certain years, it would have been justifiable to aim at a surplus. To the extent that this could be achieved only by increasing taxation, however, it would be necessary to guard against the danger that the tax burden might discourage enterprise and retard the satisfactory rate of economic growth attained in the sixties. But the intense and growing inflation of recent years, and the extent to which money incomes have been racing ahead of national output, may make it necessary to reconsider our former attitude. While, as I have already explained, a surplus could not now be achieved in 1970-71 without severely disrupting the economy, this does not rule out the possibility that we shall in future aim at a surplus on current account in conditions of inflation or at a deficit when economic activity is depressed.
Additional taxation
Against the total of just over £491 million within which we hope to contain current expenditure in 1970-71, we estimate total revenue at £477 million leaving a deficit of under £14 million. It will be appreciated that the uncertainty normally attaching to estimates, even at this stage of the year, is heightened as a consequence of the prolonged closure of the banks.
I propose to raise the sum of £5.3 million by additional taxation and to meet the residual deficit by borrowing. I have given a great deal of thought to the selection of tax measures which will have the least effect on the cost of essentials and will have little if any impact on persons in the lower income ranges. In view of the restraints on prices and incomes, I consider that it would be undesirable to increase the burden of direct tax on personal taxpayers. The Government are determined that fiscal policy will not only curb inflation but will, to the maximum extent possible, avoid price increases which would make it more difficult to hold the line regarding restraint in incomes. For this reason I am, on this occasion, leaving untouched the main body of indirect duties.
Taxation of companies
I propose, therefore, to obtain the bulk of the additional taxation required by increasing the direct taxation of companies by £3.5 million this year.
At present, companies are liable to pay corporation profits tax at the rate of 7.5 per cent on the first £2,500 of profits and at the rate of 23 per cent on the balance. Income tax at the rate of 7s in the £ is also payable, but the corporation profits tax is deducted in arriving at the profits chargeable to income tax. As a consequence, the maximum combined rate of income tax and corporation profits tax is just under 50 per cent.
I propose to disallow the deduction for corporation profits tax in computing the profits chargeable to income tax. The change will come into effect this year and will increase the amounts of tax due for payment by companies on 1st January, 1971. It will yield an additional £3.5 million in the current year and £6 million in the year 1971-72. The maximum combined rate of income tax and corporation profits tax on companies will be increased to 58 per cent. As companies can deduct income tax on payment of dividends, the net effective burden of tax on companies is reduced to 44 per cent in a typical case where about 40 per cent of profits is distributed to shareholders. This is not high when compared with that in other European countries.
Wholesale tax
In our existing state of growing inflation I consider it advisable to curb expenditure on luxury and less essential items. I propose, therefore, to increase to 20 per cent the rate of wholesale tax on those articles which are now liable at 15 per cent. The increased rate will take effect from 1st November. The articles which will be subject to the 20 per cent rate are yachts and other pleasure craft; motor cars, motor cycles, scooters and mopeds; caravans; radio and television sets, radiograms, record players, gramophones and gramophone records. The estimated yield from the increase is £0.9 million in the present year and £3.2 million in a full year.
Road tax
The only other tax increase I am proposing is to raise the rate of road tax on private vehicles by approximately 25 per cent with effect from 1st November. The new rates will be as follows:
|
£ |
|
|
Cars not exceeding 8 h.p. |
20 |
|
Cars over 8 h.p. and up to 9 h.p. |
23 |
|
,, ,, 9 h.p.,,,,,,10 h.p. |
26 |
|
Cars over 10 h.p. |
26 |
|
plus £4 for each h.p. or part h.p. in excess of 10 subject to a maximum charge of £50. |
The increases work out at somewhat less than 25 per cent for small cars and somewhat more for bigger cars. The rates applicable to motor cycles will be subject to a corresponding scale of increases.
It is estimated that these measures will yield an additional £0.9 million this year and £2.1 million in 1971-72, all of which will be made available for general Exchequer purposes.
Savings
The restrictive effects of this additional taxation, added to the restraints on prices and incomes, should help to abate the excess demand now coursing so rapidly and so injuriously through the economy. Personal saving can make a limited but worthwhile contribution. The instalment savings scheme was launched recently to encourage the individual saver to set aside part of his income for a definite period in return for a sizeable tax-free bonus. It is too early yet to appraise the response to that scheme but the indications so far are very encouraging.
Credit policy
It is regrettable that our action on prices and incomes and on the fiscal front cannot be rounded out by suitable measures in relation to credit. However, the bank closure has deprived us of reliable information regarding developments in the credit field over the last six months. As soon as adequate information becomes available a credit policy appropriate to the economic situation will be formulated.
Conclusion
The increases in taxation proposed in this Supplementary Budget are estimated to yield £5.3 million in the remaining months of this year and £11.3 million in 1971-72. They are presented as a rational and necessary supplement to the prices and incomes policy and as part of a series of reasoned measures whose purpose is to re-impose some degree of balance on the economy. To many persons in the lower ranges of incomes they will bring the reassurance that the Government are seriously concerned at the personal hardship caused by soaring prices following in the wake of unreasonable and unsustainable pay settlements. Detached observers, both at home and abroad, will recognise that the Government are firmly determined to slow the gathering impetus of inflation and to restore order in the economy.
The remedy we are prescribing may be unpalatable but I trust that it will not be too long before its good effects begin to materialise. We shall continue to keep the general economic situation under close and constant scrutiny and, while we confidently expect that the steps we have chosen will prove adequate, we shall be prepared if necessary to take further action in the months ahead.
Our economy is fundamentally sound and in the past decade has achieved a rate of growth far in excess of anything experienced before. It is our firm belief that the measures we are now taking will give it a breathing space in which to recover from the effects of the inflationary developments of the past year or two. This short pause will give the economy time to renew its strength and resume the advance towards the realisation of its full potential for economic and social expansion.
TABLE EXPLANATORY OF SUPPLEMENTARY CURRENT BUDGET, 28 OCTOBER, 1970
(Figures in brackets refer to budget presented on 22 April, 1970)
|
REVENUE |
EXPENDITURE |
|||||
|
£m. |
£m. |
£m. |
£m. |
|||
|
1. Tax Revenue (excluding Motor Vehicle Duties) |
393.70 |
(393.70) |
1. Central Fund Services ]excluding Payments to Road Fund) |
88.36 |
(88.36) |
|
|
2. Motor Vehicle Duties |
14.83 |
(14.83) |
2. Payments to Road Fund |
12.85 |
(12.85) |
|
|
3. Non-Tax Revenue |
68.54 |
(66.36) |
3. Supply Services (non-capital) |
389.82 |
(373.68) |
|
|
4. Add |
||||||
|
£m. |
||||||
|
Wholesale Tax |
0.90 |
|||||
|
Motor Vehicle Duties |
0.90 |
|||||
|
Income tax |
3.50 |
5.30 |
||||
|
5. Deficit |
8.66 |
|||||
|
Total |
491.03 |
(474.89) |
Total |
491.03 |
(474.89) |
Department of Finance,
28 October, 1970.
