In talking on this Budget, I want to speak to a considerable degree on the state of the economy and to relate the Budget to that. That is what the Budget should be. It should play a role in remedying economic problems and difficulties. One can judge a Budget only in the context of the economic situation of the country.
The position in which we find ourselves is notably unsatisfactory. The growth of the economy has slowed down to a trickle from 1970 and though this has been to some degree attributable to the strike situation, it is only partly attributable to it. It is quite clear that by any standards the economy is at present expanded and developed at a rate which is below what is possible in terms of growth of capacity, and this is being reflected in growing unemployment which, however, is aggravated by the situation in Britain. The economic problem is so serious here because people are being thrown out of work or are failing to find employment here, but part of it undoubtedly is because the employment situation in Britain is also difficult. However, it is particularly unfortunate that at a time when Irish people have fewer opportunities for employment in Britain than normal, we should have chosen that moment effectively to close the door even more firmly on their employment prospects in this country.
The slowing down of the economy has been quite dramatic. There was in 1968 a spectacular spurt of growth which reflected a pent-up situation following the latest Fianna Fáil crisis of 1965-66. During that period the growth of capacity in the economy continued at a faster rate than the real growth of output and demand and so, when the economic difficulties were over, a faster growth than is possible in a single year developed. Since that peak occasion in 1968, we had the slowing of economic growth to 4 per cent the following year and 1½ per cent last year.
I cannot trace in the annals of this country in so far as national accounts of economic growth are concerned any occasion when economic growth decelerated as rapidly as that. There have been ups and downs, of course, throughout the period since these figures have become available but in no period that I can recall has economic growth slowed down so rapidly. That itself creates problems. Quite apart from the desirability of at all times maintaining a high level of economic growth, it is also desirable that economic growth should remain fairly even. We should not experience sharp fluctuations which disturb the economy very seriously and can be the cause of many inequities and can create a situation where the growth fluctuates between rates of 1½ per cent and 8 per cent, up and down again, in a period of five years. That is not a happy situation. It is indeed one for which it is difficult to find any parallel elsewhere in Europe. Other European countries too have experienced difficulties at different times. Although all of them have had periods of inflationary pressures and consequent inflation, again I cannot easily recall any country in recent years which has experienced quite this sharp fluctuation.
There is, however, another aspect of this problem which is particularly disturbing and which has limited considerably the Government's room to manoeuvre. It is the fact that our balance of payments deficit, which rose very sharply in 1969, remained at a remarkably high level last year. Those economists whose job it is to examine in depth the relationship between the different economic aggregates are extremely puzzled at this phenomenon. On the basis of past experience, there should not have been such an upsurge in imports in 1970, in a year in which growth of output and growth in demand were so sluggish. All past experience suggests that, in these conditions, the value of imports would rise more slowly and that the balance of payments difficulties that had emerged in 1969 would have been somewhat eased.
It has been a feature of the comments made by different independent economists and different independent sources of economic comment on the present situation, that they have all expressed a certain degree of puzzlement at this phenomenon. They are, I think, agreed that among the factors responsible for it has been the fact that, as well as the exceptional rise in import prices—which is outside the Government's control of course—there is evidence of a significant change in the propensity to import. The share of home demand absorbed by imports has risen very sharply in the past couple of years. This can only be explained by some kind of change between the competitiveness of Irish goods and foreign goods.
It is, I think, no coincidence that these past two years have seen a sharp deterioration in the relative competitiveness of our goods, a sharp increase in labour costs, more rapid here than in any other nearby country, an increase, indeed, which in the two years 1968 to 1970 pushed up our labour costs by as much as 24 per cent which may be compared with the British record, perhaps almost a record figure for Britain, of a 15 per cent increase in labour costs in the same period. The British regard it as little short of disastrous that their competitiveness should be so eroded by comparison with the countries with which they trade: that in a short period of two years labour costs increased by 15 per cent.
In this country the increase was 24 per cent. This has meant that relative to British goods, in a two year period Irish goods have become less competitive by 8 per cent so far as labour costs are concerned. That is a very serious development, indeed, because, given that labour costs represent something like 60 per cent of the total value of goods produced and sold, it means that the actual price level of Irish goods vis-á-vis British goods has deteriorated by something like 5 per cent in two years. Experience in other countries has shown that, if the relative price situation of a certain country deteriorates vis-á-vis that of its neighbours by anything up to 10 per cent, it becomes impossible to maintain the parity of currency. Therefore, in those two years we went half way towards a situation that threatened the ability of this country to maintain its existing currency parity.
This, of course, has had its effect on exports and on imports. In the past we have tended too much to concentrate upon the effect on exports. We have concerned ourselves too much with exports as the test of competitiveness. There has been a tendency to say: "Oh, exports are still rising. Things cannot be too bad." This is dangerous for two reasons. First of all, there is a long-term upward trend in exports because of the establishment in this country of new export-orientated industries. This means that at least in the short and medium run, even if we are becoming less competitive, there will be at least for a period a continuing increase in exports. We should not allow this to confuse us or to delude us into thinking that, because exports continue to rise, in fact our established export trade is remaining competitive.
When one examines the increases in exports one finds to a startling degree that they consist of new types of goods made by new industries established here and that the growth of exports in the past year or two has not been attributable to anything like the degree that was true in many earlier years to the expansion of exports made by our established industries. If one looks behind the figures one finds, even on the export side, evidence of an erosion of competitiveness which is hidden and obscured by the continuing rapid growth of exports from newly established industries, in many cases foreign based. That is one reason why we should be careful not to be misled by the relative buoyancy of exports into thinking that all is necessarily well so far as competitiveness on export markets is concerned.
The other side of the coin is this. Quite apart from our goods ceasing to be competitive on export markets, they may cease to be competitive at home. What is most striking about the past couple of years is the growth in the import content of Irish home consumption reflected last year in this remarkable stability of the external deficit in a year when a slackening in the growth of imports should have given us some leeway here and enabled us to reduce our external deficit below the very high level it is at. This is what is most worrying about our present situation because, were it not for this difficulty, were it not for the decline in the competitiveness of our goods, were it not for the growing increase in imports, reflecting primarily the loss of competitiveness due to increased costs, the spare capacity that undoubtedly exists in the economy at the present time would have made it possible to stimulate growth, to achieve a more rapid rate of expansion and a reduction in unemployment.
The trouble therefore is that we have got ourselves into a position where we have very little room for manoeuvre and where, owing to mistakes that have been made, and owing to the inflationary pressures that have been allowed to prevail, our ability to maintain not full employment—that is something we have never had—but even the kind of three-quarters provision of employment for our people—the best we have been able to achieve—has been eroded. No longer is it true to say that three-quarters of those coming on the labour market, young people leaving school and university, and those leaving the land, have been able to get employment, which was the case for much of the 1960s. It is true that this has manifested itself not in emigration, which is at a somewhat lower level than normal, but in unemployment due, perhaps, to the economic situation in Britain rather than to anything that is happening at home.
The simple fact is that we are being forced away from even the kind of employment situation we had, unsatisfactory though it was, and although we have spare capacity, spare manpower, spare capacity in our industries, we are not able to use it fully lest, by stimulating home demand with a view to achieving the full utilisation of that capacity, we should worsen still further the external payments situation which is already so severe. The trouble about this is that it is not clear how we are to get out of that situation. Certainly the Government have not adverted to it. I do not recall this whole problem being analysed in these terms, or anything approaching these terms, by Government spokesmen, nor have the Government given us any indication as to how they see us getting out of this difficulty.
In fact, what is striking about this Budget in the economic sense is that it starts off with a situation where we are told in this volume, Review of 1970 and Outlook for 1971, that, on the basis of existing policies—this document was prepared on the basis of pre-Budget policies—the economy will grow by 3 per cent perhaps in 1971 which is the same rate at which it would have grown in 1970 but for the strikes. In other words, before the Budget we are told that unless the Government take some action to stimulate the economy growth will remain well below the level which is feasible. When the Budget was produced it proved to be a Budget which did nothing to stimulate growth. The Minister in his speech said that the economy will expand by 3 per cent following this Budget. I am not saying that the Budget should have stimulated growth to a greater extent. The truth is that the situation into which we have been put by the weakness and ineptitude of the Government policies is one in which the Government have not got the leeway to implement such a Budget and to stimulate growth to the extent which is technically possible. That is the ultimate condemnation of our present position.
It is one thing for a country to be in a position where it is expanding as rapidly as it can. Given the level of investment it is not possible to increase expansion more rapidly and consequently, even if the rate of growth is unsatisfactory from an employment point of view, there is nothing more that can be done about it. But it is quite a different thing when it is technically possible to stimulate growth and to reduce unemployment; but, although this can be done and the Budget could have done it, the Government are not in a position to do this lest they precipitate an even worse economic crisis. That is the problem to be faced. That is why one cannot help but be deeply concerned about our present economic position.
We should look at this in the context of our Third Programme targets. Our Second and Third Programmes have been curious in one respect. The Government have gone to much trouble in preparing these programmes. This must be an interesting and useful exercise. Once the programmes have been prepared and published they do not seem to have relevance to what happens. The Ministers in what they say show no consciousness of the fact that there are programme targets. I would expect that, when we have these programmes, the Ministers would get up and make their Budget Statements in the context of the programmes, that they would tell us how much it is possible to do in a particular year and whether they had to pull back from their targets. They might tell us that the housing, education or health targets could not be met and that taxation will run above or below the target level.
But this is not the format of Budget speeches. For 13 years, going back to the First Programme, Ministers have been making Budget speeches in the same format as they made them more than 13 years ago. They make no reference whatever to the programme or its targets. It is true that unremitting pressure has extorted from the Government, in their annual review of the economy, a section dealing with programme targets. This is very interesting to those who are able to delve deeply, to unravel the format in which these figures are presented and who are prepared to spend some hours in turning these calculations into a format which makes sense and which makes comparisons between the actual and the projected situation possible.
If one is prepared to undertake this exercise it is possible to find out what, in fact, is happening vis-á-vis the programme targets. I have attempted this exercise and I will give the House the benefit of my research. We have not had such comparisons from the Government side. The Second Programme has been abolished, so far as the Government are concerned. The Third Programme exists in theory. It is reviewed in an interesting section of this report, burried deeply in the middle of it. There are lots of statistics. Ministers are careful never to refer to these figures. If this Government had ever managed to achieve any of their targets in the Second and Third Programmes we would have heard more about planning. Perhaps it is a matter of bad luck that the Government failed to achieve their set targets. They may feel that in such a situation, silence is golden. If that is the attitude, they are not showing much understanding of what the planning exercise is all about.
Planning is designed to extort from the unwilling Government, Departments and Ministers, some kind of commitment as to what the results of their policies will be and to force them to put down in black and white what they expect to achieve with their policies. It is designed to produce a framework for the expansion of the economy within which policy can then, in future, be made. It is not a rigid framework. No one would suggest that, regardless of the changing course of events and of the new needs which may develop, the Government should rigidly follow the terms of the programmes throughout the four to six years of their span.
Some changes in programme targets will be necessary in the course of a programme. Good reasons may arise for this. If Ministers were coming into the House with their Budgets and citing them in the context of the programme and telling us that, by and large, things were working out all right but that they felt this year it was necessary to vary the allocations somewhat or that they underestimated somewhat income maintenance needs in the original programme and overestimated housing needs and that, therefore, they were making slight adjustments, while I would not agree with the policy, which is the one followed by the Government, I would have to accept that such Ministers recognised what a plan was for and that they recognised its existence and were having regard to the plan.
It is fair to say that no Budget Statement and no speech of any Minister which I can recall in the last eight or nine years since the Second Programme was first devised has ever adverted to the targets in a way which would suggest that they play any role whatever in the formation of policy. It may be possible that when the Government meet and discuss the framework of the Budget the target figures are brought forward. They may have fascinating discussions about whether or not they should change the targets. If so, it is an absolutely extraordinary state of affairs that the Ministers never even drop a hint of this outside. The best-kept secret of Government is that they ever discuss or advert to programme targets. They have never allowed a hint of such discussion to escape.
There never has been a public statement on this matter. The only explanation for such silence is, perhaps, the more probable one, and that is that, the Ministers have no regard for such targets at all. The Opposition and the public are entitled, in the absence of any evidence, to presume that the programme targets have no reality for the Government, that they are not considered by the Government and that policy-making, despite the existence of these programmes, continues to be an ad hoc matter, described to us in an interesting manner by the previous speaker. Each Minister claims what he thinks he needs for the year ahead and there appears to be an enormous amount of infighting and horse-trading. Finally, Ministers are cut back here and there until a figure is reached which is acceptable for the year ahead.
The Minister for Justice gave an interesting description of what goes on. I am sure the Minister's description is true. In the portion of the Minister's speech which I heard, there was nothing dealing with targets. When the Minister described how the Budget is prepared I did not detect that any role was being played anywhere by the Third Programme targets. There is no suggestion of any Minister saying in the Cabinet: "I must get so much money because I am entitled to it under the programme" or that another Minister would say "I know that I may not have applied for enough under the programme, but things have changed and I think I am now entitled to look for more, and I realise that this will cause a cut-back somewhere else". Nothing in the speech of the Minister for Justice suggested that these considerations arise at all at the Cabinet meeting. There is some old-style horse-trading in which the Ministers fight it out and the toughest man wins. It is interesting to judge who are the toughest and weakest Members of the Government when we see which Departments get a little more than their share and which Departments suffer. I am sure that attendance at such meetings must be an interesting human experience. Such discussions have nothing whatever to do with planning.
How, in fact, does the progress made in the past two years and the plans for the year ahead relate to the programme targets? The Government have been careful not to disclose this to us. Have the Government looked to see what the position is? I will take an opportunity of enlightening them in this matter. There is a basic difficulty in that output has not risen at the planned rate. Nearly all the figures I will be using will be 1968 money values because it is in those terms that the targets are expressed and that the annual review of the Third Programme discloses the results achieved. In 1968 money terms output fell short of the required amount by £35 million, a fairly large sum. In the terms of 1971 money values I would hesitate to put a figure on it, inflation has gone on so rapidly, but it is probably nearer to £45 million. That is a big shortfall.
What happened as a result of this shortfall? First of all, what caused it? I suppose here we can see the marks of Government policy. One can see here, perhaps, that certain Government policies have achieved results. I want to be fair to the Government. Agricultural output has fallen instead of risen. I am prepared to accept that that is due to Government policy, that the Government have for reasons which are a little obscure, having set targets for growth in agriculture in their programme, targets which would have involved an expansion in output in those two years by about 4 per cent, decided to change their policy and plan for a decline in agricultural output. They did this by varying the milk prices in a particular way, which had this effect. I do not quite know why the Government originally planned for the output in agriculture to expand and then changed their mind and set about adopting a policy to reduce it. I can guess some of the reasons but I am not sure but, of course, the Government have never told us about this policy decision. They have not even told us the results of it.
I am prepared to tell the Government the results of it. The result is that as soon as they set a target for a growth of 2 per cent per annum in agriculture which would have given a 4 per cent increase in output, agricultural output fell by 3 per cent instead of rising by 4 per cent and so at the moment agricultural output is running at about 7½ per cent behind the target level.
That is the first major shortfall. Mind you, the failures of the last couple of years are not confined to agriculture. In the industrial sector and in services also the volume of output is below what has been planned. There has been a universal failure to achieve the targets of output, most marked and obvious in the case of agriculture, where the trend has not simply been one of slower growth but of decline. So much for the output side.
What conclusions are to be drawn from this? If we have not got the additional resources has expenditure then been cut pro rata? That, indeed, would be the logical thing to do. If you plan for a certain rate of growth in output and if through policy decisions, lack of policy decisions or drift you fail to achieve this, then logically one would expect that expenditure would be cut according to the cloth.
This has not, in fact, happened in general. It happened in one area. One type of expenditure has fallen below the target level though not, perhaps by as much as would be appropriate to the shortfall in output. That is private consumption. The consumer, the man in the street, has been hit. He has lost out because the Government's failure to achieve the output targets has left them short of resources and so the consumers living standards have risen less than they should have otherwise done, less than they were planned to do. The shortfall here in 1968 money values is of the order of £10 million. The man in the street has been able to buy £10 million less than he was supposed to be able to buy in 1970 in 1968 money terms, probably £12 million or £13 million less in current money terms. The cut in living standards by comparison with what had been planned is an important and significant consequence of the failures in the output side but this cut in living standards has not been matched by equivalent cuts in other areas.
On the contrary, current expenditure on goods and services by the public authorities, which one can describe more briefly as public consumption, not only increased but increased much more rapidly than planned. Whichever belts were to be pulled in in this crisis it was not those of the Government and the public service. The plan was that in this period of two years the expenditure on the public service, the cost of running the country in simple terms that everybody can understand, was to rise in real terms by 7½ per cent. It was going to absorb 7½ per cent more resources running this country, the cost of the public service, the goods and services it needs, salaries and so on expressed in real terms, taking into account money changes. That was what was planned to happen. One might have thought that, given that there was a shortfall of £35 million in output, given that consumption, the living standards of the man in the street had to be cut on that account, the plans for the expansion in the public service would be correspondingly reduced.
Not a bit of it. They were not prepared to share in the belt tightening exercise which they advocated for the private sector and which they managed to achieve in the private sector. On the contrary, despite the fact that output was short by £35 million the growth of expenditure by the public sector, the cost of running the country, the money used up in the public sector—I am not talking of transfer payments, or subsidies, but of the cost of the public service sector itself— rose by 12½ per cent in a period when the resources simply were not there. When they had failed to achieve the increase in output, they absorbed and used up themselves very much more than they planned to do, increasing the cost there by 12½ per cent as against 7½ per cent.
There is another area in which, perhaps, it is less blameworthy, or should, perhaps, be less a matter for concern, in which spending has out run the plan, where there has been no corresponding cut back in expenditure to match the failure to achieve the output targets, and that is in the sphere of investment. Investment was planned to rise in volume terms by 15 per cent in those two years. There has been no cut back there to a lower growth rate. On the contrary, the increase in investment has been 23 per cent. One is, perhaps, less critical of this because, obviously, whatever is cut in those circumstances it is better that investment should not be cut and that the capacity of the economy to produce in the years ahead, when we get out of the present difficulties the Government have got us into, would then be there to be used for the benefit of the country. Nonetheless it may well be that in the difficult circumstances in which we are such a remarkable overspending on the investment side is perhaps not fully justified. In any event, it is there and there has been no corresponding cut back elsewhere. As far as the public service is concerned, they have happily overspent by a wide margin.
The result of all this is that expenditure under these headings, even allowing for the cut back in consumption below the target level, is running £30 million more than planned. Of course, if you are going to produce £35 million less than planned and spend £30 million more than planned you cannot be surprised if a gap emerges. The gap is, of course, the balance of payments deficit, running last year at about £62 million. The figures do not perfectly match because there are changes in the prices of imports and exports. There are other factors to be taken into account which involve some adjustment in the figures but one can broadly say that we have failed to produce as much as we planned by a margin of £30 million or £35 million. We have overspent by an equivalent amount on the opposite side and the difference between the two is reflected broadly in the £60 million external payments deficit. That is the situation we have got into.
When you look further at the Government's own sphere of action, not alone have they overspent on themselves, not alone has the cost of running the country been allowed to mount up much more rapidly than planned in a period when the resources available were less than planned, but under some of the other headings, under which the Government spend money on purposes other than paying for their own activities, there has also been overspending. National debt interest, for example, has risen in this period in real terms. The burden on the economy in real terms, allowing for money changes, has risen by 21 per cent as against a planned 17 per cent. So, despite the fact that we are short of resources, that we have not achieved our output targets, the burden on the economy of national debt interest has risen more than planned. Transfer payments, comprising mainly, though not exclusively, social welfare payments, have risen at double the planned rate. Only subsidies have, in fact, been held below the level projected in the programme. Here the success of the Government policy of cutting back milk output, is, of course, the explanation. In fact, as one analyses all these figures, one constantly comes back to this one success of the Government, the one policy that has succeeded, the cutting back of milk output. In that they have achieved something but it is, in fact, the only area in which there is any achievement I can find to the credit—or debit —in this instance, of the Government. As a result of their great efforts to reduce milk output they have managed to keep subsidies from rising in 1970 above the 1969 level and thus have held them below the target level. This is the only place in which there has been any economy to offset overspending under other headings.
If one takes all these headings together—all the activities of government, the cost of running the country, the transfer payments, the subsidies to enterprises, national debt interest, and so on—one finds that in this two-year period spending has risen 40 per cent faster than the planned rate. This is in a period when output has fallen short of the target. So much for the discipline of the plan.
On the capital side the system has worked somewhat better, although at great cost. Here, one must challenge the Government's priorities but I shall come to the cost and priorities later. At this stage, I must record that, whereas there has been gross overspending on the current side under virtually every heading, on the capital side spending has been kept in the two years within the limits of the plan. This reflects the fact that resources have not been available on the scale planned because of the shortfall in output.
There has been some evidence that the plan has worked so far as the capital programme is concerned but that evidence tends to evaporate when one looks at the details. It looks very well when you see aggregate figures close to the target but when you find how they have been kept close to the target and that the individual figures are widely different from the target figures you come to the conclusion that it is not the result of planning—it is merely a happy chance. The Government, having overspent madly under one heading and having underspent under another heading, happen to end up with a figure close to the target. Individual components of capital spending do not show any real relationship with the targets set in the programme.
Social investment—which I describe housing, health and education investment as—is 9 per cent below the target level. That is a big cut in a two-year period; effectively, it means that none of the increases in spending under this heading has happened. This needs to be analysed in detail.
From other figures given to us covering both the current and capital side, we know that health expenditure is fairly close to target. Although we have not got a detailed breakdown on the capital side, I think that probably indicates that if there is a 9 per cent shortfall in social investment as a whole and if health capital investment is on target, the cuts in education and housing capital expenditure must be greater than 9 per cent. It is almost certain that the target has been cut back by more than 10 per cent for these two items.
The other type of investment which has been cut below target level is agricultural investment. This was 10 per cent below the target level last year. I should like to have been a fly on the wall at the Cabinet meeting when these discussions took place. Did the Ministers concerned even advert to these targets? Did the discussion about capital spending take the form of Ministers saying: "I think we have got to cut back under certain headings. What needs to be cut in this country are education, housing and agriculture." I rather doubt that such discussions took place. I think it just happened because the pressures of different Ministers produced that result. I do not think it had much to do with any planned decision although I may be wrong about this. Perhaps I am being too charitable; maybe Fianna Fáil's first thought in a crisis is to cut education, housing and agricultural investment. Being charitable, I preferred to think that they were not aware of what they were doing.
