Coming up to budget time a Finance Minister is seldom short of advice. Anxieties and uncertainties generated by the current global economic unrest have this year multiplied the plethora of available suggestions. If the ideas offered converged my task would be an easy one but unfortunately contradictions predominate.
King Solomon might never have achieved fame had he not had to make a difficult decision upon irreconcilable claims. The duty I have of holding a balance between conflicting pressures is no less daunting than Solomon's dilemma but unfortunately I have no pretensions to either his wisdom or wealth. This statement therefore will be a straightforward account of the Government's view as to how best to use the nation's resources in the coming year and how those resources can be supplemented by fair taxation and prudent borrowing.
The intensity, duration and unprecedented nature of the unfavourable economic forces operating across the world since late 1973 add immensely to the difficulty of preparing the national budget of any one country. While there is a natural tendency to look upon the budget as the principal national corrective measure, the truth today is that a budget is but one of several economic influences, and on its own it can have but limited effect. It may help to ease problems for some by spreading the burden of doing so over those who can most afford it. Until such time, however, as the world, through agreed international action, finds a way out of the traumatic economic disarray caused by the oil crisis, governments will be seriously hampered in efforts to improve significantly national environments through the instrumentality of national budgets.
I am emphasising this at the commencement of my budget statement because of the necessity to dispel any illusions as to the effectiveness of mere budgetary proposals in the present world economic upheaval. Today, as we are not dealing with traditional problems we cannot rely solely on traditional ways of handling them.
This is the first year that the calendar and financial years for both Exchequer and local authority purposes coincide. The 1974 budget related only to the nine months ended 31st December last. For the first time in the history of the State, the current and capital budgets, the Estimates for the Public Services and the Finance accounts will relate to the full calendar year. The transition to the calendar year as fiscal year will be completed when the income tax year is also brought into line. Because of the need to give priority to the restructuring of the taxation code—a task which imposes a heavy burden of work on the Revenue Commissioners—it will, however, be a number of years yet before the income tax year and the financial year coincide.
It is not necessary for me to describe the economic situation in the customary detail this year since the Government's White Paper A National Partnership, which was presented to both Houses of the Oireachtas in November last, contains a comprehensive review of the economic scene both on the national and on the international plane. Significant developments since then are that, while the overall economic picture on the international level has deteriorated still further, there have been the welcome German and US decisions to expand their economies and a continued easing of prices on the world commodity markets. At home, significant shifts in the scene in the interval have been a further increase in the number unemployed and a continuing slackening of domestic demand which is likely to have brought the growth rate nearer to 2 per cent than 3 per cent. Because of the many imponderables and uncertainties in the international situation and the present paucity of information relating to 1974, it would be pointless to publish another document on the economy so soon after November's White Paper. Publication, therefore, of the annual economic Review and Outlook, which normally appears prior to the budget, will be deferred until Easter by which time more information relating to 1974 should be available.
When I introduced my budget last April the economy was in a healthy state but, as I indicated at that time, it was threatened by the dangers following in the wake of the oil crisis which were menacing our economy and the economies of the rest of the world. I foresaw a slower growth in economic activity in 1974. Unfortunately, the world economy and, with it, our own small and open economy have been even more severely affected than anyone at that time expected. Our rate of economic growth may now be not much more than 2 per cent in 1974. This growth, though disappointingly small in normal times, compares more than favourably with that of other countries some of which suffered negative growth in 1974. In common with other oil importing countries our balance of payments deficit for the year and our rate of inflation are at unprecedently high levels.
A National Partnership
In the White Paper published in November these effects were described in detail. The White Paper also set out the Government's approach to the problems presented by the difficult global economic situation and made it clear that in solving these problems priority is to be given to the maintenance of employment and the preservation of the living standards of our community. The basic message of the paper is that a spirit of national partnership is now needed from the country as a whole and that the most serious consequences could result if the various groups in the community fail to co-operate in overcoming our present difficulties. The national partnership envisaged by the Government is designed to maintain during this critical period the momentum towards social reform and to ensure fair sharing. The Government will have discussions, within the next few weeks, with all interested parties as to how best to achieve these objectives. Today's budget contains the measures in the fiscal field and in the field of social policy which the Government believe should serve as a basis for the necessary co-operation.
Central economic strategy 1975
As I have said, priority is being given in the Government's approach to present economic problems to maintaining employment and preserving living standards. This will be the central economic strategy in 1975. Therefore, while fully aware of the need to reduce inflation, the Government have decided against measures that would result in any significant disimprovement in internal demand because of the effect which such measures would have on employment. As pointed out in the White Paper, failure to pursue the objectives of maintaining employment and preserving living standards would be likely to lead to further inflationary pressures since groups in the community whose living standards would be hit would feel impelled to seek higher money incomes and since the necessity to support an ever growing number of unemployed and their dependants would raise sharply the amount to be levied in taxation.
A decision of major importance to the economy in 1975 concerns the action to be taken in regard to the balance of payments deficit of the order of £300 million in 1974 which has reached, at 10 per cent of our GNP, a very high figure by international standards. It represents 60 per cent of our external reserves. While a deficit of this order would normally call for immediate corrective measures, the Government have decided, in line with the central economic strategy for the year, that the deficit should, instead, be brought into line in a phased manner over several years. They are satisfied that, apart from the damaging effect which precipitate action would have on domestic demand, this course is justified because the deficit is in part due to exceptional factors such as the abnormal increase in oil and other import prices and the lower prices for cattle and beef exports. Steps to reduce the deficit will have to be started this year and continued for several years to come. Any domestic action that would cause it to rise must of course be avoided. In short we will have to be content with less at home so that we can pay for what we must import from abroad. Unless we start now the corrective process will be more abrupt and more painful.
The extent to which incomes increase is of critical importance to the Irish economy in 1975. Even if there were no further round of pay increases this year the total carryover effect of the present national pay agreement, including the threshold payment, will mean that the level of non-agricultural wages and salaries in 1975 will be almost 25 per cent higher than in 1974. Thus, even without further increases, domestic incomes alone will generate greater upward pressure on consumer prices this year than last year—and, since we have no control over that large part of our inflation which is imported, it is all the more necessary for us to reduce the inflation originating at home. Since the maintenance of our economic growth depends to such a large extent on an expansion of exports, our costs must now more than ever before remain competitive even if Irish goods are to maintain their share of the home market.
The parties to the National Pay Agreement who are due to enter into negotiations shortly on a new agreement will no doubt be as concerned as the Government are to ensure that the objectives I have indicated will be met. Moderation in income increases in 1975 is therefore imperative if we are to halt the serious deterioration in employment. Disproportionate increases for any one group can be achieved only at the expense of weaker sections and increased unemployment and will damage the overall interest of the community. The Government have indicated that they will examine in consultation with the interests concerned how best to arrange that earnings under any future pay agreement may be protected, through adjustments in line with the cost of living, against erosion from price increases. They have also undertaken to introduce, if necessary, legislation to ensure that those whose incomes do not come from wages or salaries will observe the same restraints as are being sought from the wage and salary sector. Furthermore, the Government will seek to ensure that any redistribution of income through the tax system in favour of the deprived sections of the community will not be nullified by the action of better placed groups. It must be accepted that living standards are not going to rise for some time and that we must moderate our income demands to avoid increased unemployment and permanent damage to the economy. If we do so, we will be well placed to move forward again when the international economic situation permits.
Public service pay
The total provision for public service pay in the 1975 Estimates volume is £381.2 million which is about one third of Government current expenditure. Of course, this figure does not include a provision of £37 million for public service pensions which rise annually in line with pay increases. The provision for public service pensions in 1975 is in fact £6½ million greater than the corresponding provision for 1974-75.
The public service pay figure of £381.2 million represents the pay cost of the Civil Service, national and secondary teachers, the Defence Forces and Garda, together with the Exchequer contribution to the pay of nurses, doctors and other health board employees and vocational teachers. It shows an increase of about £67 million or 21.3 per cent over the estimated cost in 1974-75. While the provision covers the bulk of the cost of the escalator clause in the 1974 National Pay Agreement which will come into effect for most of these staffs on 1st March, 1975, it does not include, for example, the cost of a new agreement in 1975.
Of the increased cost of £67 million, some £40 million is referable to the 1974 National Pay Agreement, that is, to the carryover effect into 1975 of the two phases of that agreement, which operated for only part of 1974-75, and to the escalator clause.
I think that it is still not generally realised how costly were the terms of the last National Pay Agreement to the public sector as well as to the private sector. In my budget statement of April last I pointed out that its terms would add to, rather than alleviate, the pressures on costs and prices. Under the agreement the average wage and salary earner will receive in one year increases totalling about 30 per cent of his original pay. In the public service alone the cost of implementing the standard increases in that agreement will amount to the immense figure of about £90 million on an annual basis.
Growth of the public service
About £8.3 million of the increased cost of the public service in 1975 is attributable to the extra cost in that year of necessary additional numbers recruited in the course of 1974. At 1st January, 1974, the total number in the public service, that is, teachers, the Garda, Defence Forces, the Civil Service, nurses, doctors and other health board employees whose pay falls to be met by the Exchequer either in whole or in part came to 131,000 and had increased by 20,000, that is by 18 per cent, over the preceding period of three years. The rate of increase varied from sector to sector.
In the case of the Defence Forces, the increase in numbers was 26 per cent, and for the Garda, notwithstanding considerable extra overtime, it came to 20 per cent. The reason for the growth of the security services has been the disruption and insecurity caused here by evil-doers connected with disturbances in Northern Ireland. This extra security pay and non-pay is costing our taxpayers about £22 million annually. The Government will not stint necessary expenditure to protect lives, liberties and property against violent men, but it is worth reflecting how much better such money could be expended in providing permanent productive jobs, more houses and other necessary improvements.
Other significant increases in numbers of public servants are due to expanding services which were responsible for a growth of 20 per cent in numbers employed by health boards. The number of teachers grew by 19 per cent, the principal causes being the increase in the number of pupils and improvements in the pupil-teacher ratios.
In the Civil Service itself, including industrial staff, the expansion was 13 per cent and, in general, is attributable to the provision of new, improved or extended services to meet public demand. A large proportion of the extra staff was assigned for telephone development to the Department of Posts and Telegraphs, to the Department of Social Welfare to cope with improved services and to the Revenue Commissioners for revenue collection. In a number of Departments our membership of the EEC has added significantly to the pressures for additional staff.
Because of the high cost of the public service, steps have already been taken to ensure that there is strict control over expansion consistent with the provision of adequate services. As Minister for the Public Service, I have to be particularly vigilant in keeping down the growth in staff numbers in the Civil Service. It is equally important that expansion in other areas of the public service should be controlled and the Ministers concerned have been investigating how growth might be contained. During 1975 a special effort will be made to improve efficiency throughout the public service and to reduce, through redeployment, the need for additional staff.
As well as expansion a number of other factors have contributed to the greatly increased cost to the National Exchequer of the public service in 1975. The transfer to the Exchequer from the rates of a further instalment of the health boards' pay bill will account for another £4.7 million this year—a total of nearly £20 million this year in respect of health services including increases in costs since the transfer began in 1973. Provision for meeting the 1974 National Agreement obligation in relation to equal pay will cost £4 million this year. Equal pay will in the period from June, 1973, when the first step was taken, to the end of 1975 have cost the Exchequer directly about £11 million. The remaining £10 million of the increased cost in 1975 is accounted for by a variety of miscellaneous items such as overtime, allowances in the nature of pay, increases in social welfare contributions and salary increments.
To sum up, therefore, even before I come to consider what may happen when the 1974 National Pay Agreement expires—and without providing for any "anomaly" or other special increases as yet unsettled—I have to provide this additional £67 million for public sector pay. The sheer size of this increase which, as I have mentioned, is not the full extent of the extra cost, will, I hope, bring home to everyone the crippling restrictions on advances in other fields which could be imposed if, in addition to this sum, the Exchequer—the pool of the community's resources—had to bear an excessive burden in 1975 under a new National Pay Agreement. In deciding what amounts must be added to the Estimates Volume provision to cover any general pay movements after the current agreement expires—a matter which I deal with later—I am proceeding on the basis that all concerned with the negotiation and settlement of income increases in 1975 will appreciate the gravity of the crisis facing us and will show the moderation that is essential if we are to protect as far as possible employment and living standards.
No one should be in any doubt, however, regarding the impossible burden which would be placed on the community as a whole if this moderation does not materialise. Clearly, with a total public service pay bill of the order of £400 million a year, any further significant increases could leave the State no option but to cut back on desirable expenditure in other areas of vital economic and social concern. A heavy responsibility rests, therefore, on those involved in pay negotiations to have due regard to the economy generally and to the welfare of the less well-off sections of our community.
The Government have been increasingly concerned at the extent to which, in the economy at large, "anomaly" and other special increases have come on top of the already inflationary standard increases of the 1974 National Agreement. Apart from any general round of pay increases for the public service that might follow the current agreement, the pay bill would also be significantly affected if there were to be expensive "anomaly" increases in the months ahead. Because of the closely integrated structure of the public service there is always the danger of pressure to extend anomaly awards for key grades not only to the directly related grades but also from one part of the public service to another. Given that the annual pay bill is now of the order of £400 million, the cost of potential repercussions of anomaly increases could be alarmingly high. All the parties to the 1974 Agreement went on record as saying that, in view of the provisions of the earlier agreements, anomaly claims under the 1974 Agreement should, to quote the document "arise only in a limited number of cases". It is vital that this understanding should be fully honoured by all sections of the community and that all anomaly and special claims under the National Agreement be subject to the most critical scrutiny. In deciding on the size of the budgetary provision to be made to cover increases in the public sector resulting from these claims, I am, however, counting on the readiness of all sections of the community to accept the need for exercising the utmost moderation.
I would emphasise the phrase "all sections of the community" because, to a large extent, what happens outside determines what I have to provide for the public service. It is inherent in the terms of the National Agreement —and, indeed, in any approach based on fair comparisons—that adjustments in the pay and conditions of some public service groups may be necessary, from time to time, if they are not to fall unjustifiably behind their counterparts outside. Of course, if general moderation does not prevail, more money will have to be found from the taxpayer or consumer, or highly desirable expenditure in other areas will have to be cut. This can only lead to further increases in unemployment.
Public service arbitration machinery
The Government are perturbed at the extent to which the existence of a large number of separate arbitration schemes in the public sector may be contributing to expensive "leapfrogging" claims, not so much between the public and private sectors as within the public service and state-sponsored body area itself. Such self-perpetuating claims could not only put intolerable burdens on the community but could, in due course, disturb a reasonable balance between public and private pay rates.
The major public service groups— Civil Service, teachers, Garda and local authority and health board employees—all have their separate conciliation and arbitration schemes and the findings of the individual arbitration boards are not always mutually consistent. Furthermore, certain State-sponsored bodies have their own internal machinery as well as having access to the Labour Court. It is essential in these circumstances to review the operation of the existing machinery with a view to eliminating the purely "leap-frogging" aspects while ensuring that the rights of the public servants to equal treatment with other groups are adequately safeguarded. This matter has already been taken up by the Minister for Labour and myself in consultation with the Irish Congress of Trade Unions and we intend to pursue it with them as a matter of priority.
Departmental expenditure allocations 1975
The Government decided that the 1975 departmental expenditure allocations, both capital and non-capital, should be fixed in the context of the twin national objectives to which I have already referred of maintaining employment and preserving living standards. In the allocation of available resources, priority was given to the creation of new and the preservation of existing employment by means of grants and loans for industry, grants for training workers and grants for the promotion of exports. Expenditure on building and construction, because of its high employment content, both direct and indirect, and because it is largely concerned with the provision of the social infrastructure necessary for future industrial development, was also given a high rating. In the agricultural sector, the provisions for grants and loans to farmers have been significantly increased.
Non-capital supply services 1975
The 1975 Estimates volume, published last month, provides for non-capital expenditure totalling £960 million in 1975. This represents an increase of £180 million, that is 23 per cent, over the corresponding 1974/75 original estimates or about £138 million, that is 17 per cent, when account is taken of Supplementary Estimates. This increase reflects the persistent tendency of public expenditure to grow at a fast rate. Many factors have contributed to this rapid growth. For example, increased expenditure on the infrastructural development necessary for economic growth; greater State participation in the operation and stimulation of the economy; additional expenditure on social welfare, medical care, education and housing.
The major items making up the increase of £180 million in non-capital expenditure in 1975 are Health, an increase of £46.4 million; Education, an increase of £38.7 million; Social Welfare, at existing welfare rates, an increase of £28.4 million; Posts and Telegraphs, an increase of £21.3 million; Justice group, an increase of £13.1 million; Agriculture, an increase of £12.2 million; and Defence, an increase of £10.9 million.
The 1975 non-capital expenditure Estimates include a number of significant provisions to which I wish to refer.
In my 1973 budget statement I explained how the Government's decision to transfer health charges and housing subsidies from the rates to the Exchequer would be implemented in four stages. Taking account of the increased costs of these services in the meantime, as well as the phased reduction of expenditure from the rates from its 1972-73 level, the accumulated additional charge on the Exchequer in 1975 is estimated at about £50 million. This estimate includes the amount of the third stage transfer of some £18 million. The amount of these charges remaining with the local authorities is now only 25 per cent of their actual expenditure on these services in 1972-73. If this transfer had not taken place, the average poundage of local authority rates would be about £4 more than the estimated average of £6.60 in the current year.
The Education Estimates include £3.2 million for the new national school capitation grants scheme of £6 per pupil recently announced by the Minister for Education.
The Agriculture Estimate includes £6 million in respect of the new EEC scheme of cash payments to livestock farmers in hilly and other disadvantaged areas planned to come into operation early this year.
Total provision for the security services—£99 million in 1975 as compared with £75 million for 1974-75— is greatly increased and reflects, as I mentioned earlier, the continuing concern of the Government with the security situation. In 1975 the Garda and the Army will be maintained at a high strength and allocations for communications, equipment, transport and stores have been substantially increased.
On top of the expenditure provided for in the Estimates volume further expenditure will arise in 1975 in respect of the following items, in addition of course to public service pay, which I have already referred to, and social welfare, with which I shall deal separately later.
AnCO (Manpower Training)
The Estimate for the Department of Labour provides for a greatly increased grant of £4 million for AnCO. In view of the present unemployment situation I have decided to make available an additional £1 million, that is on top of the £4 million in the Estimates volume, to enable AnCO to increase repidly the number of adult workers taken into training in 1975. This total provision of £5 million, excluding capital expenditure, represents an increase of £3 million on the amount provided in the nine months' period ended 31st December last. Since much of the expenditure will be supplemented by matching grants from the European Social Fund, AnCO should have available, when these grants are taken into account, a total of about £9 million for current expenditure in 1975. This provision will enable an extra 2,000 adults to be brought into full-scale training in 1975 and will bring the total number of adults in such training to 5,000. About 1,000 apprentices will also be trained by AnCO this year.
Oil subsidy for horticulture
The Government have decided to continue to give an oil subsidy for horticulture up to 30th June, 1975. The purpose of the subsidy, which was introduced in July, 1974, is to help growers to adjust to higher costs for heating oil. The rate of subsidy for the period 1st January to 30th June, 1975, will be 2p per gallon and the cost to the Exchequer is estimated at £0.27 million.
Sea fisheries development
Having reviewed the position of our sea fishing industry which has been expanding rapidly in recent years and having regard to the steeply rising costs of boats and equipment, I have decided to provide an additional sum of £1.4 million in the present year for the capital development requirements of An Bord Iascaigh Mhara. This additional provision together with the existing capital budget allocation of £4.2 million will be sufficient to meet the full requirements of the board in 1975 and is in fact 41 per cent greater than the corresponding allocation for 1974-75.
Local improvements scheme
The 1975 Estimates volume includes £500,000 for the local improvements scheme administered by the Department of Local Government. Under the scheme grants are given towards the cost of constructing or improving accommodation roads, bog roads, drains, and so on, for the joint benefit of groups of farmers. I have reviewed the provision for the scheme in the light of the current and prospective unemployment situation and I have decided to increase the allocation to £1,000,000. I am, therefore, providing an additional £500,000.
General situation of the cattle and beef industry
As has happened in other countries, the Irish cattle industry has had serious problems over the last year. Because of increased production and a reduction in demand, a surplus of beef emerged in the EEC and prices throughout the Community have fallen well below the guide level set by the common agricultural policy.
The Government have been very concerned about the problems of the cattle industry and have taken all possible steps open to them to deal with the situation. I must emphasise that the Government can act only within the framework of the common agricultural policy and our obligations under the EEC Treaties. Indeed, Ireland's best interests require that the EEC rules be adhered to by all.
A whole series of EEC measures to assist the industry has been implemented by the Government including the green £, the cattle slaughter premium, the variable premium and, above all, the operation of the intervention system on a scale unprecedented anywhere else in the Community.
There are a number of facts about the operation of the intervention system which are not generally realised. The Department of Agriculture and Fisheries purchased in 1974 about 120,000 tons of beef at a cost of over £75 million. This is almost 50 per cent of the entire output of the meat industry for the year and, indeed, in recent months the proportion has been closer to 60 per cent. An enormous effort has gone into organising the purchase, cold storage, ultimate disposal and financing of this huge quantity of beef. The purpose in doing this was to provide the Irish cattle and beef industry with an alternative outlet at attractive guaranteed prices, well above those of previous years, rather than have to sell at whatever prices could be got on an over-supplied meat market. As a result of these large intervention purchases, the amount of beef sold on the open market this year is well below that of previous years.
The action of the Government in funding this enormous operation has been to ensure, at a cost of over £75 million, that factories and farmers were paid for cattle which could not otherwise have been sold except at very poor prices. This is by far the largest rescue operation ever undertaken by the Government.
Despite these assistance measures the prices of all cattle and particularly young cattle are well below what could be expected from a normal equitable division of the fruits of intervention. There are charges and counter-charges of profiteering and exploitation. This situation has come about, not through the absence of finance for the industry or poor prices at intervention but because of the general oversupply of cattle; buyers have been in a strong position and have taken advantage of this fact.
Subsidised loan interest scheme
Until conditions of effective competition are restored, the Government consider that certain further measures should be taken to alleviate the position of those who are hardest hit especially the small farmers who depend primarily on producing young store cattle and who are concentrated mainly in the west. In November last, the Government introduced a subsidised loan interest scheme to enable such farmers to purchase winter feed and retain young stock which would otherwise have to be sold. The Government propose to extend the scheme to 31st October next and are in consultation with the EEC Commission about this.
Cattle feed vouchers
In October last the meat industry agreed to contribute to a fund to subsidise the cost of cattle feed to small farmers. This was a very welcome gesture and the Government wish to congratulate the industry which to date has contributed about £1.0 million for feed vouchers. It is the Government's wish that the scheme should be continued to meet approved demands which, it is estimated, could require over £2.0 million more than has already been contributed and that the cost should be met in full by the cattle and beef industry.
To meet immediate requirements it will be necessary for the Exchequer to advance about £2.2 million. This will be advanced by the Exchequer and will be recovered by adjusting the VAT regulations to withdraw temporarily the tax credit at present available to meat factories and other registered purchasers of cattle. I feel that this proposal will be generally acceptable as it will enable extra funds to be channelled to small farmers to alleviate their feed problems. Indeed, the Minister for Agriculture and Fisheries, who is on duty today in Luxembourg, is consulting with the EEC about this matter.
The change in the VAT regulations will come into operation on 1st March, 1975, and it is expected that the Exchequer advance will be recovered over a period of 12-14 months. The sum to be recovered in this fashion in 1975 is £1.2 million.
Public Capital Programme 1975
Estimated expenditure on the public capital programme in 1975 is £458.9 million, that is 19.4 per cent more than the corresponding estimate for the 12-month period 1974-75. This includes the additional allocation of £1.4 million for An Bord Iascaigh Mhara to which I referred earlier. It is particularly important in present circumstances that credit should be available to assist the survival of sound industrial firms in order to preserve employment and protect the base for future industrial expansion. In creating new employment the work of the Industrial Development Authority is of critical importance and must be intensified. Accordingly, for capital investment in, and loans to, industry, the 1975 public capital programme provides a total sum of £90 million representing a major increase—£26 million, or 41 per cent—on the 1974-75 estimate.
Investment in housing, at £100 million, is almost 30 per cent above the corresponding 1974-75 estimate and 122 per cent above the level of three years ago. The Government are conscious of the importance of the construction industry for its high employment content and for the attainment of the Government's social policy goals in the housing field. This is why investment in housing has been a priority item in the public capital programmes of recent years and why other exceptional measures have been taken including subsidisation of building society rates.
Current budget outturn 1974
For the nine months ended 31st December, 1974, the deficit envisaged at budget time was £76.1 million. Were it not for the abnormal economic circumstances of 1974 the expansionary effect of the budgetary measures on the economy would have generated additional tax revenue and reduced the deficit. This has not, in fact, happened. On this occasion the economy here, as in comparable countries, did not respond in this way —mainly because of the deflationary effect of the increase in oil and other import prices. In addition the fall in agricultural incomes in Ireland proved more severe than earlier expected. A reduction in overtime earnings and increasing unemployment during the last quarter of the year also contributed to a falling-off in tax receipts. As a result the revenue outturn of £651.4 million represented a short-fall of £6.7 million in tax revenue as compared with the budget estimate but this was largely offset by an increase of £6 million in non-tax revenue. As well, there was also an unavoidable net increase in expenditure of £15.5 million over the budget estimate so that the deficit on the current budget for the nine months period ending 31st December last amounted to £92.3 million, that is £16.2 million more than estimated at budget time.
Exchequer capital resources and foreign borrowing
A table which is being circulated with the other budget documents today shows the amount of borrowing necessary to finance the capital budget, that is the public capital programme, certain non-programme capital expenditure and the deficit on the current budget. The most striking feature of the table is the foreign borrowing requirement of the Exchequer. In the nine months to December, 1974, this amounted to £147 million. In addition, State bodies borrowed some £35 million abroad during the same period to enable them to finance their share of the programme.
Present indications are that the Exchequer will have to borrow possibly some £100 million abroad to finance 1975 capital expenditure; the corrsponding figure for State bodies is £50 million. This estimate assumes that the Exchequer's normal resources will continue to be on target. However, it must be emphasised that some of these are by no means assured. In particular, sales of securities to the non-bank public are especially difficult to predict. As well, sales of securities to the banks depend on the growth of bank resources during 1975 and therefore will be affected by any change in the general economic situation. Moreover, it is clear that foreign borrowing of this magnitude will pose considerable problems. Indeed, foreign borrowing is becoming increasingly costly and, while the nominal rate of interest may on occasion appear to be lower than on equivalent domestic securities, the possibility of extra costs arising because of unfavourable exchange rate movements must not be overlooked.
While the Government have decided for the reasons I have already given, to continue in 1975 a high level of public expenditure—and the high level of foreign borrowing which this necessarily involves—it is obvious that this country cannot continue to borrow large sums abroad indefinitely. If we were to do so, our present excellent creditworthiness abroad—as evidenced by the willingness of foreign lenders to invest with the Government and State bodies and by the substantial inflow of private capital—might be affected. Further, the refinancing of foreign loans when they mature will become a major problem in the next few years. Since, in recent times, long-dated securities have lost their attractiveness for investors as a result of unsettled world economic and monetary conditions, much of our recent foreign borrowing is necessarily short to medium-term and this pattern seems unlikely to change significantly in the immediate future. This situation underlines the need to look to domestic sources for as much of the Exchequer's borrowing as is practicable. The rates of return on State small savings schemes are under constant review and, while I am satisfied that in general present rates and conditions compare favourably with those available elsewhere, I propose to make two changes which are designed to improve further their attractiveness.
The first of these relates to the prize bonds scheme. I propose increasing the rate of interest on which the prize fund is based to 6.25 per cent net, equivalent to an interest rate of approximately 10 per cent before tax. This will enable the prize fund to be increased by £600,000 annually which will permit me to give a new top monthly prize of £50,000 in addition to the present prizes the top prize of which is £25,000. The price of bonds will remain the same. The other change relates to the National Instalment-Saving Scheme which was introduced in 1970 and amended in 1973. Under it a person agrees to save a fixed monthly instalment for 12 consecutive months and to leave the proceeds with the Exchequer for a period of up to a further five years. The present maximum monthly instalment allowable is £20 and I now propose to increase this figure to £40 a month.
Medium and long-term economic policies
In my statement last year, I said that the Government had decided against publication of an economic and social programme for a medium-term period ahead because it could not be meaningful in the context of the unsettled world economic situation. As the situation and its impact on the domestic economy has worsened, the obstacles to the presentation of a comprehensive programme are greater than they were a year ago. Of all the tasks which could engage my attention, the least realistic would be the publication of a medium or long-term economic plan based upon irrelevancies in the past, hunches as to the present and clairvoyance as to the future.
The main bread and butter objectives to which our efforts must be urgently directed are self-evident in terms of employment, investment, income distribution and price stability. The most significant likely development in the medium and long-term is an increase in population and the need to provide employment for a growing labour force with steadily improving living standards. In order to meet the challenges which the attainment of these objectives implies, forward economic thrust, greater than has been achieved heretofore, will be necessary. The absence of a published programme at this stage does not denote any discontinuity of the Government planning process. Close attention is being given to the continuous updating of medium-term and long-term policies and public expenditure programmes for a number of years ahead are being prepared. As soon as a realistic and well-based plan, with reasonable prospects of achievement, can be stood over it will be published.
Current budget expenditure 1975
The total of the non-capital supply services in the Estimates volume for 1975 is £960 million. When the cost of the Central Fund services, £200 million, and the provision for payments to the Road Fund, £19.1 million, are added, the expenditure total for the year amounts to £1,179.1 million. This is the figure that appears in the White Paper on the Receipts and Expenditure for 1975 presented to the Dáil on Friday last. I have already today added £3.97 million in total to this figure because of the extra provision I am making for manpower training, the local improvements scheme, cattle feed vouchers and the horticultural oil subsidy. To it must now be added a further provision of £40 million for public service pay, giving a total of £1,223.1 million.
A substantial part of this £40 million is already committed since it covers the 1975 cost, including arrears, of arbitration awards recently approved and related adjustments which were not taken into account in the Estimates volume and also the extra amount that has to be provided for the threshold payments of the 1974 National Agreement now that we know the actual consumer price index figure for November, 1974. The balance of the £40 million is intended to meet the effect on public service pay and pensions of whatever general arrangements follow on the expiry of the 1974 National Agreement and any other increases under that agreement that may have to be met in the meantime. There are obvious difficulties in estimating the cost of these last two items since it depends on the outcome of negotiations still to come but, in view of their importance, it would be imprudent not to include them in any global provision I am now making. In deciding how much to put into the global provision for these as yet uncertain elements, I have proceeded on the basis that when it comes to negotiating arrangements to follow the 1974 agreement and when unions may be contemplating special claims there will be a satisfactory response to the Government's request for restraint in the interests of all and, in particular, the interests of the weaker sections of the community. If the Government's appeal for moderation is not heeded the consequences in costs and taxation would be even less palatable.
In 1972-73 Exchequer expenditure on social welfare was £92 million. Each of the two budgets since then provided for unprecedented increases in social welfare spending so that the 1975 Estimate, on a prebudget basis, stands at £177 million—almost double its 1972-73 level. We have also advanced by several months in some cases the dates on which improvements in payments have been made. As a result we now have a far more comprehensive, efficient and humanitarian social welfare service covering many groups whose needs formerly went unrecognised, at rates of payment which reflect a more realistic assessment of requirements than previously was the case. The Government are resolved that economic pressures will not be allowed to erode the very substantial social welfare progress of the last two years.
The Government recognise that pensioners and other social welfare recipients remain far more vulnerable to the ravages of inflation than are other sections of the community. In the White Paper A National Partnership it was made clear that special steps were being taken in this budget to cushion those who are dependent on social welfare payments against price rises and that such payments would be revised during the course of the year. In fulfilment of this commitment I am happy to announce that all rates of social welfare payments will be increased from the beginning of April rather than from July, so that only nine months will have elapsed since last July's increase, compared with the full year which normally elapses. Moreover, a further increase in weekly payments will come into effect from the beginning of October next, which will be designed to maintain the real value of the level of payments established in April. The April increase in the personal, adult dependant and child dependant rates of payment for all social insurance and assistance schemes as well as for related schemes administered by the health boards will on average range between 21 per cent and 23 per cent. This, for instance, will mean an increase in the contributory old age pension for a married couple from £15 per week to £18.40 where both are over pension age. Unemployment benefit for a married person with three dependent children will rise from at least £19.00 per week to £23.00 per week, and more on the pay-related scale. In addition to compensating for the rise in the cost of living since last July this increase will provide for a substantial improvement in real terms in the value of the pensions and other benefits which will in turn be preserved against erosion over the course of the year by the further October adjustment. Thereby social welfare recipients will be assured of the maintenance of the purchasing power of their payments.
Children's allowances for the second child and for subsequent children in families are also being increased by 30p per child. The allowance for the second child will now be £3.60 per month and for the third and subsequent children £4.35 per month.
In each of the past two budgets provision has been made for a one-year reduction in the qualifying age for old age contributory and non-contributory pensions and, consequently, for the free travel, electricity allowance and television licence schemes. This year again, in keeping with the Government's commitment to a progressive reduction of the qualifying age, I am happy to say that a further one-year reduction is being made, so that it will now stand at 67 years. This will enable a large additional number of persons to qualify for pensions and the associated fringe benefits.
I am also providing for a further easement of the means test, by increasing the amount of assessed means which will be disregarded from £5 to £6 per week of current income. The liberal provisions as to capital means will be as heretofore.
I might best illustrate the dramatic effect which the relaxations of the means tests in recent years have had by saying that, taking into account this latest relaxation and the reduction in the qualifying age, a non-contributory pensioner couple, both of whom are over 67, will be able to have joint income up to £12 per week and still receive a full pension at the new rate of £8.85 per week each—a combined weekly income of £29.70.
I now turn to the question of financing these reliefs. The Exchequer share of income maintenance expenditure here is over 60 per cent, which is abnormally high by western European standards. One of the main explanations for this is that employers and employees together contribute a far lower proportion than is normal elsewhere of the cost of the social insurance element in this expenditure. The Government have therefore decided in principle to transfer the Exchequer contribution towards the cost of social insurance to the other contributors to the social insurance fund over a period of six years or so. This will have the effect of bringing the Exchequer's overall share of income maintenance expenditure more into line with practice in other EEC countries and of making the social insurance Fund more self-financing.
The total cost of all the social welfare improvements I have announced is estimated at £51.25 million in 1975 and £80.76 million in a full year of which the Exchequer will bear £27.53 million and £49.14 million, respectively.
In view of the likely trends in employment in 1975, the Government have also decided that it would be prudent to make available an extra £15 million against additional benefit and assistance claims above the level provided for in the published Estimate for social welfare. The Exchequer will be providing £7.1 million of this sum and the balance will be raised by way of a special increase in the social insurance contributions.
A more detailed statement of the improvements will be found in the summary of the principal features of the budget which will be circulated when I conclude this statement.
The extra provision of £34.6 million for social welfare brings my expenditure total to £1,257.7 million.
Finance Bill 1975
I now turn to some of the more important provisions which will be included in the Finance Bill some of which will have important implications for the receipts side of the budget.
Capital allowances for industry
The provision for free depreciation in respect of new plant and machinery, outside the designated areas, and its equivalent in the form of 100 per cent initial allowance, was renewed in 1973 for a second period of two years and is due to expire on 31st March, 1975. In considering the question of further renewal of these allowances the Government have been influenced mainly by the need to stimulate investment at this time and by the advantage of assisting Irish industry to equip itself for the highly competitive years which lie ahead. They have, therefore, decided that the existing rates of allowance should continue for a further two years. As a corollary, the present suspension of the shipping investment allowance will be continued for a similar period.
The special 20 per cent investment allowance in respect of new plant and machinery for use in the designated areas is due to expire at the end of March and I propose that it also should be retained up to 31st March, 1977.
The present position in relation to capital allowances for industrial buildings—in any part of the country— is that an initial allowance of 20 per cent and an annual allowance of 2 per cent are available. This initial allowance is a temporary one and is due to expire on 31st March next. In order to give additional and early help to the nation's industrial and building sectors the Government have decided to increase substantially the existing rates of allowance. I therefore propose that new rates of 50 per cent initial allowance and 4 per cent annual allowance will apply in respect of industrial buildings from 1st April next. The new rates will continue for two years as in the case of the other capital allowances to which I have referred.
The cost of these increases is estimated at £0.5 million in a full year but in 1975 no cost will arise. I would like to emphasise that these allowances are temporary and it would be unwise for anybody to assume that they may be renewed from time to time. The Government's reason for extending and improving the allowances this year is to give an immediate boost and encouragement to industry, including the construction industry. Firms interested in availing of these allowances will need to act quickly to get advantage of the incentives before they are withdrawn.
As I have indicated on a number of occasions, it is my policy to take firm and timely action against tax avoidance and evasion in order to ensure that people who can afford to pay tax pay their fair share.
Income tax and corporation profits tax
In 1973 and again in 1974 I introduced a number of anti-avoidance measures. Further action is necessary this year. A device recently brought to my notice involves the creation of a lease between a parent company and a subsidiary company with special terms which secure that in the accounts of one company a large premium becomes immediately deductible for tax purposes while the same premium in the hands of the other company is chargeable to tax, not at once, but over a long period of years, often as long as 40 years. It is necessary, in view of the possible loss to the Exchequer, to take immediate action and I propose, accordingly, to move a Financial Resolution today with immediate effect designed to counter this device.
I now come to three anti-avoidance measures in relation to value-added tax. Because of the possible loss of revenue, it is desirable to take action at once and accordingly I shall be asking the House today to approve the necessary Financial Resolutions relating to these proposals, which will have immediate effect.
The first two VAT avoidance devices relate to the working of the top VAT rate of 36.75 per cent. This is on a two-tier basis and applies to a limited range of goods comprising private cars and motor cycles, radio and television sets, gramophones and records.
Of the 36.75 per cent rate applicable at the manufacturing level 30 per cent is not subject to the normal VAT recoupment arrangements but is trapped in the price passed on to the next stage of distribution.
It follows, therefore, that if the manufacturer's price is fixed at an artificially low level the loss of tax can be appreciable. It has come to my notice that some manufacturers are selling at artificially low prices to their own subsidiary wholesaling companies so as to avoid much of the tax. In order to put an end to this device which is unfair to competitors and deprives the Exchequer of necessary revenue I propose to provide that in such cases the value on which tax is chargeable at the manufacturer's level must be the open market price.
The second avoidance device to be countered arises out of the cessation of manufacturing or assembly. As the VAT legislation stands, there is a doubt as to whether, if manufacturing ceases, stocks which are on hands are subject to the higher tier of the top VAT rate. As in the case of the other VAT avoidance device this practice is objectionable as, apart from the loss of revenue, it gives the people involved an altogether unjustified advantage over competitors.
The third VAT matter on which it is proposed to take action concerns a doubt which has arisen about the application of a provision in existing VAT legislation. The relevant section of the Value-Added Tax Act, 1972, was intended to ensure, in a case where materials are supplied for the manufacture of goods and where the tax rate for the finished goods exceeds the rate for the materials, that the Exchequer would receive in total the amount of VAT appropriate to the finished goods. The doubt I referred to is whether the existing legislative provision applies in cases of importation of materials where no tax would be payable at that stage by a person registered for VAT. I estimate that these three measures to combat avoidance of VAT will yield £0.5 million in 1975.
Interest on overdue tax
Existing legislation provides for the charging of interest in respect of overdue payments of tax. The purpose is to discourage delay in tax payments and also to recoup the Exchequer in respect of the interest on the borrowing by the State necessitated by delay on the part of taxpayers in paying tax.
At present, interest at the rate of 1 per cent per month is chargeable in respect of overdue PAYE tax deducted by an employer from his employees and in respect of tax deducted from payments by a contractor to a sub-contractor. The same rate of 1 per cent a month applies in respect of value-added tax not paid by traders to the revenue authorities by the due date. As regards a taxpayer's own income tax or corporation profits tax, the rate of interest chargeable on overdue tax is ¾ per cent per month. Present interest rates on overdue tax were fixed when interest rates generally were some percentage points below—indeed, well below—current rates.
In view of the current high cost of borrowing generally, these rates are now clearly inadequate. I propose to increase the rate of interest for all overdue tax of the kinds mentioned to a uniform 1½ per cent a month, the change to take effect from 6th April, 1975.
At present, where an employer neglects to make a return of PAYE tax or makes a return in respect of an amount of tax regarded as inadequate and the revenue authorities assess him by way of an estimate of the tax, there is no power to charge interest on the overdue tax for any period prior to the month in which the estimate is made. It is proposed to rectify this matter by providing that interest may be charged as from the end of the year of assessment to the time of payment. I will move an appropriate Financial Resolution today.
Corporation profits tax exemption
As announced some weeks ago, the new system of company taxation which was to have come into operation on 6th April, 1975, has been deferred in order to allow ample time for arrangements consequential on the passage of the necessary legislation, which will be of a complicated nature. As a result of the deferment I propose to include in the Finance Bill provisions to extend, for a further period, the existing corporation profits tax exemption for certain public utility societies and other bodies, including building societies.
Taxation of farming profits
I would now like to refer to a number of matters in relation to the taxation of farm income for which I shall be providing in the Finance Bill. The first of these relates to the option provided for farmers of electing for assessment in the present income tax year on a notional basis. The intention is that this concession will be available to farmers, as an alternative to assessment on an actual profits basis, for a transitional period and accordingly I propose that it will continue to be available for the income tax year 1975-76 on the same basis as in the current income tax year.
When a new capital allowance is introduced the normal practice is that the new allowance relates only to expenditure incurred from a current date. In the case of the farm buildings allowance which was introduced in the Finance Act, 1974, the operative date is 6th April, 1974. Many farmers invested a substantial amount of borrowed capital on farm buildings in the years immediately prior to 1974 in wise anticipation of the opportunities presented by Common Market membership. This investment was originally undertaken and loans raised when the repayment of these loans could be met out of tax-free profits. Since this is not the case as far as those farmers now liable to tax are concerned, the Government, having regard also to the difficult year experienced by farmers generally, have decided exceptionally to make the existing annual farm buildings allowance retrospective. Instead of applying from 6th April 1974, the allowance will now apply from 6th April, 1971.
In addition to this concession, the Government have also decided to introduce an initial allowance of 20 per cent in the case of farm buildings, with effect from April, 1974. This allowance will enable capital expenditure to be written off more quickly and should provide a valuable incentive to farmers. So as to ensure that market gardens will not now be at a comparative disadvantage in this regard, it has also been decided to increase to the same level and from the same date their initial building allowance which at present is at the rate of 10 per cent. The costs to the Exchequer of these changes will be £100,000 in 1975 and about £150,000 in a full year.
The next matter relates to land taken for grazing, which, under existing law, is not included in determining land occupied for the purpose of the taxation of farming profits. On the other hand, grazing profits have always been chargeable to tax. I propose to remove the anomalies by treating land taken for grazing as occupied by the person taking it and by treating a grazier as carrying on farming. The change will have effect as from 6th April, 1975.
The final provision is designed to remove a doubt relating to the application of sections 15 and 16 of the Finance Act, 1974. It has been contended that farmers with land of rateable valuation of £100 or more who are also carrying on another trade or profession are not within the scope of section 16 and are, therefore, entitled to marginal relief and to the option of being assessed on the notional basis. This was not intended, and I propose making a suitable amendment, effective from 6th April, 1974, in the Finance Bill.
At present repayment of duty at the rate of 20 pence per gallon, subject to a maximum of 350 gallons per person per year, is made in respect of petrol used in road motor vehicles driven by disabled persons. This sum approximated to the duty payable on a gallon of petrol prior to the increase in the duty effective from 5th December last. I have decided to authorise the Revenue Commissioners to increase the rate of repayment to 34.05p per gallon, equivalent to the present amount of customs and excise duty. This increase for disabled drivers will apply to petrol purchased on or after 5th December last.
Irish thalidomide children
As announced by An Tánaiste last week the Government have decided to supplement the capital and monthly awards which are already payable to Irish thalidomide children by a trust set up in the Federal Republic of Germany. It has also been decided that the monthly payments to be made by the Exchequer will be exempted from income taxation in the same way as the monthly payments from the West German trust were exempted by the Finance Act, 1973. The Finance Bill will make provision accordingly.
Business liquidity, credit policy and taxation
Representations have been made to me in recent months regarding the liquidity problems of the business sector. These problems, it is stated, result from the operation of credit policy, price control policy and tax policy.
The indications are that bank lending in 1974 was some what less than it could have been. The slowdown was marked in the second part of the year when it was associated with the slackening in economic activity arising from, among other causes, sluggish external and internal demand, adjustment to a more competitive environment, and the effects of inflation on cash flow and profitability. There are indications that some firms are unwilling, because of cost and uncertainty, to increase their borrowing at present, while the banks, for their part, although they have the necessary resources to assist firms to overcome their short-term problems, are having difficulty in assessing the degree of risk involved in lending in some cases.
The Government are concerned that problems arising from the present difficult economic situation should not be aggravated by difficulties in regard to credit. Priority must be, and is being given in the use of available credit resources to meet the requirements of the productive sectors of the economy which must be preserved and strengthened. Discussions are being held with the interests mainly involved on the question of providing special medium-term facilities to finance investment needs. These discussions will now take into account an assessment of the position in the light of the reliefs which are being provided in this budget. The substantial provision available directly through the Industrial Credit Company, Fóir Teoranta and the IDA is indicative of the Government's determination to ensure that industry will be provided with the necessary finance to surmount present problems and to secure its future progress.
The White Paper on A National Partnership accepted that continued industrial expansion would require additional facilities for export credit. It is intended in co-operation with and with the assistance of the banks, to provide credit on such preferential terms as will meet the future export credit financing requirements of Irish exporters of capital goods. Details of the revised scheme will shortly be announced.
It has been argued from some quarters that problems have been caused for industry and commerce by the operation of present price controls, mainly in connection with the maintenance of cash flow and the financing of investment programmes. Obviously it would be harmful for the welfare of the community if price control were operated in such a fashion as to cause unemployment or to prevent productive investment. This fact has always been recognised and has, indeed, been referred to in reports of the National Prices Commission. These matters and the implications for price control of changes I am about to announce in the system of assessing profits for taxation will be considered by my colleague the Minister for Industry and Commerce in consultation with the National Prices Commission. My colleague will deal further with these points when he speaks during this debate.
As regards taxation it is claimed that because of inflation the system of taxing company profits is causing severe liquidity problems for some businesses. In particular, it has been claimed that, because of the inflated replacement prices of trading stock, a certain amount of profits which would otherwise have been free for general reinvestment or for distribution as dividends is immediately required for the purchase of more costly trading stock, and should not be the subject of taxation.
It might be as well, Sir, to be clear on one point. The treatment of trading stock for tax purposes is in accord with the accepted valuation conventions of the accountancy profession. It must also be borne in mind that, generally speaking, Irish companies pay tax on the basis of their profits in the preceding year and on average do not pay tax on the profits from a particular transaction until, about 18 months later. In this respect— and viewed in conjunction with our schemes of export tax relief and free depreciation—Irish companies are at a considerable advantage compared with their foreign competitors; most of the other EEC countries require much earlier payments of company tax, whether by way of "advance corporation tax" or substantial payments on account, during the course of the accounting period. The deferral of payment in this country constitutes a substantial aid to business liquidity, especially in a period of heavy inflation.
The first White Paper on Company Taxation published in 1972 proposed that the dates of payment of company tax be advanced. However, following representations in the matter, this Government announced in the second White Paper published last March that companies would be permitted to continue with their present patterns of payment so as not to cause serious cash flow problems for them. Since then, there has been a substantial increase in the prices of commodities and raw materials generally. The Government have, therefore, been considering whether further alleviation is required, bearing in mind that the problems of business liquidity vary as between one firm and another, depending on factors such as the type of business, profit margins, frequency of stock turnover and the increase in the costs of raw materials. They have decided that the most appropriate way of giving relief through the taxation system is by deferring the payment of income tax and corporation profits tax on profits tied up in increased costs of trading stock.
Accordingly, I propose that in respect of corporation profits tax on profits of accounting periods which ended in the tax year 1973-74, and in respect of income tax for 1974-75— which would normally be based on the same profits—certain classes of trading companies may be allowed a deduction, in the computation of taxable profits, of the amount by which the increase in the value of trading stock and work-in-progress exceeds 20 per cent of trading profits in the accounting period. The concession will apply to companies engaged wholly or mainly in manufacturing, construction or farming or in the sale of plant, machinery or material to those sectors.
The relief will continue for a second year covering accounting periods which end in the tax year 1974-75. For practical reasons it is not possible to bring unincorporated traders in the sectors concerned within the concession this year but it is intended that the relief will be extended to them next year, with retrospective effect, so that over a two year period they will be placed in the same position as qualifying companies. The knowledge that they will enjoy this concession should be of immediate help in reducing the provision which would otherwise have to be made to meet tax liabilities.
The relief will have immediate effect so that income tax and corporation profits tax liabilities at present due for payment will be reduced accordingly; if payment has already been made relief will be given by way of a refund. The appropriate arrangements will be announced by the Revenue Commissioners shortly and the detailed legislative provisions will be contained in the Finance Bill. The cost of the relief to the Exchequer will be £12 million in 1975.
This form of relief is both ad hoc and temporary, dictated by the need to give immediate assistance with a view to maintaining employment and stimulating investment. I am not taking a line at this stage on whether there should be any permanent adjustment of the system of taxing company profits. Any future changes in this respect will depend on such factors as the rate of price increases, developments in regard to accounting conventions for the measurement of profits in an inflationary situation and the implication of such developments for taxation.
Estimation of revenue
I now come to my estimate of total revenue receipts for 1975, that is, from tax revenue, including motor vehicle duties, and non-tax revenue. This is shown at £1,115 million in the White Paper on Receipts and Expenditure. This figure, of course, includes the £27.5 million estimated to accrue in 1975 from the additional tax on petrol introduced last month. It does not however include any amount in respect of the proposed new capital taxes which are being introduced instead of death duties. As already explained, the yield from these new taxes is not likely to be large in the initial years. I am allowing for only £3 million from this source in 1975. The estimated yield from death duties is, of course, lower than it would have otherwise been if these duties were not being abolished from April next. When the £3 million is included the estimate of total revenue for 1975 becomes £1,118 million.
The estimation of tax revenue, while always a problem in conditions of inflation, is particularly difficult in times of international economic uncertainty such as the present. There is a tendency to think that Ministers for Finance are excessively cautious when it comes to forecasting revenue. The experience in 1974, when tax revenue —for the reasons I have already explained—fell short of the estimated figure by £6.7 million should correct this view. Indeed, a continuation of the trends experienced in the economy in recent months would make for a depressed estimate of revenue in 1975.
I am confident, however, that these trends will not continue and, as an earnest of my belief in the basic strength of the economy and its capacity to ride out the present unsettled conditions, I am estimating receipts on a fairly optimistic basis in 1975 in the expectation that the economy —aided by the beneficial effects of today's budget—will revive in the coming year.
Indeed, there are hopeful signs of such a revival already: I refer to the continuing rise in industrial exports and the boost to agricultural exports that will be provided by higher EEC prices. I must, however, sound a note of caution. If, contrary to my reasonable expectations at this stage, the economy should not respond adequately during the year there may be a fairly serious shortfall in revenue and appropriate corrective action may have to be taken later. The position will be kept under careful review as the year evolves.
Income tax relief
The Government are committed to a policy of reviewing the personal income tax allowances at regular intervals and, as an earnest of this policy, allowances were substantially increased in my last budget. This year all personal allowances are being increased by 15 per cent, some of them indeed by more. This compares with the increase of 8.6 per cent in the consumer price index between May, 1974, and November, 1974. The following are illustrations of the improved allowances. The single allowance will be increased from £500 to £575, the widowed allowance from £550 to £635 and the married allowance from £800 to £920. The increase in the child allowance will be from £200 to £230. Thus for a married couple with three children the combined allowances will rise from £1,400 to £1,610. Commensurate increases will be made in the other personal allowances.
An increase of £30 in the working wife's allowance will ensure that the personal allowance of a married couple at work will equal the corresponding allowances given to two single persons. Details of the increased allowances, and resulting savings in tax to taxpayers with different level of income, are contained in the "Principal Features of the Budget" which will be circulated separately to Deputies at the end of my speech.
I have long felt that the tax code does not give sufficient recognition to the position of our senior citizens who, during their working lives, contributed to the revenue of the State. I propose to increase significantly the special "age allowance" for persons aged 65 or over—which can, of course, be obtained in addition to the ordinary personal allowances to which such persons are entitled. The "age allowance" will be increased by 80 per cent to £45 in the case of single and widowed persons and by 190 per cent to £145 in the case of married persons. The combined "age" allowance and personal allowance of a single person, widowed person and married person aged 65 or over will be £620, £680 and £1,065, respectively—which ensures, for example, that if such a person's sole income is a social welfare pension, no liability to income tax should arise. The cost of the increases in personal income tax allowances is £15.3 million in 1975 and £28.1 million in a full year.
So as to mitigate possible hardship from the imposition of both income tax and wealth tax, particularly if the combined taxes exceeded income, I announced last May, that, contemporaneously with the introduction of the wealth tax, the top rate of income tax would be reduced from 80 per cent to 70 per cent and that, in addition, there would be substituted for the existing two bands of taxable income of £2,000 chargeable at 50 per cent and 65 per cent, three bands of £2,000 each chargeable at rates of 45 per cent, 55 per cent and 65 per cent. As wealth tax is due to come into effect on 6th April, the beginning of the next income tax year, I am now making the necessary provisions to give effect to these income tax adjustments. The cost to the Exchequer in 1975 is £0.4 million and £1.75 million in a full year.
Life assurance premium relief
Under the new simplified income tax structure introduced last year relief in respect of life assurance premiums is available to income taxpayers whatever their marginal rate of tax. In the case of taxpayers liable at rates exceeding 35 per cent this resulted in a widening of the absolute or cash differential of rebate as between Irish and non-Irish assurance companies. In response to representations on this point I announced in this House during the passage of last year's Finance Bill my intention to introduce amending legislation in 1975. I have now decided that the pre-1974 cash level of differential should be restored by allowing relief on the ? or ½ basis, as appropriate, for tax rates up to 35 per cent and to afford relief at ? of the premium for the excess of higher tax rates irrespective of whether the policy is with an Irish or non-Irish office. The revised arrangement will be provided for in the Finance Bill and will be made retrospective to the beginning of the tax year 1974-75.
The opening deficit shown in the White Paper on Receipts and Expenditure was £64.15 million, to which I have now added a total of £78.6 million in respect of public service pay, social welfare and the other new expenditure items I mentioned. My opening figure of receipts will be augmented by £4.7 million in total from capital taxes, VAT anti-avoidance measures and the temporary suspension of the VAT credit available to registered purchasers of cattle. From the receipts side a total of £27.8 million falls to be deducted for the tax reliefs I have described. This means that the total deficit is now £165.85 million. From this figure I propose to deduct £6 million in respect of unspent balances of Exchequer issues in the hands of Departments at the end of 1974. This reduces the deficit to just under £160 million.
I am now faced with the major problem of financing a deficit of this order. Clearly, the raising of new taxation of the size necessary to meet this deficit—even if it were otherwise acceptable—has to be ruled out in present economic circumstances because of the contractionary effect it would have on demand at a time when what the economy needs is the maximum sustainable expansionary action. Indeed, looking backwards, it is clear that were it not for the expansionary policy pursued in my two previous budgets the growth rate of the economy in those years would have been much lower.