There has been an upturn in the pace of economic activity in recent months and the indications are that, on current trends, the growth rate for 1973 will be slightly over 4 per cent. For the past three years the economy has been running well below capacity and it is encouraging that this year we can look ahead to a growth rate nearer to what we must attain if unemployment is to be reduced and living standards raised substantially. A growth rate of a little over 4 per cent, however, while welcome, will not be sufficient to take up the slack which has developed in the economy and it is clear that a higher rate of growth could be achieved this year without causing serious difficulties. Accordingly, the Government have decided to expand economic activity to obtain a higher growth rate which, apart from increasing employment and improving living standards, will help to take up the slack and underused capacity of recent years.
A major problem facing the economy in 1973, however, is that of prices. The Government have inherited a very high rate of price rise—the consumer price index at mid-February was 10 per cent higher than at mid-February, 1972—and it will be difficult in a short period to bring this rate of increase down significantly. Factors originating abroad, which are outside our control, will unfortunately continue to push up prices in the months ahead. At least in so far as food prices are concerned, there will be compensating benefits to the whole community, particularly to those engaged in agriculture, and to the balance of payments. This does not apply, however, to the prices we pay for our imports which are likely to cost considerably more this year.
Favourable conditions in external markets for agricultural produce are again likely to result in a substantial addition to farmers' incomes. The agricultural sector, which for long tended to lag behind in income increases, has made considerable progress in the past year or so and future prospects remain promising.
The volume of consumer demand is expected to rise by, at least, the same rate as in 1972. Investment, aided by the stimulus resulting from the increase in the public capital programme this year and also by the rise in the general level of economic activity, is likely to move ahead noticeably faster than in 1972. This is particularly encouraging since, in the years ahead, increased business investment is imperative if we are to realise our full potential in more competitive trading conditions.
Assuming that our competitiveness is not seriously affected by the likely rise in unit production costs—a rise which is all the more a matter for concern in view of the efforts being made in other countries to moderate the increase in incomes and prices—we can expect that the strong upward trend in industrial exports that was evident in 1972 will continue this year. Agricultural exports are also likely to be dynamic. Tourist receipts should be somewhat higher although, of course, the trend of events in Northern Ireland will continue to be a major factor affecting the industry.
Imports have shown a very substantial rise so far this year. In the first quarter they have increased by a third and, for the year as a whole, a significant increase over the 1972 level is likely. This rise is largely related to the quickening pace of economic activity together with certain other factors such as the reduction of tariff barriers and the increase in import prices. However, the increase in exports, together with the current inflow from the EEC agricultural fund, should go a long way towards offsetting the prospective rise in imports and ensure, despite a much higher level of growth, that the balance of payments will improve somewhat in 1973.
Prices and Inflation
A strong—and accelerating—upward trend in prices has plauged the economy for some years past. The year 1972 saw no real improvement in inflationary pressures. During the year as a whole the consumer price index increased on average by 8½ per cent as compared with 9 per cent in 1971. While there was some improvement in non-food prices during the year, food prices rose rapidly and continued to accelerate into 1973. The indications for the present year are far from reassuring. As I mentioned, at mid-February, 1973, the increase in the index was 10 per cent, of which food prices represented over half.
High meat and potato prices accounted for by far the greater part of the rise in food prices in the past year. Because of the present international shortage of beef and other quality meat, the prices obtaining for our cattle have rises considerably. While this brings worthwhile benefits to the farming community, it has also meant that the price of meat to the shopper has risen. The shortage of potatoes-because of falling acreages and a generally poor growing season —was an additional and quite an unexpected adverse development in 1972. I must stress that these increases in food prices are entirely outside the direct control of the Government. However, every effort is being made through the operation of the price control machinery to ensure that, as far as possible, unwarranted increases are not being passed on to the consumer.
A further external factor pushing up consumer prices has been the increase in the price of our imports which in turn partly reflected international currency realignments, especially the floating of sterling.
While external factors have been important in contributing to domestic inflation in recent years, we cannot overlook the undesirable fact that the rate of increase in money incomes in Ireland has been out of proportion to the growth in national output. In manufacturing industry, earnings rose by about 15 per cent in 1972: the volume of output, on the other hand, rose by only 4 per cent. The consequent rise of 11 per cent in unit wage costs was by far the highest among EEC member countries and has a bearing on the fact that the rate of increase in our consumer prices was also the highest among those countries.
Excessive rates of increase incomes and prices of this type have the most serious consequences for the economic and social life of any country. While few are completely unaffected, those who lose most are persons in receipt of fixed incomes and those out of work or those whose jobs are jeopardised. Real improvements in incomes and purchasing power are more important than illusory and inflationary monetary increases.
For these reasons, it is vitally important that any future wage settlement following the expiry of the National Agreement, 1972, must make an effective contribution to slowing down the rate of increase in prices. Profits, professional earnings, fees, dividends and other non-wage incomes must, in equity, make a similar contribution.
National Pay Agreements
The National Pay Agreements are a recognition that the social partners see voluntary agreements at national level as making a positive contribution not only to reconciling the interest of the social partners themselves but to the achievement of national economic and social objectives.
The current agreement, therefore, offers the prospect of a further period of peace on the industrial relations front. Considerable effort have been made by most trade unions and employers to ensure that the terms of the agreement are fully observed and these efforts are greatly appreciated and must clearly be maintained and intensified. The agreement marks the first step on the national level to the implementation of the principle of equal pay for equal work—a matter to which I will return later in my speech. It is noteworthy, too, for its constructive contribution—both in relation to increases in basic pay and improvements in conditions of employment—towards improving the relative pay position of lower-paid workers.
As Minister for Finance I am aware, however, that the agreement has other effects on the economy. Inflation arises from many causes—import prices, profits, costs other than wages, wage costs—nearly all of which are interrelated. Yet, if compensation is sought in full to meet rises in cost which have already taken place, the rate of inflation is consequently multiplied. It is in this context, and not overlooking the other inflationary factors at work, that I note that the pay increases given under both phases of the current agreement are likely to result in arise of about 9 per cent in our unit wage costs this year and they will bring about a further substantial increase in the wage and salary bills for 1974.
Increases of this order, inevitably limit the scope for achieving any appreciable improvement in the rate of price inflation this year or next year. Yet, unless we begin to get our rate of inflation down to at least the level of the other EEC member countries, we will find it increasingly difficult to avail of the opportunities presented by EEC membership. Unless we avail fully of these opportunities, we will make little headway in reducing unemployment and providing more jobs for our people.
The Government are committed to the principle that voluntarily negotiated National Pay Agreements, which meet the economic and social objectives of the community, are the best basis for economic development, stability and growth in jobs. They have noted that the statement of objectives in the 1972 National Agreement makes it clear that the social partners are looking at increases in wage and salary incomes in the wider social and economic context. The Government intend in the near future to explore with the social partners ways and means by which wage and salary developments might best contribute towards these objectives. The next National Agreement must be an essential part of an anti-inflationary campaign and must, therefore, be one which will contribute to a slowing down in the rate of price increases. In the national interest, other income earners and profit makers will be required to play their part, too.
A prime aim of this year's budgetary policy is, therefore, to set a favourable climate for the conclusion of an agreement that will be of maximum advantage to the economy and thus to the community as a whole.
In accordance with the National Coalition's announced intentions, substantial increases in social welfare benefits and services are being provided in this budget, as a first step towards implementing our comprehensive social programme. These welfare increases, together with this year's move towards fulfilling the promise to remove health charges and housing subsidies from the rates over four years, and also the removal of value-added tax from foodstuffs, constitute major contributions by the Government in the fight against inflation.
Price control
The Government are giving urgent attention to devising ways and means of strengthening existing price control machinery. Under the Prices Acts, wide powers, which were in fact extended during the past year, are at present available to the Government in relation to a broad range of prices and charges. Guidelines disallow any element of price adjustments sought as a consequence of pay increases in excess of those provided for under the National Pay Agreements. The Government draw on the advice of the National Prices Commission. Steps have been taken, under the Housing Acts, to bring the price of new houses under control. A major task immediately facing the Government is to ensure that the removal of the value-added tax from food—a measure indicating our determination to combat inflation—will be fully reflected in consumer prices. The Minister for Industry and Commerce has undertaken that his Department, in consultation with the National Prices Commission, will give top priority to this task. Special precautions are being taken to ensure that traders do not increase prices in anticipation of the removal of value-added tax.
The European Communities and the budget
As this is the first budget to be presented since our accession to the EEC, I now propose to refer to the budgetary implications and to certain other matters arising out of membership which are of particular significance to this country.
We must, as a member state, contribute to the operating costs of the Communities and the net contribution this year being provided for in today's budget is £5.0 million. Also arising out of membership, Ireland will make certain other small payments not falling to be met out of the current budget and amounting to about £0.5 million in all.
That is the debit side. On the credit side of the current budget, there are certain consequential reductions in expenditure which would otherwise have had to be met by the Exchequer and provided for in today's budget. These represent mainly relief from agricultural support payments. As a result of our participation in the Community's Common Agricultural Policy, our farmers have access to higher market prices. Furthermore, the Community's Agricultural Fund bears the cost not alone of subsidies necessary to close any gap between the domestic and the export prices for our agricultural products but also the cost of any intervention necessary to keep domestic prices above the particular floor, or guaranteed, level set by the Community.
It is estimated that the resultant gross savings in current Exchequer expenditure in 1973-74 will be about £33 million. This fact should be borne in mind in connection with table 5 of the current budget tables detailing State support for agriculture.
A further financial gain is that, under Community regulations governing social security for migrant workers, we will be recouped by the British Government in respect of the provision in this country of social services for dependants of persons resident in Britain or for British pensioners resident here. Estimated receipts under this head in 1973-74 will amount to about £1.5 million.
In sum, taking account of the items I have mentioned, the net Exchequer gain on the current budget in 1973-74 from EEC membership is estimated to be of the order of £29 million.
Effect of EEC entry on agriculture
The most immediate gain from entry to the EEC arises in relation to agriculture. However, even before joining the Community, farm prices and incomes had begun to show a dramatic improvement. The year 1972 was an exceptionally good year for farmers. Farm prices rose by about 20 per cent and out put by 2 per cent. With the price of farm inputs rising at a slower rate than farm prices, this gave rise to the greatest ever annual increase in farm incomes. Total farm incomes rose by over £70 million or about 35 per cent. All the indications are that there will be a further very substantial increase in farm incomes in 1973.
The EEC Common Agricultural Policy to which I referred earlier has operated in Ireland since February last. While it will be some time before our farmers can enjoy its full benefits, it will nevertheless have a striking effect on farming, even in its first year. The most immediate and obvious effect has been on prices. The minimum intervention, that is the floor, or guaranteed, prices recently decided on by the Ministers for Agriculture are on average about 20 per cent above the level ruling in Ireland 12 months ago. For cattle and milk, which are our main products, guaranteed prices are some 30 per cent above last year's level.
The second gain to farmers is security of access to markets. No longer do we face the threat that trade barriers will be erected against our exports to the Community. Such trade obstacles as still exist will be gradually dismantled, thus further obviating the need for costly Exchequer export subsidies.
The third and, in the long term, perhaps the most important effect of the Common Agricultural Policy is that our farmers will be put on the same competitive footing as those in other member countries. Also, a common scheme for modernisation of farms and improvement of farm structures is being implemented throughout the Community. A new scheme of aids for certain less-favoured areas, which can benefit large parts of this country, is being formulated.
Our farmers, therefore, through higher prices, secure access to markets and improved competitive situation vis-á-vis fellow producers in other countries, will be in a position further to contribute to the growth not alone of their own industry but to that of the whole economy. This, I am happy to say, they appear to be doing already. Indications are that the level of investment in agriculture has increased significantly, particularly in the livestock and milk sectors where the greatest opportunities exist. Demand for investment grants and especially for credit has increased sharply and it is the Government's intention to provide the necessary resources to meet this demand. Increased financial allocations have already been made for farm building grants and land reclamation. Particular attention as drawn to the increase of over £11 million provided in the capital budget for agricultural credit.
I might add that prices this year for our main agricultural products—except those for sheep—have been settled satisfactorily by the EEC Council of Ministers. The Minister for Agriculture is, however, pressing the EEC to introduce a common policy for sheep. Although prices for sheep and lambs were good during the year, our sheep flocks are not showing the desired expansion and, accordingly, I am providing an additional £500,000 in this budget to promote the development of the sheep industry. This sum will be spent on improving the hogget ewe subsidy scheme and on renewing and improving the extension made last year to the mountain whether lamb scheme. The Minister for Agriculture and Fisheries will shortly announce details of the improvements.
The EEC price settlement resulted in higher prices for our butter and other dairy products and in new subsidy arrangements for butter for home consumption. The Government are anxious to keep the increase in the price of butter to consumers to an unavoidable minimum and I am, therefore, providing and extra subsidy of £0.6 million for this purpose. Also in the context of agriculture, I would like to mention that the Minister for Agriculture and Fisheries will announce alterations in various capital aids for buildings and equipment. Provision for these, likely to cost about £0.3 million, will be a charge on the capital budget.
Economic and Monetary Union
I shall now turn to certain other major issues arising out of membership of the EEC which are of prime importance to this country.
As the House is aware, the Community is committed since 1969 to achieving economic and monetary union in stages by 1980.
The programme for the second stage of economic and monetary union, which is due to commence on 1st January next, is now being prepared. This stage will, the Community accepts, need to take full account not only of economic and monetary conditions within the Community but also of developments on the wider world scene and their implications for the future. For our part, we will emphasise the desirability of priority for measures designed to speed up economic union since, in our view, progress on this front is a prerequisite to satisfactory progress on the monetary front. The Government will be particularly concerned to ensure that, in line with the concept of harmonious and balanced development throughout the Community laid down in the Rome Treaty, the programme will include adequate policies and provisions relating to regional development and to the sectors of our economy which need basic adaptation and reorientation to help us to close the gap between our standard of living and that of other Community generally.
Economic and monetary progress in the EEC will depend to a substantial degree on the level of economic and monetary stability in the other major trading nations. The unsettled conditions on the foreign-exchange markets over the last few months have underlined the necessity for pressing on with the search for an improved monetary system that will be more responsive to the needs of the times. We are associated with our EEC partners and with the other members of the International Monetary Fund in this work and I hope there will be early and fruitful results. All countries, big and small, need a stable economic and monetary climate if their trade and commerce are to expand.
Regional policy
The importance for this country of the Community's regional policy can hardly be over-emphasised. It was agreed at the Parsis Summit in October last that the correction of the structural and regional imbalances in the European Community should receive high priority and that particular attention should be given to those regional problems which result from the predominant position of agriculture in certain countries, from industrial change and structural underemployment. Under these guidelines, our problems would qualify for particular attention. Most important of all, the Summit agreed that a Regional Development Fund should be set up before 31st December, 1973.
The Government are pledged to working for a Community regional development policy a that will assist Irish agriculture and our western and our other underdeveloped regions. We intend, in accordance with this pledge, to do our utmost to see not only that the decisions of the Summit are implemented but that they are implemented in a manner and on a scale which reflects the major importance of regional policy for the future development of the Community. It is clear that, unless the major imbalances within the Community are reduced significantly, the Community will lack the cohesion essential to its further evolution.
In the implementation of Community regional policy, the main principles which we will strive to have adopted are these. First, the Regional Development Fund must be financed on a scale commensurate with the great tasks it will face. Second, its resources must be concentrated on areas where the most severe problems exist. Third, member States must be allowed a certain measure of flexibility and discretion in deciding and applying the measures that are most suited to tackling their regional problems, while, at the same time, national policies should constitute a sensible whole when seen at Community level. Finally, Community institutions must ensure that their actions on different policy fronts affecting regional growth support one another and that the principles mentioned are reflected in their decisions.
The Government will, of course, take any internal measures necessary to ensure that Ireland is ready to take full advantage of the opportunities which the Community regional policy will afford.
Budgetary policy 1972
When the 1972-73 budget was being prepared, the economy was then, as now, experiencing a high rate of price rise and a steep rate of increase in unit labour costs. As well, unemployment was high, and, for the third consecutive year, the economy was growing at a rate well below its longterm capacity. There existed side by side the need both to moderate inflation and to boost domestic demand. In the event, the budgetary policy chosen by my predecessor was designed primarily to improve the growth performance of the economy and also to contribute to a moderation of the pressure on costs and prices. Current expenditure was set at a high level and this, together with improved personal income tax reliefs, acted as a reflationary stimulus. To stimulate the economy further, it was decided to finance the deficit of £34.8 million partly by a receipt of surplus income from the Central Bank but mainly by borrowing.
It was estimated that these budgetary measures would raise the growth rate by about 1¾ percentage points between mid 1972 and mid 1973. It was explicitly indicated that, to the extent that increased tax revenue would arise from the impact of the budget on the economy, the projected deficit on current account would be reduced. In fact, extra tax revenue of £31 million arose from a high rate of inflation, the general effect of the budget on the economy, and also because of a strong rise in consumption of the "old reliables"—alcoholic liquor, hydrocarbon oils and tobacco —together with a sharp rise in motor vehicle customs duty receipts and certain estate duty windfalls. However, expenditure rose also—although at a lower pace of growth than in recent years and absorbed a substantial part of the increased buoyancy. The net effect was that the actual deficit on the current budget in 1972-73 turned out to be £5.47 million.
Capital budget 1972-73
Expenditure on the 1972-73 capital budget was £278 million, of which almost £249 million was incurred on the public capital programme. Details of the 1972-73 outturn are included in the booklet Capital Budget 1973 which was published recently.
Capital budget 1973-74
The public capital programme for 1973-74 has been set at a level of £305 million. This shows a substantial increase of over £56 million or nearly 23 per cent as compared with the expenditure in 1972-73. If we exclude the expenditures of Irish Shipping Ltd. and of the air companies, most of which are incurred abroad and financed from foreign borrowing, the programme represents an increase of 27 per cent over the 1972-73 outturn.
The importance of the programme for the advancement of national prosperity hardly needs to be stressed. The exceptionally large increase in the programme will provide a marked stimulus to economic activity this year.
Major provisions include some £76 million for housing and ancillary services—an increase of £21 million over last year's outturn; £19 million for educational buildings—an increase of nearly £3½ million; £57 million for agriculture—an increase of £11 million; £51 million for industry—an increase of £9 million, and £34 million for electricity development—an increase of £7 million. Details of the outlays and the financing are contained in the capital budget booklet.
Revenue and expenditure 1973-74
Total revenue for 1973-74 is estimated at £734.7 million. The main constituent—tax revenue excluding motor vehicle duties—I am placing at £614.2 million, an increase of £74½ million over the 1972-73 outturn. When appropriate adjustments are made for tax changes and other factors, the true buoyancy increase is £95 million or just over 18 per cent. This is an historically high buoyancy increase, both in absolute and percentage terms. While I need not emphasise the major difficulties in forecasting tax revenue growth in an inflationary situation, I am satisfied that this year's estimate is realistically based. It was arrived at after a careful analysis of the trend of tax revenue buoyancy in recent years and an examination of each individual tax head in the light of the macro-economic projections for the year.
Rates easement
Since taking up office, the Government have—in the limited time available to them—examined the non-capital expenditure allocations for 1973-74. Following this examination and in the light of the requirements of the prevailing economic situation, the Government have settled the pre-budget expenditure total at £754.9 million including the net sum of £12.7 million being provided towards easement of rates. The inclusion of this provision in the Book of Estimates gives effect to the promise made by the National Coalition that part of the health charges and housing subsidies would be transferred this year from the rates to the Exchequer, to be met from general taxation. What the Government have done is, first, to freeze the rates contribution to health charges and housing subsidies at their 1972-73 levels so that the full increases in these charges over the 1972-73 levels that would otherwise have fallen on the rates in this and future years will now be borne by the Exchequer.
In addition, the Government have decided to relieve ratepayers of the remaining liability in respect of health charges and housing subsidies. This decision will be implemented in four stages and the first such step has been taken. As a result of these decisions, local authorities need levy a rate for health charges and housing subsidies in 1973-74 equivalent to only 75 per cent of the rate levied in respect of them in 1972-73. This will make a substantial contribution towards the easing of inflationary pressures on ratepayers. The Book of Estimates also includes a grant of £3.29 million to the Road Fund to finance additional expenditure on roads.
With revenue at £734.7 million and expenditure at £754.9 million, there is thus an opening gap, before account is taken of specific budget changes, of £20.2 million. Full account has been taken, of course, as I have explained earlier, of the net saving attributable to EEC membership in arriving at this gap. Accordingly, it will be seen that, prior to the change of Government, the net saving to the Exchequer of £29 million, resulting mainly from the reduction of agricultural subsidies within the EEC, had sunk without trace in the sea of inflation.
Budgetary policy 1973-74
In determining an appropriate budgetary strategy for 1973-74, in the light of the options open to me as Minister for Finance, a wide variety of factors affecting our economy has to be taken into account. I must first of all have regard to the high rate of unemployment which must be reduced.
Our second major economic task is to slow down the continuing high rate of price increase, for economic no less than social reasons. The difficulty, of course, is that any action designed to deal with either of these problems in isolation could have serious adverse effects on the other and conflict with the Government's basic aim of significantly increasing employment opportunities. Moreover, in a survey of priorities, account must be taken of the Government's aim substantially to improve the relative position in our society of the lower paid and of the social welfare beneficiaries. Finally, the economy is faced with the continuing need for increased infrastructural expenditure if we are to compete effectively in the larger European economic arena.
It is obvious that there is no clearcut prescription in terms of budgetary policy that will simultaneously serve the various objectives. I concur, however, with the recent OECD judgment that the economy needs the continuing stimulus of substantially increased government expenditure in 1973-74 if its full growth potential is to be realised. This must be regarded as an economic priority for the year ahead.
Notwithstanding the pronounced boost to economic activity provided by the high level of this year's public capital programme, I am satisfied that a further contribution is required from the current budget. A further increase in current public expenditure is, indeed, unavoidable if the Government are to honour their social commitments. Since I start with an opening deficit, I have had to decide whether the enlarged deficit should be met by increases in taxation or by resort to borrowing. As increases in taxation of the order necessary to close the gap entirely would only accentuate inflationary pressures, I have had to rule these out. On the other hand, borrowing to meet in full the higher deficit would run the risk of overstimulating the economy and would unduly inflate borrowing requirements which are already stretched because of the substantially increased public capital programme.
Having reviewed all the options, I have decided to impose some additional taxation so as to reduce the deficit to a more tolerable level. The National Coalition's proposals for the easement of rates and the very substantial benefits provided for in today's budget will, thus, be implemented with only moderate increases in taxes in certain areas where the impace will be borne mainly by the better-off and will be least severe on the less well-off, whose relative position, I should add, will also be improved by the removal of value-added tax from foodstuffs.
I shall now outline the new expenditure proposals which are being provided for today in addition to those included in the Book of Estimates. The major item in this category is the set of social welfare improvements.
Social Welfare
The pre-election statements of the National Coalition Government made it clear that financial provision would be made in this budget for improving and extending the social welfare and health services. I am happy to say that the steps which we are taking in fulfilment of this commitment exceed anything ever before done in this field in a single budget.
I mention here, as an indication of the magnitude of the proposals, that they will involve a total expenditure of about £51 million in the current financial year and a total of £68.7 million in a full year, of which the Exchequer will bear £38.9 million and £52.5 million, respectively.
The increases in rates of social insurance benefits, social assistance payments and children's allowances which are being provided go far beyond covering the increase in the cost of living since these payments were last increased, and also go a long way towards bringing these various payments, particularly pensions and children's allowances, into line with those payable in neighbouring countries.
Because of the great variety of improvements in the social welfare and health services provided for in this budget, I will refer at this stage only to the main points. A more detailed statement will be found in the summary of the principal features of the budget which will be circulated shortly. The personal rates of all social insurance and social assistance benefits, as well as health allowances, will be increased by £1 per week. There will be an increase of 50p in addition for adult dependants, with an additional increase of 50p for adult dependants, aged 69 or more, of old age contributory pensioners. Child dependant rates in both the insurance and assistance categories will be increased by 50p. Exceptionally, the increase for child dependants of widows and deserted wives will be 65p per week.
To improve further the position of families, the Government have approved a substantial increase in payments under the general children's allowances scheme. The present rates of payment under this scheme are 50p per month for the first child, £1.50 per month for the second child and £2.25 per month for the third and subsequent children. These allowances will now be increased by £1.50 per month for each child. Thus, the allowances will become £2.00 per month for the first child, £3.00 for the second child and £3.75 for the third and each of the subsequent children. At the same time, the maximum age for receipt of those allowances will be raised to enable children who are continuing in full-time education, are in apprenticeship or are permanently incapacitated, to receive the allowances until they reach the age of 18, instead of 16 as at present. As a partial contribution to the cost of these proposals, the allowances under the Income Tax Acts for each such child will be reduced in the case of taxpayers whose net incomes exceed £2,500. This will yield £1 million in the current financial year and £2 million in a full year.
The position of the aged will be also much improved by reducing the qualifying age and easing the means test for old age pensions. The qualifying age for both contributory and non-contributory old age pensions will be reduced by one year from 70 years to 69. So also will the qualifying age for the free travel, free electricity and free television licences schemes. At present, the maximum rates of old age and widows non-contributory pensions and deserted wives allowances are payable only to those whose means are assessed as "nil" while assessed means in excess of £5.60 per week totally disqualify a person without dependants from receiving any pension. The means test will now be radically alleviated by disregarding assessed means of up to £4 per week so that a person with means not exceeding that figure will qualify for full pension, while total disqualification from pension will not arise for a person without dependants until his or her assessed means exceed £9.50 per week. There will be further extensions for those with dependants. This very substantial advance will apply, as I have said, not just to non-contributory old age pensions, but also to non-contributory widows pensions and deserted wives allowances.
The means test for the disabled persons maintenance allowances scheme will also be greatly eased. At present, in the assessment of means of a claimant under this scheme, not only the claimant's own means but also those of near relatives are taken into account. In future, only the means of the claimants themselves and of their spouses will be reckoned.
In the past, there has been much criticism of the postponement of payments of new social insurance and assistance benefits. I am, therefore, glad to announce that all the foregoing improvements will be effective from July this year: in previous years social assistance and health improvements took effect from August and social insurance and children's allowances improvements from October.
Finally, I am putting aside £2.5 million in the current year to cover a number of important improvements in the social services generally which will cost £4.2 million in a full year. Those areas where help is most needed have, of course, been long apparent or have been pinpointed through the work and representations of voluntary bodies. Indeed, one of the Government's main aims in the application of this sum will be to encourage and assist existing voluntary efforts to identify and alleviare local community needs. To give a substantial impetus to this most necessary work and to enable a considerable expansion to take place, a sum of £0.5 million will be devoted this year to home care welfare services, building up to £1 million in a full year.
One particular area where assistance is badly needed and no direct help is available at present is for the severely physically and mentally handicapped under 16 years of age who are living at home and need constant care. For these a new allowance will be introduced, costing about £0.45 million this year and up to £0.9 million a year thereafter.
I am, furthermore, allocating £0.2 million this year and £0.24 million in a full year as a first step towards the implementation by the Ministers concerned of the various proposals in relation to deprived children which have been made by CARE.
In welcoming recently the Report of the Commission on the Status of Women, I stressed the importance of that document as a contribution to the formulation of a strategy of social refrom. As a practical earnest of this Government's intentions in this regard, I propose to devote the remaining £1.35 million of the sum I have mentioned to a number of significant improvements in the social services so far as they relate to women, of which I will mention the following examples.
There has been growing concern in recent years about the lack of support for unmarried mothers who keep their children. This year a scheme will be introduced which will provide assistance for them on broadly the same basis as the existing scheme of allowances for deserted wives.
Although the existing non-contributory scheme of allowances for deserted wives which was introduced in 1970 has, in general, been successful in providing much-needed assistance for this needy section of the population, experience of its operation has shown that certain improvements and easements in the regulations are desirable: I am now providing for these. Perhaps the most notable defect of the existing scheme has been that hitherto if a deserted wife was divorced abroad by her husband she became ineligible to receive a deserted wives allowance. This practice, which added injury to insult, will now be abandoned and such persons will in future qualify for deserted wives' allowance.
Full details of all of the proposals for improvements in the social services generally will be given in due course by the Tánaiste and Minister for Health and Social Welfare.
There is one final point to which I wish to refer. It relates to a change this year in the financing of the social insurance elements in the improvements which I have just announced. This year, the employer will be asked to bear a higher proportion than usual of the cost of those improvements for two reasons—first, in view of the relief which employers at large are being afforded in their rates liability on industrial and commercial premises and, secondly, as a move towards the continental pattern of allocation of the cost of social insurance schemes.
Aid to developing countries
During the debate on the Estimates for his Department last week, the Minister for Foreign Affairs announced the Government's intention to develop a comprehensive programme of official aid for the developing countries. I believe that in pursuing this course the Government will be responding to the generous feelings of the Irish people towards the poorer regions in the world community.
The elaboration of such a programme, which will entail commitments to substantial expenditure in the years ahead, will take some time. Meantime, I propose to make available during this financial year a further £250,000 on top of the sum of £1¼ million already being provided in the Estimates Volume and elsewhere. The total provision for official development assistance, at some £1½ million, is double the amount provided in 1972-73. It will be applied to increase the level of Government contributions to agencies tradionally engaged in administering multilateral aid, to contribute our fair share of aid through the European Communities, and towards the development of new projects such as the Central Agency for service by Irish personnel on economic and social projects in developing countries already referred to by the Minister for Foreign Affairs.
Deontais Ghaeltachta le haghaidh staidéar na Gaeilge
Nuair a bheartaigh and Rialtas nach mbeadh pas sa Ghaeilge riachtanach feasta chun an Ardteistiméireacht, an Mheánteistiméireacht nó an Teastas Ghrúpa a ghnóthú, chinn siad freisin ar na deontais a dhúbailt atá iníochta faoi láthair le mná tí a chuireann lóistín ar fail do pháistí a fhreastalaíonn cúrsaí Samhraidh Gaeilge i gceantair Ghaeltachta. Méadófar an deontas ó £12 go dtí £24 agus meastar gurb é £160,000 costas ar ardú seo don Státchiste i mbliana. Is léiriú é seo ar pholasaí an Rialtais staidéar na Gaeilge a chothú agus a spreagadh trí ghríosachtaí.
Higher renumeration in the public sector
The Government have given full consideration to the recommendations for pay revisions which were made in the Report of the Review Body on Higher Remuneration in the public sector. They have considered the Review Body's recommendations in the light of the Report of the Special Committee of the Employer/Labour Conference which was set up to consider and advise on:
the extent to which effect might be given to the Review Body's recommendations for each group covered in the report on the basis of, and for the duration of, the National Agreement.
Broadly speaking, the Special Committee of the Conference recommended in December last that the national pay agreements should apply to the categories concerned. The Government consider that there is no justification for further delay in dealing with the matter and have decided, with some qualifications, mainly regarding the operative date, to accept the special committee's recommendation. In the case of members of the Government and of the Houses of the Oireachtas, they have decided that the consequential increase will take place from 1st July next. Increases for the judiciary and for officials concerned in the public service will take effect as from the relevant dates in the national pay agreements.
The special committee of the Employer/Labour Conference stated that some of the groups covered by their report might have claims under the "anomaly" provisions of the national pay agreements. I propose to have these resolved at the earliest possible date. Apart from any other consideration, delay will add to the retrospective elements in the ultimate settlement.
I am providing £1 million to cover payments likely to arise in this year from these decisions. This sum is necessarily conjectural as it is not possible, at this stage, to assess the cost of "anomaly" claims.
Public service pensions
The Government reaffirm the principle of parity for public service pensioners. Parity will be implemented on the basis of revising pensions with effect from 1st October each year by reference to the rates of pay in force on 1st June in that year. Provision has been made accordingly in this year's Book of Estimates.
Subject to what I have to say later about the Road Fund, this completes my description of the expenditure side of today's budget and I shall now turn to taxation aspects.
Value-added tax
One of the most important elements in the National Coalition programme is the removal of the value-added tax from food. Expenditure on food constitutes a significant proportion of the average housewife's total weekly outgoings and, in the case of the less well off, the food bill is by far the largest item in their weekly outlay. As I mentioned earlier, when dealing with prices generally, it is, unfortunatly, in food prices that the greatest increases have taken place over the past year or so.
Accordingly, I am happy to announce that value-added tax is being removed from food from the earliest date practicable. This is the most immediate and most practical step that can be taken to bring about relief from rising food prices. The Government had hoped that it would have been possible to implement this relief from an early date. But, because of the alterations which will have to be made by traders to operate the revised system, it is not possible to introduce the change before 1st September next. To ensure that all the necessary preparations can be made by that date, I have arranged for the Revenue Commissioners to consult with the business community in the matter. These consultations have already started.
I have decided, however, that there would be no justification for removing the tax from certain luxury consumable items which affect family outlay only marginally. The categories to which the concession will not be extended, therefore, include alcoholic drink, sweets, chocolates, ice cream, confectionery, and soft drinks. On the other hand, I have decided to extend the concession to include oral medicines for human consumption.
As I have already mentioned, the Government regard it as essential to ensure that there will be a full corresponding reduction in the prices charged by traders for the items from which the tax is being removed. Prices will be carefully monitored by the Department of Industry and Commerce and the full powers under the Prices Acts will be invoked in any case where a trader is not implementing the reduction. I should point out that, while the rate of tax that is being abolished is of course 5.26 per cent, the corresponding reduction in retail prices is 5 per cent. This difference is accounted for by the fact that the 5.26 per cent rate is calculated on the price before tax whereas the price reduction will be calculated on the full price including tax.
The cost to the Exchequer of the relief will be £16.75 million in a full year and £8.35 million this year. This cost, together with a modest contribution towards reducing the current account deficit this year, will be recovered within the value-added tax system by increasing the existing rates on other items. It has been decided to keep the increase as low as possible on the rate applicable to basic commodtities and to increase to a greater extent the rates on other, less essential, items.
A part from dancing, where a special regime applies, the new scheme of value-added tax rates, accordingly, will be as follows:
A zero-rate, instead of the present 5.26 per cent rate, will apply to food including oral medicines but excluding the less essential items I have mentioned.
A 6.75 per cent rate, instead of 5.26 per cent, will apply to services and to the other goods at present subject to the latter rate, for example, alcoholic liquor, tobacco, petrol, fuel and electricity, clothing and footwear. The effective rate on housing will, however, remain unchanged at about 3 per cent.
A 19.5 per cent rate will apply to those goods at present subject to the 16.37 per cent rate, for example, hardware, electrical goods and furniture, furnishings, jewellery and sports equipment.
A revised rate of 36.75 per cent will apply to those goods at present subject to the 30.26 per cent rate, for example, motor cars, television sets and radios.
Details of the revised arrangements, including the exact definitions of the items to be zero-rated as food, will be published at an early date.
In joining the EEC we took upon ourselves certain commitments regarding the harmonisation of value-added taxes in the Community. As yet, however, the degree of harmonisation achieved by the EEC is not such as to preclude substantial differences in the rates and structure of VAT applied in the member states, and, accordingly, in making the changes just announced, we are not in conflict with present Community legislation.
The pace and degree of the movement towards a Community-wide unification of the structure of the tax and, later still, towards a narrowing of the differences between the various national rates of tax are matters for discussion and agreement between the member states.
Death Duties
The Government, before taking up office, undertook to abolish estate duty and to replace it with a new form of taxation of capital. This commitment will be honoured. However, any radical reshaping of our present system of taxing capital is a matter that requires detailed consideration. The question is being studied in depth and a White Paper will be published as soon as possible. This will afford all interested parties an opportunity to give their views on this important and complicated matter. The speed at which it will be possible to replace estate duty by a new form of taxation on capital will, therefore, depend on the cooperation of the interests concerned.
Meanwhile, I have decided on a number of proposals which will greatly alleviate the present burden of estate duty in those cases in which hardship is most likely to arise under the present system.
Increase in the general exemption limits
First, I propose to raise the general exemption limit for estate duty from £7,500 to £10,000. This will provide significant relief in the case of smaller estates and is a move towards the complete abolition of the duty. At present, legacy and succession duties also apply in the case of estates exceeding £7,500 and I propose to increase this limit to £10,000.
Abatement for widows and dependent children
Next, I propose to double the present estate duty abatments for widows from £2,000 to £4,000 and those for dependent children from £1,000 each to £2,000 each. These abatements apply to estates not exceeding £100,000. The increased relief will mean that property passing to a widow alone will be exempt from duty where the value of the estate does not exceed £25,000 as against £17,750 at present. The reliefs will raise the exemption ceiling in the case of a widow with one dependent child from £21,430 to £33,333 and with three dependent children from the present figure of £30,200 to £41,666. These limits will also be further increased, in appropriate cases, by a new relief which I am proposing for life insurance benefits and by an improvement which I am proposing to the present relief in respect of superannuation benefits to which I shall now refer.
Insurance policy exemption
I propose to exclude from the value of an estate for estate duty purposes the first £7,500 of life insurance benefits. At present superannuation death benefits of £7,500 or less are exempt from estate duty. In my view it is difficult to distinguish in principal between provision for old age or retirement or by means of a contribution to a superannuation scheme by employees and contributions to, say, endowment insurance which in many cases is a substitute for a superannuation scheme in the case of self-employed persons.
Superannuation death benefits
As I have mentioned, while superannuation death benefits are exempt at present up to £7,500, once the benefits exceed this figure the full amount is liable to duty. This restriction can nowadays cause hardship in many cases particularly since the estimated present market value of the pension payable to a widow under a superannuation scheme is included as part of the exempt sum. It is, accordingly, proposed to remove the restriction so that, irrespective of the aggregate value of the superannuation death benefits, the first £7,500 will be excluded from the estate and will not be subject to estate duty. This will ensure equal treatment as between persons whose conditions of employment provide for a superannuation scheme and persons who must effect insurance to secure similar benefits.
Artifical valuation
The final measure of estate duty relief relates to agricultural land. Agricultural land is valued for estate duty purposes on an artifical basis, its value being taken as 25 times the rateable value, less the redemption value of the land purchase annuity. Any other charges on the lands for which the deceased was personally liable are also deducted from the value of the estate. If the value of the total estate on this basis is less than £2,000, this artificial valuation system is adopted and no estate duty is payable. I now propose to raise this limit to £3,000, thereby relieving many more farmers' estates from estate duty. This will go some distance towards meeting the special problems which estate duty has posed for farmers. Farmer's estates will also, of course, benefit, in appropriate cases, from the other estate duty concessions I have announced. These death duty reliefs will take effect in the case of estates of persons dying on or after today.
Inheritance taxes
Legacy duty or succession duty, as appropriate, is chargeable at the rate of 5 per cent on property passing to brothers and sisters of the deceased and their spouses and to descendants of such brothers and sisters and to their spouses and, at 10 per cent, on property passing to more distant relatives and strangers. I propose to double the rates of these duties. As with the reliefs, the increases will take effect in the cases of estates of persons dying on or after today. These duties do not apply at all in the case of property passing to a spouse or children of the deceased.
The death duty reliefs which I have announced represent a major reduction in the burden of death duties without precedent in the history of the State. They will cost £0.75 million this year and £1.75 million in a full year. This cost will be partly offset by the yield from the increases in the legacy and succession duties which, because of the time allowed for payment of these duties, will yield only an extra £0.05 million this year and £0.25 million next year. The eventual full year yield of the increased rates is estimated at £1 million. Thus the net cost to the Exchequer of all the death duty changes is estimated at £0.7 million this year, £1.5 million in 1974-75 and £0.75 million a year eventually.
Income Taxation Simplification
I have been considering proposals for the reform of personal income tax. Such a reform is particularly called for because of the dramatic increase in the number of taxpayers now within the scope of the tax. A basic goal of the reform would be to promote voluntary compliance by taxpayers with the income tax code by making it as simple as possible for them to understand but, of course, sufficiently detailed to prevent abuse by those who wish either to exploit loopholes in the law or to evade paying their proper share. I envisage a reform of the basic structure that will make it less complex and more manageable than the present system which, essentially, has remained unchanged since the foundation of the State.
The changes I have in mind involve the merging of the present anchronistic and administratively costly dual structure of income tax and sur-tax into a unified system, graduated over the whole range of incomes, and the introduction of rounded personal allowances. The existing distinction between earned income and investment income would be substantially maintained by the grant of earned income relief of a fixed amount, as well as by the introduction of a lower rate of tax on the first slice of earned income. Such a scheme would help to remove the confusion at present existing in the minds of many taxpayers with earned income that their marginal rate of tax is 35 per cent whereas this rate applies only after the deduction for earned income relief has been made.
My aim is to devise a scheme which will achieve the greatest degree of simplification at minimum cost to the Exchequer. If a satisfactory scheme can be devised, the necessary legislative provisions will be enacted at the earliest feasible date. In the normal course, the new scheme would come into operation next year, 1974-75, but the timing of its introduction would have to be examined carefully in the light of the present and prospective burdens on the Revenue Commissioners in the tax field generally.
Evasion
Immediately, and without prejudice to the more fundamental reform I have just referred to, certain measures require to be taken in the income tax field.
One of the reasons why our rates of income taxation are so high is that a great many people who ought to pay a lot of tax pay little or, indeed, pay no tax at all. As far back as 1962, the Commission on Income Taxation referred, in their seventh report, to the belief that evasion was widespread. This belief is probably even more generally held today, and has serious psychological as well as revenue consequences in that it tends to create a climate where evasion becomes socially acceptable.
Steps have been taken in recent years to counter evasion. These have not, however, proved adequate to deal with the problem, and further comprehensive provisions to ensure that the burden of the tax will fall more equitable are being studied. In the meantime certain measures will be taken in the forthcoming Finance Bill, among which are the following.
Penalties and interest charges
First it is proposed to rationalise the income tax penalties legislation so as to enable defaulters to be dealt with more effectively. This will be accompanied by the imposition of a minimum interest charge, payable by employers, in respect of PAYE tax not paid over by them within the stipulated time. Such a minimum interest charge already applies in the case of value-added tax. In addition, I propose to introduce legislation to ensure that, in general, interest on overdue tax will not be a permissible deduction for tax purposes.
Business entertainment
Next I propose to introduce a stricter test for determining the admissibility of expenditure incurred on business entertainment. There has been widespread criticism that some concerns are entertaining on an unduly lavish scale, ostensibly for the purpose of building up the goodwill required to secure and retain customers. Under existing law, expenses on entertainment, however lavish, are admissible in computing the profits or gains of a trade or profession if they can be shown to have been incurred "wholly and exclusively" for the purposes of the trade or profession. While reasonable expenses incurred on business entertainment will, of course, continue to be admissible, I propose to introduce legislation to amend the Schedule D expenses rule so that such expenses will not be deductible unless they have been incurred, not only wholly and exclusively, but also necessarily for the purposes of the trade or profession.
There will also be a restriction on the giving of capital allowances in respect of the use of a capital asset, such as a yacht, for purposes of entertainment except where such use is connected with business entertainment provided wholly, exclusively and necessarily for the purposes of the trade or profession.
Capital allowances for cars costing over £2,500
The Finance Bill will also contain a measure which will have the effect of restricting the amount of capital allowances in respect to motor cars used by business and professional people to the allowances appropriate to a maximum price of £2,500 for each car. This will ensure that business concerns who want their executives to use more expensive cars will have to carry the excess of more than £2,500 themselves and not pass on, in effect, up to half the cost to the Exchequer.
