It is customary at the outset of the budget statement to review recent economic trends and to sketch the prospects for the year ahead. The summary of the economic background is, as usual, brief because the ground has been covered in detail in recent publications.
The year 1970 was a mixed year for the Irish economy as it was for quite a number of other economies. Growth slackened and unfavourable trends in incomes and prices developed. However, exports retained their buoyancy and there was an improvement in the balance of payments on current account, although the deficit was still large.
National output expanded by 1½ per cent. The sluggishness of industrial production, caused mainly by industrial disputes, was largely responsible for this relatively slow growth. Nevertheless, employment outside agriculture continued to rise although not strongly enough to absorb the outflow of workers from agriculture. Agricultural output showed only a small increase over the year.
Further large increases in incomes were recorded with the total non-agricultural wage bill rising by 13 per cent. This, together with other factors such as higher import prices, led to a very high increase of 8¼ per cent in consumer prices.
Outlook for 1971
The indications now, however, are that the economy is on the mend. Activity is reviving and the industrial peace we all hope for should provide a more stable environment within which this recovery can continue.
Much will depend on the trend of income increases in 1971. Present indications are that the increase in the non-agricultural wage bill will be some percentage points less than in 1970, notwithstanding the substantial carry-over effects of the high settlements reached last year. Allowing for an anticipated improvement in productivity, this would mean a more favourable cost/ price position.
Demand at home is expected to recover from last year's relatively low level. The volume of consumer spending may rise by 2½ to 3 per cent as against last year's rise of about 1½ per cent. Investment, aided by a revival in building and construction, is expected to be well above last year's low level and should lead to a welcome increase in opportunities for employment.
We would hope that industrial exports will continue to climb steadily with the aid of improved competitiveness. The prospects for agricultural exports are quite favourable. On the debit side, the higher level of activity this year may be expected to boost the import bill. Large imports of capital goods, including some £25 million for aircraft, are expected. Given a reasonable increase in net invisible earnings, the balance of payments on current account (excluding imports of ships and aircraft) should, however, show an improvement.
Present indications are that the economy should grow at about 3 per cent this year. While this is below our aspirations in other circumstances, it would be a welcome advance on last year and is probably the most we could hope to achieve without reinforcing inflationary trends.
On the international plane, our negotiations for entry to the EEC are proceeding satisfactorily. As indicated in the comprehensive review recently circulated by the Minister for Foreign Affairs, discussions in the coming months will concentrate on the transitional measures in the industrial and agricultural sectors and on the applicant countries' contributions to Community finances in the transitional period. The successful conclusion of these negotiations this year should enable our accession to the Community to be made at the beginning of 1973.
We have therefore little more than a year and a half in which to complete our preparations for membership. If the economy is to be able to meet the obligations which that will impose —and I must stress that the new environment in which it will have to compete will be radically different from that to which we have become accustomed—we must now eradicate those factors which have retarded growth over the past two years. This gives added urgency to the central theme which I shall be propounding in this budget—minimising the inflationary pressures in the economy and strengthening the factors conducive to steady and sustainable growth.
The accelerating trend in price increases in the past two or three years gives grounds for anxiety. In the early sixties, consumer prices increased by an average of 3 per cent a year but in the three years 1968 to 1970 the rise averaged almost 7 per cent a year. Undoubtedly there are some elements in the price increases over which we have little or no control. These consist mainly of the effect of rising import prices and those increases in agricultural prices which are largely determined in external markets. Our situation is inescapably influenced and affected by what is happening in the world around us and in the countries with which we trade. Economically the map is deceptive. There are not islands on the economic globe. Having made that point, however, I wish to emphasise that the main cause of our inflation has been accelerating wages and salaries and increased indirect taxes— which themselves reflect higher wage and salary costs for services provided by government.
In this situation fiscal and monetary policies can help and, indeed, must be designed to avoid creating a climate in which inflationary pressures would be likely to emerge. However, while such policies may slow down inflation, they will not halt it unless applied with a severity which would be unacceptable in terms of sharply increased unemployment. We reject the concept of strength through misery. The main emphasis, therefore, must be on prices and incomes policy.
National Pay Agreement
The National Pay Agreement could be an important step forward in containing incomes inflation. We must, however, be realistic about it. The agreement is clearly inflationary. Its main importance is the hope it holds out that current inflationary pressures can be moderated in an atmosphere of industrial peace. We must ensure that the agreement is a permanent advance and not a "once-for-all" effort which, when it terminates, will leave the basic problems much as they were before.
If the agreement is fully observed, the year 1971 could mark a break with recent experience of rapidly rising money incomes pushing costs upwards even more rapidly. Even a short and modest respite might drive home the lesson that money incomes which outstrip the growth in national productivity bring lasting benefits to none, cause hardship to many and jeopardise the economic prospects of all sections of our community. I should like therefore to stress as strongly as possible the importance of giving the hard-won terms of the national agreement a fair chance of succeeding.
It is the Government's hope that the agreement will lead towards a better system of income bargaining and industrial relations with less disruption of employment and a welcome reduction in unemployment. Improvements in the system have the support of those involved and it was for this reason that the Government welcomed the NIEC Report on Incomes and Prices Policy which made proposals for new institutional arrangements and highlighted certain deficiencies in our present system of collective bargaining.
The agreement emphasises that the rate of increase in costs and prices must be moderated substantially and sets out the ways in which wages and salaries should develop if this is to be achieved. The Government, for their part, intend to press ahead speedily with steps to ensure that non-wage incomes will be subject to the same sort of discipline as wages and salaries. Legislation is being prepared by the Minister for Industry and Commerce to amend the scope of the Prices Acts and the Restrictive Trade Practices Acts and to extend them to activities and services not at present covered. The present arrangements for price control are being reviewed with a view to improving their effectiveness and the submission made by the Irish Congress of Trade Unions is being sympathetically examined.
The Government have already announced the conditions under which pay increases will be accepted as justifying higher prices. Price additions must be fully justified and must conform with the terms of the National Pay Agreement. While the agreement should contribute to an easing of inflationary pressures, it will not result in any immediate or spectacular easing of the pressure on prices. I want to stress this in case there is any misunderstanding. There will be further price increases this year. Apart from higher import prices, the large money increases given in the 12th round are still affecting prices and will continue to do so during most of 1971. I am hopeful, however, that, if the agreement is respected by all concerned, the rate of increase in prices will slow down in 1971 and that there will be a further improvement next year. If this can be achieved, the stage will be set for a further advance towards increased employment and higher real incomes, particularly for the lower-paid and for those depending on social welfare payments.
A recent OECD report on inflation has stressed that member countries should pursue cautious demand management policies in 1971. It recommended that, until price increases level off and show a more stable pattern, countries should be willing to accept a temporary reduction in growth below what might otherwise be possible. The relevance of this advice for Ireland is clear. We are faced with three interrelated problems of rising prices, excessive external deficits and a growth rate below our long-term potential. Our objectives are also threefold—to moderate the growth in prices, to reduce to manageable proportions the external deficits and to increase the national growth rate. In the short term we cannot advance on all three fronts simultaneously and with equal effect. Economic policy must, therefore, aim at striking a reasonable balance between these objectives. There is clearly no point in aiming at maximum growth in the immediate future if this would push both the external deficit and prices to dangerously high levels. This would mean purchasing short-term growth at the expense of longer-term prospects for sound and sustainable expansion.
Inflationary costs and price increases go hand in hand with balance of payments difficulties. Loss of competitiveness through higher unit wage costs results in greater imports and lower exports. The OECD report on Ireland warned us that the increase in our export prices in 1970 was amongst the highest in OECD countries. We are fortunate in that the underlying trend of both national production and the balance of payments is towards improvement and that our official external reserves have been rising, but the level of the external deficit still remains much higher than would be considered desirable in the long term. The upward trend in reserves reflects the large continuing net capital inflow and thus the confidence of external investors in the economy and its future prospects. However, annual repayments of profits, interest and capital automatically tend to rise with increases in the net capital inflow and will constitute a greater annual liability in the balance of payments in future years. For this reason demand management policy must be directed towards keeping the balance of payments deficit within reasonable bounds.
The past year has been one of exceptional difficulty for monetary policy. Because of the inflationary pressures in the economy and the balance of payments position, continued restraint of credit growth was necessary and the Central Bank guidelines provided accordingly. In the event, the effectiveness of these guidelines was impaired by the bank closure which— although the situation has not yet been fully clarified—appears in its overall effect to have been inflationary. In present economic circumstances, continuance of restraint in the coming year is unavoidable. The Central Bank will issue credit guidelines to the commercial banks in the near future and has already indicated that the total appropriate increase is likely to be about the same as that originally advised for last year. These guidelines will continue to give priority to productive purposes. Consumer credit must continue to be kept under control in the coming year and for this reason the hire purchase restrictions introduced early last year, which have not been as effective as was expected, must be continued.
The reduction in lending rates for industrial, commercial and service enterprises, which was announced to-day by the commercial banks follows a general downward tendency throughout the world. I wish to make it clear that this welcome reduction in the cost of credit does not imply any lessening of the need to curtail the expansion of credit in the coming year.
Inflation and the budget
For some time the Government have been concerned because public expenditure has been rising at a rate substantially faster than national production. If this were allowed to go unchecked, it would soon give rise to financial and economic problems of an acute and dangerous kind. There are many reasons for the upward trend. They include the need to provide services and finance on a growing scale for agriculture, commerce and industry; the desire of the Government to meet the pressing demands of social justice; and the rising cost of servicing the national debt. These and other forces operate to expand the role and cost of Government.
In addition, there is the impact of price and wage inflation on the labour-intensive public sector, for which pay alone now amounts to £154 million, and on the wide range of goods which must be purchased out of Exchequer funds.
A substantial part of the claims of the weaker sections of the community on the public purse is needed solely to maintain their position in the face of rising prices. All these additional costs must be met before improvements in services or benefits can be considered. Financing these costs can, of course, be itself inflationary because of the effects of extra taxation on both prices and incomes.
Control of expenditure
It is essential therefore to slow down the rate of growth of Government current expenditure to something more closely approaching the automatic growth in revenues at existing rates of taxation. The economy could not continue to devote to public expenditure the rising proportion of gross national product which became commonplace in the past decade. Concerted steps are therefore being taken to improve the arrangements for planning, approving and controlling the budget. New procedures are being instituted to ensure that expenditure is more closely aligned to the resources likely to be available. At an early stage in the preceding year, the level of aggregate expenditure for the coming year will be determined by the Government in the light of such factors as the yield of tax revenues at unchanged rates, the desirable level of domestic and foreign borrowing and current and prospective economic trends. This aggregate will be divided into block allocations for each service and Ministers will then be free, within broad limits, to decide the detailed subdivision of their allocations. This should strengthen the resolve of the Departments to discover ways and means of increasing the efficacy of each £1 spent and to optimise the benefits to be derived from their limited allocations. The fact that block allocations will be determined well in advance should assist Departments in making the policy and administrative changes required to keep expenditure within the limits assigned to them.
Experimental studies in programme budgeting have been proceeding in the Department of Education and in the Forest and Wildlife Service of the Department of Lands. Draft programme budgets for those services covering the period up to 1975-76 have recently been completed. Four more Departments have now been included in the experiment and it is intended ultimately to cover all Departments at a pace determined by the availability of certain skilled staffs which are quite scarce at present.
As an interim measure until programme budgeting becomes fully operational, multi-annual budgeting on what might be described as traditional lines is being developed. This involves extending the present annual expenditure estimates for a further two years ahead—that is, estimating for three years in all—and making provisional allocations in respect of those estimates based on a projection of resources. This procedure should enable more systematic control to be exercised over expenditure in the light of expected resources and facilitate Departments in planning their expenditure over a longer period.
The public service
The staffing requirements of the public service are determined by the extension and improvement of Government services. At present the remuneration of the public service in all its branches —civil service, Army, Garda Síochána, teachers, health staffs and so on—pre-empts a considerable proportion of total revenue. It will cost £154 million in 1971-72 out of a total expenditure figure of £542 million. Apart from its large and growing size, the pay cost of the public service creates major budgeting problems in a time of rapidly rising pay such as we have experienced acutely in recent years. It is now difficult to predict and provide accurately in a budget for the cost of pay increases likely to occur in the year ahead. With a total remuneration of £154 million, even a small deviation can entail several million pounds. When it is considered that public service pay is affected by national pay rounds in outside employment generally, by particular pay adjustments in comparable sectors of outside employment and by claims to alter or maintain differentials and relativities within its own grading structure, the difficulty of precise budgeting for public service pay becomes apparent.
As the second phase of the twelfth round agreement for the public service generally covers the calendar year 1971, the cost of remuneration can be estimated with greater certainty than was possible last year, but there is nevertheless an area where the estimates are still somewhat tentative. The amount to be provided for the removal of existing anomalies within the terms of the National Pay Agreement cannot be predicted with confidence. The best estimate that can be made to cover both this and the cost of the 13th round after January, 1972, is, on present information, £6.5 million. This sum has been included as a contingency in the pre-budget estimates.
The Government are seriously concerned at the extent to which national budgetary and financial policy has been upset in recent years by the need to meet additional pay liabilities far in excess of the amount provided in the budget. In the supplementary budgets introduced in 1968 and 1970, public service pay increases were one of the greatest items of additional expenditure to be met. Such unexpectedly large mid-year additions to current liabilities can frustrate the Government's attempts to budget rationally. The Government propose, therefore, to consider what action can be taken to safeguard budgetary plans against disruptions of this nature. Any proposals to change the present system will, of course, be discussed with the staff associations.
Conciliation and arbitration
To allay any staff misapprehensions, I wish to make it clear that the Government fully accept the principle of conciliation and arbitration. Some changes in the present conciliation and arbitration machinery may, however, be desirable. There are four major arbitration boards covering the civil service, the local authority service, teachers and gardaí, as well as other boards for smaller groups. They have emerged at different times in the past 20 years and it has been a matter of some concern that there has been no co-ordinated approach between the public service arbitration boards themselves or between them and the major body in this field, the Labour Court.
This led the Government to propose in 1966 that all arbitration claims be dealt with by the Labour Court. Regrettably, the proposal was not acceptable to the staff. It was then suggested that a tribunal be set up under the aegis of the Labour Court to deal with all public service arbitration claims. This proposal, too, was not acceptable. Ultimately, the 1969 Industrial Relations Act provided for the addition of two Labour Court members to public service arbitration boards. While this improvement, when it becomes effective, will no doubt be of help, the problems are such that they can be solved, or at least minimised, only by a fully coordinated approach to claims at arbitration level.
Report of the Public Services Organisation Review Group
Action on the recommendations of the Public Services Organisation Review Group is continuing and I have introduced legislation for the setting up of a Department of the Public Service. While I do not wish to anticipate the debate on the broader aspects of the group's report to which the passage of this legislation will give rise, I would like to stress two points here. First, the functions of organisation and personnel will be given enhanced status, both in the new Public Service Department and in Departments generally, to reflect the importance attached by the Government to the management of the public service. Second, the Government are determined to press ahead with all steps necessary to increase the efficiency and minimise the cost of the public service.
Outturn of current budget 1970-71
The budget of April, 1970, aimed at a balance between current expenditure and revenue at the level of £475 million. However, during the course of the year heavy additional liabilities totalling about £20 million were incurred principally on public service pay, additional assistance to CIE, social welfare and health costs and defence. It was therefore necessary to introduce a supplementary budget which aimed at reducing the likely deficit to £8.6 million by a combination of reductions in expenditure and increased taxation.
The outturn, as shown in the budget tables, does not significantly differ from the position as projected in October. The deficit of £8.9 million, which had to be financed by additions to our residual borrowing in 1970-71, has of course affected the outturn on the capital budget for that year.
Capital budget 1970-71
The booklet Capital Budget 1971 which was published some days ago shows that expenditure on the capital budget in 1970-71 was very close to the April 1970 estimate. It included the current budget deficit of £8.9 million. The projected pattern of financing the budget, and in particular the residual borrowing, was substantially altered mainly as a consequence of the effects of the bank dispute. This is set out in detail in the booklet.
I have given careful thought to the question of the budgetary measures best suited to our present economic situation which, as I have already mentioned, presents three interlinked problems of rising prices, excessive external deficits and a slow rate of growth. The forces of inflation would be given a further impetus if the upward trend of Government spending, both capital and current, were allowed to continue unchecked. This total rose by 18 per cent in 1968-69, 16 per cent in 1969-70 and 18 per cent last year, necessitating undue recourse to domestic and foreign borrowing and increased taxation which contributed to sharply rising prices. A marked increase in public spending would adversely affect our balance of payments deficit, and while it might give us some short-term prosperity, the price would be too high and the benefits transitory.
We decided that the rise in Government spending would have to be moderated and the original current and capital expenditure programme of £797 million for 1971-72 has been reduced to the total of £721 million—an increase of 9½ per cent on last year's outturn. This very substantial reduction, which was not achieved without difficulty, represents the main effort of my budgetary policy for 1971-72 and is of much greater significance for our economic well-being than the changes I shall announce to-day.
Capital budget 1971-72
The capital budget for 1971-72 totals £217 million. The public capital programme which makes up the bulk of the outlay represents an increase of about 6½ per cent over the outturn for 1970-71. In these comparisons the expenditures of the air companies and Irish Shipping are excluded: most of them are incurred abroad and financed from foreign borrowings and have little direct effect on domestic resources and demand. It is planned to keep total residual borrowing at a level of £73 million.
Provided that movements in wages and costs generally are contained within moderate limits, the programme proposed should ensure steady economic and social advance. Two items deserve special mention. First, the allocation for industrial grants is up from £18.5 million to £23 million—the highest level ever. Second, the allocation for housing and ancillary services, at £43.5 million, is £4 million greater than the outturn in 1970-71. These two increases, totalling £8.5 million, should add significantly to the job opportunities available this year.
The problem of financing the capital budget is not limited to finding the money, from whatever source, to cover the total outlays. Nor is it a matter solely of finding the cheapest sources of capital, although the cost to the Exchequer cannot be ignored. We must also have regard to the impact on the monetary system and on the economy generally of the different sources of finance used. It is here that budgetary policy and monetary policy have a meeting place and where one policy can complement the other.
An appropriate monetary policy could not, on the basis of present information, be maintained during 1971-72 if bank and foreign borrowing by the Exchequer were to rise significantly above the £73 million proposed. It is hoped to raise £48 million of this requirement from the banking sector and £25 million from abroad. In the past, borrowing from the domestic banks was confined almost exclusively to the associated banks, but in view of the growth of deposits with the other financial institutions, an approach is now being made to the non-associated banks for part of the £48 million.
Borrowing from the Irish public
The normal sources of capital finance, chiefly small savings and national loans, are generally regarded as the safest and most desirable way to raise capital for the Exchequer. Too much reliance on bank credit can run the risk of swelling the money supply to inflationary levels, while foreign borrowing can have similar effects. All aspects of Government stocks and other means of raising money on the domestic market are being reviewed. Irish Government stocks are at present giving generous yields by comparison with British securities, but other aspects are being looked at with a view to providing attractive investment opportunities for the public and the various investing institutions. Underwriting discounts and brokerage commissions have been increased on new issues and conversions, and stocks are being issued with maturities which best suit the needs of the Irish investor.
Last February £41 million of national loans came due for redemption. Of this, £25 million was converted into new stock. At the same time three new stocks were issued for public subscription and these attracted funds of over £21 million. The Government therefore borrowed £46 million in a single operation. It was the largest of its kind ever attempted and betokens a gratifying degree of confidence in the continued progress of the economy.
Small savings continue to be a valuable source of finance for the public capital programme, and while I do not expect a repetition of the record level reached last year, because of the bank closure, I hope that the public will continue to recognise the advantages which the various Government media provide for the saver. The National Instalment Savings Scheme introduced last September has obviously proved attractive. So far, some 30,000 agreements have been entered into providing for total saving under the scheme in its first year of nearly £5 million. The new Prize Bond scheme introduced in March has got off to a good start, and up to £1.8 million has been subscribed since then.
It seems to me, however, that the present issue of Savings Certificates, which were put on sale in March, 1966, are now outdated, and I accordingly propose to withdraw them from sale and to introduce a new decimal certificate. This will have a shorter life of five years, and will be issued in £1 units which will accumulate to £1.35 at the end of the five year period, giving an effective net interest rate of 6 per cent per annum free of tax. This is equivalent to a gross return of 9¼ per cent to the saver who is liable to tax at the standard rate.
I also propose to improve the services of the Post Office Savings Bank by providing for speedier withdrawal facilities. I hope that these will encourage more people to make use of the Bank.
Current budget 1971-72
The deficit of almost £9 million incurred in the current budget for last year would disclose an even more serious underlying imbalance between revenue at existing tax rates and expenditure, were it not for the fact that the taxation imposed last October—which yielded only £5.3 million in 1970-71— will produce a further £6 million in 1971-72. The pre-budgetary publications show that total current expenditure for 1971-72 is about 10½ per cent up on last year's outturn. This represents a virtual halving of last year's increase of over 19 per cent and it leaves me with a nominal opening surplus of £119,000.
Given the need for additional State assistance for those sections of the community who have been worst hit by rising prices, additional taxation will obviously be necessary if even the most pressing requirements are to be met. But any increase in taxation must be minimised for both long-term and more immediate reasons. During the sixties the percentage of GNP taken in total taxation rose from about 21 per cent to 31 per cent and, if present trends were not checked, that percentage might well rise by a further ten points in the seventies. In the context of 1971, it is of the utmost importance to safeguard the National Pay Agreement from the price effects of any avoidable increase in taxation. Although its terms are far from ideal, the agreement holds out the prospect of a more balanced approach to income settlements in 1971 and in the next few years. The Government consider that it must be given every chance to succeed this year and to lead the way to greater moderation after its first phase is completed. This means that I must reduce to the absolute minimum any budgetary impact on prices. I propose therefore to add only £9.37 million in the form of budget concessions to the estimate of expenditure.
The Government consider that, although extra taxation is necessary to meet the cost, priority must be given to increasing the social welfare payments in view of the rise in the cost of living in the past year. The increases apply to both the personal and adult dependant rates, as distinct from last year when they applied to personal rates only.
For example, the personal rate of the old age contributory pension will be increased by 50p to £5.50 a week while the rate for a person with an adult dependant will be increased from £8.50 to £9.35. The old age non-contributory pension will be increased by 40p to £4.65. Widow's contributory pension will be increased by 50p to £5.00 while the widow's non-contributory pension and the deserted wives' allowance will be increased by 40p to £4.65.
The personal and adult dependant rates of disability benefit, unemployment benefit, invalidity pensions and retirement pensions, maternity allowances, orphan's allowances and unemployment assistance are also being increased. Full particulars will be circulated to Deputies at the conclusion of this statement.
The special needs of widows and deserted wives with dependent children have been the focus of a growing measure of social concern in recent years. The Government have decided this year to improve their position exceptionally. At present the first two dependent children of a contributory widow pensioner qualify for 90p each and the remaining children for 65p each. These rates will be increased to a uniform £1 per week for each dependent child. Likewise the corresponding sums of 75p and 50p which non-contributory widow pensioners and deserted wives receive for their children will be increased to a uniform 90p per week for each dependent child.
In addition, to improve still further the position of working non-contributory widows and deserted wives, the present concession whereby £39 per annum of earnings is disregarded in respect of each child in the assessment of means will be doubled to £78. Special provision is also being made for the widows of military service pensioners; I shall announce the details in a few minutes. I shall also announce substantial additional reliefs for widows and dependent children in the field of estate duty.
The disabled persons maintenance allowance and the infectious diseases maintenance allowance, administered by the Department of Health, will be increased in line with the improvements in the social assistance rates.
The increases in the assistance rates and in the health allowances will take effect from the beginning of August, while the increases in insurance benefits will, as last year, be paid from the beginning of October.
Recent improvements include the raising of the remuneration limit from £1,200 to £1,600 per annum and the making of regulations which will greatly reduce the number of cases in which loss of benefit can arise due to an employer's failure to stamp insurance cards.
The cost to the Exchequer arising from these various increases, improvements and extensions of services will be £3.1 million in this financial year. A further sum of £0.55 million is being provided to cover payment of unemployment assistance to men without dependants in urban areas and further exemptions from the recent Employment Period Order under an amending order which the Minister for Social Welfare is making today. This order will enable unemployment assistance to be paid with immediate effect to men, without dependants, resident on coastal islands and to men without dependants, aged 50 years or more in rural areas.