We have witnessed and are still seriously affected by the most dramatic turnabout in the economic fortunes of the western world since the late 1920s. At the start of the year, not only was economic activity in the world at large at a very low ebb, but there were widespread indications that the recession was deepening. The only ray of light on the horizon was that an upturn in the world economy was expected around the middle of this year. Against that background, the Government made it clear that their approach to our economic problems would give priority to the maintenance of employment and the preservation of living standards. We also stressed the necessity to reduce the rate of inflation and made it clear that the Government could succeed only if all sections accepted self-discipline in incomes. We pointed out, for instance, that the better-off should not insist on recouping, in higher pay, the taxes they must pay if the poorer sections of the community are to be protected against rising prices. It is disappointing that this last exhortation, which few, if any, have publicly disputed, has not yet been acted upon.
The budget of January last sought to give effect to the Government's objectives. I made it clear at the time that the pace of inflation—then running at some 20 per cent a year—and the size of our balance of payments deficit—then standing at some 10 per cent of gross national product—would in normal circumstances have required immediate corrective action, involving a reduction in domestic demand and the running of the economy well below capacity levels, possibly for a prolonged period. This would have involved heavy unemployment and possibly a resumption of emigration. The Government set their face against this course and opted instead for what I described at the time as a carefully expansionary budget, designed to preserve employment and maintain living standards. This strategy was founded on a pattern of public expenditure which was designed to protect the weaker sections of the community, help the agricultural sector over the difficulties it had encountered in 1974 and stimulate industrial growth and employment through a combination of taxation relief and capital expenditure. In short, the budget was intended to float the economy over the rocks of recession into the flood-tide of world economic recovery.
This strategy was not without risk. The world recession could turn out worse than was then foreseen, the eventual recovery could be delayed. Since then, world recession has turned out to be deeper and more prolonged than any international or national authority foresaw at the start of this year. Unemployment particularly has deteriorated in Europe and the United States of America.
Steps taken in many countries to stimulate economic activity have not yet been effective and the timing of the long-awaited upturn cannot yet be predicted with confidence. In the two "lead" economies of the western world—the United States and Germany —a full resumption of economic activity is improbable until near the middle of 1976. Even then, such recovery as is likely, particularly in the US, will be founded on their own internal strength, rather than on growth in world trade, to which we must look for our future prosperity. Indeed, given the normal time lags inseparable from our peripheral economic position, we cannot realistically hope to see a resumption of the export-led growth path before the second half of 1976.
This means that for the next year or more, we shall have to tackle and solve our economic problems largely on our own and without the benefit of the growth in international trade on which we have become increasingly dependent during the past decade. Furthermore, if we wish to participate in the fruits of that trade when it does revive, we must put ourselves during that period in a position to do so. That means improving our international competitiveness—and that means curbing inflation now.
Inflation
Let there be no ambiguity about this: inflation is the economic enemy that must first be beaten before we can progress. Unemployment, which is a chronic and a corrosive evil with deplorable social effects, is an inevitable consequence of inflation. The difficulties of deficit financing and foreign borrowing are considerable, but they are largely caused by inflation and they limit the freedom of action by the Government to cope with the problem. Future prosperity and growth depend on exports, which simply cannot be achieved if inflation erodes our international competitiveness. It is beyond question that none of our major problems can be solved until we first cure this terrible disease of inflation. Other countries including our partners in the EEC have taken action, in some cases quite drastic and unpopular action, to curb inflation. It is apparent that Britain is considering special efforts to reduce the rate of inflation there. As others are wisely getting off the accelerating merry-go-round of inflation, we must do the same or suffer the consequences if we do not.
It is of fundamental importance that the country at large should understand the absolutely basic nature of this task. There is no possibility of making any substantial reduction in the present number of unemployed, much less providing for the growing labour force of the future, unless we can curb inflation. It is no longer possible to consider any aspect of economic or social policy—whether affecting employment, welfare, education, investment or the public service—without having to take account of either their impact on inflation or of the extent to which inflation reduces their real value. In short, it is not possible to make any sort of economic or social advance until this cancer in the economy has been dealt with.
The country's economic future now depends on this. The goal of full employment in the medium term can, essentially, be reached only on the basis of export-led growth. This can be done only if industries operating here are internationally competitive —and recent experience in the textiles, clothing and footwear industries shows that in free trade conditions this means being competitive on the home market too. Up to recently, we were helped by the fact that inflation was common to all OECD countries and our own inflation rate was not substantially in excess of our competitors'. This is no longer true. At the moment, our inflation rate is about twice the European average; next year, with the increasing success of other countries in bringing their inflation under control, it could easily be three times that average. Unless it is swiftly reduced, this could be a recipe for unemployment on a scale previously unknown and intolerable living costs at home.
Nor can we console ourselves with the thought that at least we are inflating no faster than Britain, our main trading partner. Apart from the fact that this leaves us terribly vulnerable to corrective action taken by the UK to safeguard its own position, the effects of current inflation on the economy are such as to make it intolerable even in the short run; it offers no credible basis whatever for long-term economic and social development. As thousands of workers know only too well by now, current inflation rates are speedily making many of our industries increasingly uncompetitive. It is not so often realised that this kind of inflation can have profound effects in the public sector too.
Consider some of the main elements in public expenditure. Public sector pay and social welfare expenditure have been increasing faster than inflation in recent times. These two comprise about one-half of current public expenditure. Another fifth is now accounted for by debt service charges, which increase both with rising capital costs and interest rates and also with the larger capital repayments needed because borrowing to meet deficits can only be arranged on a short term basis. Inflation is, therefore, a powerful engine inexorably pushing Government outlays to intolerable levels, even before account is taken of the limitless demands for further and further moneys for expansion and extension of public services and subsidies.
It is sobering to consider the effects of current inflation on public expenditure even over a short space of time. Since the publication of the current budget on 15th January last, the Government have had to approve additional current expenditure by Departments totalling £76 million or 7.3 per cent of the budget estimate for these expenditures. Almost 85 per cent of this is a direct reflection of the present inflationary situation. The balance is mainly due to the need for increased expenditure on security services.
The principal headings on which extra expenditure arises are health, £18.8 million; social welfare, £8.1 million; CIE subsidies, £8.0 million; education grants, £6.6 million; justice, £3.3 million; agriculture, £3.0 million; defence £2.9 million and post and telegraphs, £2.0 million. An increase of £20.1 million in the global provision for public service pay increase is also necessary because of the additional unforeseen cost of the 16th pay round and of certain anomaly increases. It has also been found necessary to provide a further £10 million for servicing the public debt because of the high cost of borrowing in present inflationary conditions. Large as all these increase are, they are far short of the total additional expenditures for which approval has been sought, and the Government have had to refuse to sanction a substantial amount of these. We are tightening the control of public expenditure so as to avoid any further increases during the remainder of the year, apart from those I will be announcing later in this statement.
As regards revenue, the rate of inflation is not on the Exchequer's side. Inflation at present rates is a brake on consumption and economic activity, not a stimulus. The growing uncompetitiveness of Irish industry and the resultant layoffs and short-time working have further reduced purchasing power and added to uncertainties about the future. This in turn has caused a reduction in consumption and investment. As a result, the growth of receipts from both direct and indirect taxes has fallen off. The unpalatable fact is that to date in the current year tax revenue is running at a rate below that expected last January.
As a result of double-digit inflation, therefore, public expenditure has risen enormously, while revenues are being squeezed. It has been possible to maintain the level of public activities only through large-scale borrowing, which itself has risen greatly in recent years. The rate of foreign borrowing has risen fivefold in the last two years. Notwithstanding that present circumstances necessitate such borrowing, there are sound economic reasons why this trend should not and, indeed, cannot continue indefinitely. A compelling one is that the raising of money on the scale required would simply not be possible. The Irish economy does not have an unlimited capacity either to borrow resources or to repay them—a fact no less apparent to our creditors than to ourselves.
Last January we attempted a "holding operation" to cope with the situation until general worldwide recovery enabled a more fundamental restructuring of the economy. That operation, while successful in preventing a worse situation than the one we find ourselves in, has not been enough, largely because the recovery in the world economy has not yet taken place. I may be pardoned for recalling that last January I pointed out the limitations of an annual budget in a period of great instability and said that further corrective measures might be required if the global and home situation did not improve throughout the year. Many countries, for similar reasons, have been obliged to resort to more than one budget a year in these exceptionally difficult times.
The White Paper stressed, and I reiterated as forcibly as I could in my January statement, that it was essential that self-discipline and moderation be observed in seeking income increases, that the questions of competitiveness and the wider national implications of pay increases be given full weight in negotiating the 1975 National Pay Agreement and that the better-off should not seek compensation for any additional tax on nonessential items if we were to avoid increased unemployment and permanent damage to the economy.
Events have shown that our economic difficulties would be less acute if these precepts had been taken more fully to heart. It is now clear that the current national pay agreement gives increases in pay, including increases reflecting taxes on alcoholic drink and tobacco, which cannot be paid in present economic circumstances without doing serious economic and social damage. It superimposed price-related pay increases on the increases already given under the 1974 agreement. That agreement ensured that the majority of workers obtained an average increase in pay of about 30 per cent over a 12-monthly period—well in excess of the price rises that took place during the year. This meant that most employees got real income increases far in excess of real economic growth—growth which was, as we now know, negligible. The economy cannot absorb this any longer. Last year, external sources accounted for threequarters of our inflation, so that the domestic causes were overshadowed; this year, external sources will contribute less than 20 per cent of our inflation—the rest of the wound is self-inflicted.
The situation is now extremely grave. There is a growing threat, caused by our intolerably high rate of inflation, to employment and to business generally. There is now an inescapable obligation on all of us to accept that, collectively and individually, steps must be taken to curb inflation now. The withdrawal symptoms will undoubtedly be painful, but they will be far less agonising than the dreadful consequences that will ensue if we fail to correct present tendencies.
The Government have, over recent weeks, consulted the main economic interests in the country through the Working Group on the Economy, in which Ministers took part with representatives of labour, industry and agriculture, and the National Economic and Social Council. I wish to express the Government's thanks to the members of both these bodies for the time and attention they have given to these problems. Their comments and deliberations have been of much value to the Government in our consideration of the measures needed in these difficult times. In the course of consultation with these bodies, there has been a broad measure of agreement on the problems of inflation and unemployment facing our people—though, understandably, rather less agreement on the measures needed to cope with them. In these circumstances, it is the duty of the Government to act in the general interests of all the people, unaffected by sectional favour. The measures devised by the Government should be seen in this light; they are designed to tackle the problems of inflation and unemployment simultaneously.
Incomes
The Government and many reputable institutions both national and international have reiterated time and again the over-riding necessity for moderation in pay claims if inflation is to be curbed and employment to be protected. The package which I will outline later represents a carefully-considered effort by the Government to give a lead in tackling inflation and unemployment.
Measures of the kind I will outline, however, cannot achieve their aim and could well increase inflationary pressures unless other parties make their contributions. A financial sacrifice, in the form of additional taxation, will be sought from certain taxpayers. The well-being of each citizen will be most closely affected by the success or failure of the Government's efforts. Unless he, too, plays a major part, that fight cannot succeed. It is, therefore, in his own as well as in the community interest that he makes his contribution. What is needed? Primarily, that the dangerous inflationary pressures in the economy should be relieved. By whatever detailed renegotiation is necessary, we must take immediate steps to ensure that the measures which the Government are taking to wind down inflation will be matched by an appropriate revision of the remaining national agreement increases—for example, by dropping the third phase or by modifying the third and fourth phases or some equivalent adjustment. How exactly the agreement should be revised to achieve this end is a matter for consideration in the first instance by the Employer-Labour Conference and I am asking the chairman of the conference to have it convened urgently to put this examination in hands.
I want no misunderstanding to arise. There is no question of reneging on or abandoning the national agreement. This Government have openly pinned their faith on the value of national agreements. We have consistantly tried to uphold the agreements both in the letter and in the spirit and that remains our policy. What we are asking is that, in return for a slowing down of price increases, there should be a corresponding slowing down of income increases and that the parties should agree to make the necessary changes in the agreement to ensure this. We are not asking people of small means for a financial sacrifice. That is being asked of those better able to bear it. What we are asking each income earner to do is to respond to the Government's action to reduce the cost of living below what it would otherwise be by abating the nominal income increase he would probably have needed if the Government had taken no action. In the end, the ordinary worker will certainly be no worse off but he and the community at large will be much better off in terms of competiveness and employment.
I must point out that there is a critical time-scale to these proposals. The essence of the measures I have described so far is that there should be a tangible step, in the form of a scaling-down of the national agreement provisions, towards the easing of inflation, in return for the measures taken by the Government to reduce the cost of living and to boost employment. If this is to result in a start to winding-down our intolerable inflation rate, the first milestone on this road will be the next quarterly consumer price index figure, on which payment of the third phase of the national agreement is to be based. It is, therefore, crucial that it should be clear within a matter of weeks whether, in fact, there is to be an adequate response to the Government's initiative. It would be completely unacceptable and most harmful to the whole economy if the costs, risks and sacrifices involved in the package of measures that I will announce should be undertaken without an adequate return to the community in the form of a revised national agreement that corresponds to the Government's anti-inflation package.
The time available to the Employer-Labour Conference is, therefore, short; I know they will approach their task in full consciousness of this and in full awareness of their responsibilities. If there is an adequate response in terms of pay restraint to the Government's initiatives, the Government will take steps to impose a corresponding restraint on dividends and professional fees. If, on the other hand, modifications of the national pay agreement should be refused or if they should be inadequate, the Government would be reluctantly obliged to consider revoking the price reliefs which are a significant feature of this budget. As will be seen, the proposals I am announcing will transfer part of the cost of some goods and services from the consumer to the Exchequer but the overall cost to the nation will be the same. The purpose is to maintain the real value of incomes as distinct from nominal increases which in the absence of Government action would be further eroded by inflation. If people insist on maintaining all the terms of the national pay agreement intact it will simply not be possible for the Exchequer to meet the increased cost of today's package of proposals plus the cost of implementing in full the national pay agreement. To try to do both would only add to inflationary pressures and make a difficult situation worse.
Special pay increases
A particular difficulty, which has been the cause of anxious concern to the Government, arises in regard to pay increases and other improvements in conditions of employment over and above the standard increases of the national agreements.
It would, in the Government's view, heighten social tensions and cause serious inequity if particular groups were to get special extra increases at a time when workers generally are being asked to accept restraint. Furthermore, as we know, some firms have already indicated that they may not be able to pay even the standard increases of the 1975 agreement.
The plain facts are that, in our present circumstances, any group can secure special increases only at the expense of others and that those most secure in their jobs are in the best position to press sectional claims. The Government consider it crucial, as part of the fight to slow inflation and protect jobs, that any modification of the standard increases of the 1975 National Agreement should be accompanied by an embargo on special increases. This will, no doubt, be covered in the forthcoming Employer-Labour Conference discussions and it is the Government's earnest hope that, in the national interest, the parties will be able to reach quick agreement on this provision.
Pending these discussions and in view of the urgency, the Government have decided that, within their own direct area—which includes the civil service, local authority and health services, teachers, Army and Garda—no further special improvements of any kind in pay or conditions will be approved as from today, except in accordance with a finding already made—or to be made shortly in a case where the hearing has been completed—by one of the public service arbitration boards or by the Labour Court itself, or where at conciliation there has been a firm and unconditional offer not related to changes in the employment concerned.
It is the Government's intention that all other public sector employers should act in a similar manner and Ministers will be in touch with these bodies. In the meantime, I must ask them to take this statement as Government policy and, accordingly, not make any improvement in pay or conditions except in accordance with a finding already made by the Labour Court itself—or to be made shortly in a case where the court's hearing has been completed—or where at conciliation there has been a firm and unconditional offer not related to changes in the employment concerned.
Trends in Government Expenditure
Public expenditure has been rising at a rapid rate in recent years to meet unavoidable increases in existing services and to provide much needed improvements. This is a matter for concern. The exceptional inflationary conditions of the past year or two have given an added impetus to this rise, but the underlying upward trend has persisted for the past decade or more and continues to add pressures on taxation and borrowing fronts. Exchequer financing at high levels leads to undue pre-emption of available national resources to the detriment of the private sector. In so far as this trend has been a feature of the public capital programme it can be more easily tolerated because of the extent to which total national investment, and through it capacity to repay, derives directly or indirectly from the public capital programme.
It is in relation to non-capital expenditure, however, that the overrapid rate of growth is particularly worrying. It is this that gives rise to budget deficits on current account which have to be met by borrowing.
Moreover, non-capital expenditure is mainly used to defray the costs of on-going services, which, though often laudable, do not create lasting assets of a productive nature. A large part of this expenditure is devoted to social services such as health, housing and social welfare payments. The demand for such services is so high and their cost so sensitive to the effects of inflation that it is essential to ensure that they and, indeed, all other non-capital expenditures are kept under constant review.
The Government intend, therefore, to adopt a policy of moderation in regard to non-capital expenditure generally in order to conserve scarce resources for productive purposes. The naïve notion that all can be provided by the State if enough clamour is generated will have to be replaced by a patient realisation that nothing more can be provided until extra resources become available. Desirable improvements or extensions of existing services, or the introduction of new services, will have to be shelved until the present economic difficulties have been overcome and resources once more become available to meet additional costs. Existing expenditures are being reviewed to identify those that might be curtailed or eliminated. Such expenditures would, for example, include those which are no longer appropriate because of changes in the circumstances which gave rise to their introduction in the first instance or because of changes since then in the circumstances of the sectors or groups of individuals who benefit from them. Consideration will also be given to making realistic charges for public services which are either provided free at present or are charged for at uneconomic rates. This may involve a review of the pricing policies of some State bodies. Exchequer subsidies to various bodies which should more appropriately be supported from other sources will also be looked at critically. In general, all low-priority services, particularly those which have a small or negligible employment content, will be reviewed to see what economies can be achieved.
As a further measure to control the excessive growth of non-capital expenditures, strict observance of budgetary limits will be insisted upon. This will mean in the case of openended grant schemes, for example, that when the annual budgetary allocation has been exhausted further expenditure will, in general, be deferred to the next budget period.
The Government will maintain as high a level of expenditure on the public capital programme as is possible in the light of the available resources. The first priority will continue to be investment which creates permanent and self-sustaining employment. While every effort will be made to maintain a high level of social investment, expenditure on industrial, agricultural and infrastructural investment will have first call on scarce capital resources because this kind of investment is a pre-condition of growth.
Government measures
I now propose to outline the measures which the Government have decided to take to deal with the situation. Further details will be made available when I have concluded my statement.
These measures must be viewed as a whole, rather than by reference to the particular efficacy of individual components of the package. If inflation is to be defeated, any attack on it must comprise two related elements: first, steps to break the "inflationary mentality"—in other words, measures to convince people that there is nothing inevitable about the continued rise in prices—and second, the more specific measures which will ensure a gradual winding-down of the inflationary spiral.
Reduction of Consumer Price Index
The Government have therefore decided to
—increase the subsidy to CIE in order to reduce fares to their level before 12th May last; this will mean that fares can be reduced by an average of 25 per cent. The amount of the reduction in any particular fare will, of course, depend on the amount by which it was increased in May.
—subsidise the price of bread by 5½ per loaf of 800 grams and of flour by 4½p a kilo
—subsidise the price of butter by 10p a lb.
—subsidise the price of milk by 2p a pint
—reduce the price of town gas by 12½p per cent and
—remove VAT from electricity, gas, all fuels except road fuels, and clothing, clothing materials and footwear.
The bread subsidy will absorb an increase of 1½p which otherwise would shortly come into effect. The subsidies will be brought into effect as soon as the necessary arrangements can be made. The VAT reliefs will take effect on and from 1st July, 1975.
The net effect of all these measures will, it is expected, be to reduce the rise in the Consumer Price Index by four percentage points or more. By this means, the Government hope to break the fatalistic expectations of continuing inflation which in present circumstances can too easily become self-fulfilling. The Government expect these very significant price reductions to be transmitted into a winding-down of the inflationary process through a revision of the current National Pay Agreement.
The measures chosen are designed to give the maximum possible assistance to those who, relatively speaking, have to spend much more of their disposable income than others on the staple foods and who have been hardest hit by the rise in fuel prices. Additionally, of course, as I announced in my Budget Statement last January, all weekly social welfare and related health allowance payments will be increased from the beginning of October in line with the increase in the cost of living since last April. The removal of VAT from clothing and footwear will also be a significant aid to the maintenance of living standards, as well as giving assistance to that section of Irish industry that has suffered most from the recession during the last twelve months.
Employment Premium
Another main aim of the Government is to stimulate employment especially when it can result in the production of marketable goods and services. I say this because to create employment in uneconomic activities, or in "make-work" programmes, would merely help to undermine further the long-term competitive position of the economy and ensure that our ultimate situation would be even worse. An essential requirement in present circumstances, therefore, is to introduce a measure which will avoid these dangers while instilling confidence in manufacturers so that they can be ready to avail themselves of the opportunities that will arise as soon as the upturn appears.
The main brunt of the increase in unemployment during the past twelve months has been borne by manufacturing industry, which has, in consequence, a considerable amount of spare capacity. At the same time, the productive capacity and potential of those who are unemployed is being wasted at great loss to the country as well as to themselves. While a basic objective of the combination of measures I am announcing is to provide a substantial stimulus to employment generally, the Government consider that special and direct action is necessary in the case of manufacturing industry to provide employers in that sector with an extra incentive to re-employ workers who have been laid off in the recent past.
The Government have therefore decided to introduce with effect from 27th June, 1975, until 30th June, 1976, a temporary scheme of employment premia for manufacturing industry other than some highly seasonal food processing operations. This will subsidise employers who recruit from the Live Register net additions to their full-time work force. Up to 31st March, 1976, the premium will be at the rate of £12 a week for each additional worker employed; from 1st April, 1976 to 30th June, 1976, it will be £6 a week. Employers will not be chargeable to tax in respect of the premium payments and legislation to provide for this will be introduced in good time.
The scheme, to be known as the Premium Employment Programme, should make both the re-employment of workers and the creation of new jobs an attractive proposition in cost terms. Employers who can take up spare capacity in this way will obviously be in a position to respond quickly and smoothly to the expansion of their markets as world conditions improve. The Government expect, therefore, that a significant number of extra jobs will be created in a short time. Because of the many imponderable factors involved I am unable to give an estimate of the cost of this entirely new scheme. To the extent to which it is successful, however, expenditure on the premia should be offset by a reduction in social welfare costs.
Further details of this scheme will be circulated when I conclude and the Minister for Labour, whose Department will administer the scheme, will make a further statement as soon as possible on its operation.
Footwear Industry
In addition to bringing unemployed workers back into employment, it is equally important that existing employment be preserved wherever possible. As I mentioned earlier, there are certain sectors of manufacturing industry which are finding it difficult to maintain production and employment. The most seriously affected as regards unemployment is the footwear industry. A further approach has recently been made to the EEC Commission with a view to the adoption of immediate arrangements which will enable the flow of imports of footwear to be regulated in the interest of employment in the industry.
Stimulus to capital expenditures
The 1975 public capital programme was settled last January at a level which, together with other Government policies, was designed to assist in achieving the twin objectives of maintaining living standards and preserving employment. In February last, as a further boost to the construction industry, local authorities were authorised to spend on their housing programmes an extra £7 million, of which £3 million was provided through an increase in the public capital programme. This ensured the provision of 1,000 additional jobs. In their current examination of the economic situation, the Government have decided to give a further stimulus to employment and to demand generally by adding over £27 million more to the public capital programme. This brings the total of the programme for 1975 to £490 million, an increase of 27 per cent on the 1974-75 figure. The main components are Housing £10.5 million, Telephones £8 million, Industry £5.2 million and Agriculture £3.4 million. The £5.2 million extra for industry goes to Fóir Teoranta (£4 million) and Gaeltarra Éireann (£1.2 million).
Construction and house purchase
The Government recognise the importance of the building and construction industry in any strategy to sustain and stimulate the economy, both because of the relatively short ‘start-up' time often involved and because of its relatively low import content. Housing, in particular, has been a priority area of concern to this Government from the outset. Of the additional £10.5 million now being provided for housing, £9 million will be devoted to additional local authority loans for private housing and £1.5 million to private housing grants. The total Exchequer allocation for local authority house purchase loan schemes this year is thus increased to £46.5 million, which should be sufficient to finance mortgages for about 11,000 houses.
The additional provision for housing in 1975 will ensure a continuation of the Government's housing programme and its impact should be felt throughout the country. Roughly, 2,000 additional jobs should directly result in the house-building sector, together with an increased demand in the industries which manufacture and supply building materials. Since the schemes now being allocated additional funds are already in being, this increase should take effect with a minimum of delay.
A refreshing development has been the recovery in the inflow of funds to the building societies. In the first five months of the current year, the net inflow was £20 million compared with £7 million in the same period of 1974. In the first quarter, loan approvals were up 50 per cent on the first three months of 1974. Given a continuance of these trends, the societies' contribution to financing the housing programme will be well in excess of last year's £40 million, another £15 million or thereabouts.
In view of the major importance of a prosperous construction industry and the need to maintain the housing programme, I am particularly pleased to inform the House that the major Associated Banks have indicated their willingness to make available £40 million over the next two years for house purchase loans. Discussions are being held with the banks and a further announcement will be made as soon as the details of the scheme have been settled. The banks' move has the approval of the Central Bank. It demonstrates in a positive manner the desire of the banks to assist in the solution of our current difficulties and the Government welcome it for that reason.
Concomitant with the stimulus being received by the construction industry from the Government, the building societies and the banks, it is appropriate to rationalise in some degree the financial apparatus that underpins it.
For some considerable time now, the rate of interest charged on advances from the Local Loans Fund to local authorities for the house purchase loan schemes has been below the average rate at which the Exchequer can borrow for the purpose of issues to the Fund. At the same time, the period of 35 years allowed for the repayment of such loans has been in excess of that normally allowed by building societies and other lenders such as insurance companies. The Government have decided that these loans should be brought more into line with current lending terms in other sectors.
As from today, therefore, interest on new advances from the Local Loans Fund to local authorities for these loans will be increased from 10 per cent a year to 11 per cent and the repayment period will be reduced from 35 to 30 years. As a consequence, the normal interest rate of loans to new borrowers will be increased from 10½ per cent to 11½ per cent a year. For those who avail of the maximum loan of £4,500, the net additional charge to the borrower will be approximately 75p per week income tax relief at 26 per cent on interest payments is taken into account. The change in the Local Loans Fund rate will result in extra non-tax revenue of about £0.4 million annually. The effect this year will be nominal.
The building societies have been in receipt of an Exchequer subvention since May, 1973. This subvention, which is due to expire on 30th June, 1975, amounts at present to one percentage point of the societies' shares and deposits and enables them to offer a rate of 8 per cent to investors while charging a mortgage rate of 11¼ per cent. The Government have decided to extend the subvention beyond 30th June, 1975. However, the decision to increase the rate of interest on local authority house purchase loans to 11½ per cent makes it necessary to consider the present rate of subvention which, if continued unchanged, would give borrowers from building societies an interest rate advantage of ¼ per cent over local authority borrowers. The Government have decided, therefore, to reduce the subvention from 1 per cent to ¾ per cent with effect from 1st August. The cost to the Exchequer of extending the subvention to 31st December next will be about £1.1 million, none of which will fall due for payment in 1975 because the subvention is paid six-monthly in arrears.
Personal income tax surcharge
I stated earlier that the present situation demanded collective and individual action to cope with the problems. This cannot be painless and it is only equitable that the relatively better-off should be called upon to make some temporary financial sacrifice. The Government have accordingly decided that, as from the current income tax year, 1975-76, a 10 per cent surcharge will be imposed on income tax paid by individuals which is charged at rates of 35 per cent and upwards on taxable income. For example, in the case of the 35 per cent rate, the effect of the surcharge will be to increase that rate to the equivalent of 38.5 per cent. Taxable income is gross income less the various allowances and reliefs to which a taxpayer is entitled, and income tax is charged at an increasing rate on each successive slice of taxable income. The surcharge will not apply to tax on the first £1,550 of taxable income, which is chargeable at 26 per cent and, therefore, individuals whose total taxable income in 1975-76 does not exceed £1,550 will not pay any surcharge. As a further contribution to arresting downward trends in production and employment, the Government have decided that companies should be excluded from the surcharge.
The effect of the surcharge in 1975-76 can be illustrated. An individual with taxable income between £1,550 and £4,350 will pay additional tax ranging from zero to a maximum of £98. With taxable income between £4,350 and £6,350, he will pay a maximum of £188; between £6,350 and £8,350, the maximum is £298; while from £8,350 to £10,350 it is £428. Over £10,350, the cumulative effect of the surcharge will depend on the amount of taxable income. I would like to give an illustration which may help to avoid any misunderstanding, accidental or deliberate. A married man with two children would not, for example, be affected by the surcharge if his gross income did not exceed £2,930 and if his income exceeds that figure the surcharge will apply only to the excess and not to any portion of his income up to £2,930. The estimated yield to the Exchequer from the surcharge is £8 million in 1975.
Changeover to PAYE by employees not yet covered
When PAYE was introduced in 1960 it was not extended to groups which had been subject to a separate statutory tax deduction scheme since the foundation of the State.
Those concerned are civil servants, national teachers, army, gardaí, industrial workers employed by the State, members of the Oireachtas, judges, public service pensioners as well as employees and pensioners of the Central Bank of Ireland, Dublin Port and Docks Board, the Commissioners of Irish Lights, the Representative Church Body and employees recruited by the Bank of Ireland prior to amalgamation with the National and Hibernian Banks. These are assessed to income tax by reference to their earnings in the preceding year.
The scheme of PAYE was brought into effect in 1960 to facilitate the general body of taxpayers by providing machinery for regular tax deductions from current earnings and also to improve the collection machinery for an important source of revenue for the Exchequer. At that time, there was no expectation of money incomes increasing at the rate they are increasing today, so no question arose as to the equity of assessing the majority of employees on a current year basis and the rest on a preceding year basis. There can, however, be no doubt that, whatever the position may have been in 1960, nowadays, when large general increases in money incomes occur at frequent intervals, individuals assessed to income tax on a preceding year basis enjoy an advantage over taxpayers under PAYE.
The Government have accordingly decided that equity requires that this situation should not continue and that all remuneration at present outside the scope of PAYE should be brought within the system. The changeover will, however, involve considerable preparatory work by the Revenue Commissioners and by the accounts branches of public departments and of other employers affected by the change. Some idea of the size of the task may be gauged from the fact that there are over 100,000 taxpayers involved. Furthermore, the current work-load on the revenue machinery involves dealing with nearly threequarters of a million individual income taxpayers. It is intended, however, that all employees will be brought within the PAYE system as soon as possible.
Value-added tax reliefs
As I stated earlier, the Government have decided that, with effect on and from 1 July 1975, the zero rate of VAT will be applied to the following categories of goods which are at present subject to the 6.75 per cent tax rate:
(a) clothing and clothing materials and footwear
(b) electricity and heating fuels generally.
The removal of VAT from these commodities will result in an estimated loss of revenue of £8.2 million in 1975. Because of the two-monthly accounting system for VAT the 1975 figure represents only a 4 months' loss of revenue. So far as consumers are concerned, however, the removal of VAT will operate from 1st July.
The success of these measures will depend on traders responding to them by price reductions which will fully match the tax being removed. The Department of Industry and Commerce will ensure that customers will get the full benefit of the relief in reduced prices.
Revised deficit
I will now summarise the budgetary position consequent on the measures I have announced.
The deficit on the current budget last January was £125.3 million. Additional current expenditure by Departments of £76 million and the provision of a further £10 million for servicing of the public debt, which I have already adverted to, bring the deficit to £211.3 million before taking account of the package. The net Exchequer cost of the package this year is £20 million. This takes account of the direct additional costs of the subsidies (£18.5 million), VAT reductions (£8.2 million) and of offsets from the Income Tax surcharge (£8 million) and other factors such as expected reductions in public expenditure consequential on the package. As I have already stated, tax revenue today is running well below that expected in January—so much so that I consider it prudent to trim the January post-budget estimate of total revenue by £11 million. I might add that even this reduced estimate allows for some improvement in tax revenue receipts which could not be expected to take place in the absence of today's package. This leaves the revised current budget deficit at £241.6 million or £116.3 million greater than in the January budget.
Resources
Taking account of all the adjustments made, the revised capital budget requirement comes to some £786 million as compared with a figure of £649 million in my January Budget. To this figure must be added some £38 million extra required to finance the placing of agricultural products in intervention. The additional amount is required mainly due to worsening market conditions and also to the unforseen necessity to take milk-powder into intervention.
Total requirements therefore come to £824 million as compared with £649 million in January. On the resources side, sales of Government securities on the Irish market have been very buoyant, showing investors' belief in the underlying strength of the economy, and I think I could now reasonably expect some £40 million more from that source this year than I expected in January. In addition, I can expect an increase of £15 million from sales of securities to the commercial banks, arising from an increase in the level of current and deposit accounts in these institutions, but I must take account of an expected reduction in payments from the European Regional Development Fund. The net effect of all these changes is to put the residual financing requirement for 1975 at £372 million.
The commercial banks have accepted, following consultations with the Central Bank, that it is appropriate that moneys for intervention purposes should be provided through the banking system and have already agreed to provide £58 million for this purpose, being the amount advanced by the Exchequer for this purpose to 31st December last. Discussions are now being opened with them on the additional £38 million required in the current year. On the assumption that this amount will also be forthcoming, this would leave a balance of some £276 million to be raised to finance Exchequer requirements this year. A large part of this will clearly have to come from external borrowing, some of which has been secured or is being arranged. In my Financial Statement in January last I stressed the danger of relying too much on such borrowing for the financing of public expenditure. While I feel that a reasonable amount of external borrowing is justified, I have some hopes that part of the residual requirements may be raised at home without recourse to external markets.
Deputies will recall that the Central Bank, in its last Annual Report, stated that on the basis of substantial adherence to the then budgetary dispositions, it considered it appropriate to help in financing the Exchequer borrowing requirements. It is proposed to have further discussions with the Bank in the light of the revised dispositions which the Government consider necessary in present circumstances. The Central Bank will, moreover, be reviewing its credit policy next month in the light of the Government's present measures and of the desirability of ensuring that monetary policy contributes effectively to the achievement of the overall aims of reducing inflation and promoting economic growth.
Savings
It has been suggested that national savings would be increased if index-linked savings schemes were to be introduced. In speaking on the Committee Stage of the Finance Bill on 16th April last, I warned of the danger of believing that general indexation is the cure for our troubles. It is illusory to believe that a country can enable itself to pay higher prices for imported goods by increasing individuals' incomes by amounts sufficient to cover imported costs. That process compounds inflation; it certainly does not compensate for it. As any general scheme of index-linked savings would have to be matched by index-linked interest charges to borrowers, thereby fuelling inflation, indexation must be carefully limited.
There is however, one area in which I think it socially desirable that an index-linked scheme of limited application should be introduced. I refer particularly to the savings of our older citizens, who usually like to have a small nest-egg to provide for contingencies. I propose, therefore, to introduce a scheme of savings indexation limited both as to those who may participate and as to the total extent of their participation. I am also considering a limited scheme of indexation, related to the National Instalment-Savings Scheme, confined to those who are prepared to set their savings aside for a minimum fixed period of time. I hope to be in a position to announce particulars at a very early date.
Sterling link
It has been suggested of late, with increasing frequency, that exchange rate adjustment and particularly the breaking of the link with sterling offers a way out of our problems. It is important that the public should not be distracted from the task of tackling inflation now by the chimera of instant salvation through the exchange rate. Whatever advantages there might be, in certain circumstances, in a severance of the sterling link, they could not be attained unless we first of all effectively tackled the current malaise of domestic inflation.
A high rate of inflation in our main trading partner undoubtedly contributes to our own intolerable inflation. Given a one-for-one link with sterling, our inflation rate will, in the long run, relate to the British rate. The fact is, however, that for some years now our inflation rate has been faster than the British rate and it should, irrespective of any other considerations, be possible by domestic policy alone to reduce our rate below that of Britain over a similar period.
It would be illusory, however, to think that we have much scope for manoeuvre as regards exchange rate variation. Anyone who is tempted to think otherwise might with profit study the comments in the recent NESC report on inflation. It is only by embarking on a programme of regular upward revaluation against sterling that we could hope to insulate ourselves from this particular source of inflation. I do not hold any objections of principle to this course, but I am bound to point out some severe limitations on its immediate practicability. First, the immediate effect of a revaluation would be to make Irish industry less, not more, competitive, with immediate and widespread results in unemployment. Second, for this and other reasons it would simply not be credible to attempt a revaluation until domestic policies to curb inflation and improve competitiveness had been implemented and were seen to be working. I might point out, moreover, that the alternative to a link with sterling could be a link with another major currency, which in present circumstances would impose an even more severe deflationary discipline on the Irish economy.
Even if conditions were such that exchange rate adjustment could be contemplated, this would not of itself ensure that our inflation rate would improve. All it would do, if successful, would be to help to insulate the economy from imported inflation. It would be as necessary as ever to ensure that domestic economic policies and developments contributed to reducing inflation, not increasing it. The Government have, therefore, concluded that a change in our existing currency arrangement could not in present conditions be relied upon to make any worth-while contribution to the solution of our economic problems.
In quite a different climate it could be worth while to review our exchange rate arrangement but any change would have to be, and be seen to be, the result of sound judgment to maintain and improve a healthy economy.
Future developments
Action cannot stop with this package of measures. Once the counterattack on inflation has started, with the winding-down of the price/wage spiral, the momentum must be carried forward. We must already start looking ahead to the next national pay agreement, negotiations on which will in any event be starting in the autumn. We must avoid becoming the victims of inflation-making procedures of our own devising. The form, duration and content of the next National Agreement will require the most careful consideration to ensure that it carries forward the anti-inflation momentum started today. The Government will take steps to bring the implications of national economic priorities to the forefront of these negotiations. At the least, it is now beyond question that any form of pay indexation in future National Agreements must not be linked to changes in prices brought about by tax increases needed to protect the deprived sections of the community against inflation. A clear acceptance of this principle by the negotiating parties should be forthcoming; I do not think this can be regarded as an unreasonable request in the circumstances of our time. It may prove desirable to formalise this position, but I would hope that the spirit of national partnership and the sense of national responsibility which, I know, informs the parties to national agreements, would make this unnecessary.
Medium-term outlook
The measures outlined above are designed as a short-term approach to the problems of inflation and stagnation. They are intended merely as temporary measures to get the economy moving on a path of growth with reducing inflation. In particular, we do not regard the taxation, subsidisation or employment premium measures as being needed—or, indeed sustainable— for more than a very limited period of time. There is the danger, however, that the solution they produce could be short-lived unless supported by policies over the medium term ahead aimed at maintaining the confidence restored, the stability regained and the renewed growth in the economy. This stabilisation programme must be succeeded, therefore, by an effective strategy for medium-term growth which takes full account of the problems affecting us and embodies the changes required to ensure that they do not persist or reappear.
On previous occasions, I have stated that I did not then regard it as opportune to publish a formal national plan, mainly because of the global economic uncertainty and prevailing inflation rates. It scarcely needs pointing out in current circumstances that talk of solving current economic problems by formulating a "plan" is futile unless the plan includes steps to control inflation. Without a stabilisation policy for abating inflation, an economic "plan" would simply not be credible. With this economic package under way, however, we can prepare a plan for recovery and growth. In doing so we shall have to consider how, over the medium term, we can redress the damage to our growth potential caused by the inflation to date and the world recession which may hopefully soon begin to ease. In the past, planning concerned itself mainly with the policies necessary to increase employment and incomes; it tended to take for granted that the consequential increases in Government expenditure— which are high in the Irish economy given the lead role of the public sector —could be financed without great difficulty and it more or less assumed away the inflationary problems arising from the demands for income redistribution. Any future plan will have to be firmly grounded on realistic assessments of resources and on realistic programmes of public expenditure, both current and capital. It will also have to deal explicitly with the inflationary side-effects.
Previous plans did not, in practice, succeed in achieving the acceptance of the results for taxation and savings of the planned distribution of growth among the various needs and demands —investment, social welfare, government expenditure generally and wages and profits. The past few years should have taught us that a plan is futile unless the community accept the redistribution involved without seeking compensation through income increases. Any medium-term perspective must spell out the cost, in terms of added taxation and demands unsatisfied, that is necessary for the achievement of its objectives, and the discipline involved in terms of income distribution policies over the medium term must be accepted by the social partners. Otherwise it is doomed to failure.
We must grapple immediately with a key element in the development of a medium-term strategy, namely, the role of public expenditure over the next few years. The Government have before them projections of public expenditure for the years 1976 to 1979 inclusive. The kind of inflationary conditions we are at present experiencing makes multi-annual budgeting a more uncertain and difficult undertaking than it would be in more stable conditions. However, the Government hope to take decisions shortly on the broad outlines of expenditure and on an order of priorities for those years having due regard to the estimates of likely resources and the choice of objectives which can be achieved. Any such attempt will be fruitless unless we first create an economic environment in which we as a community are in a position to make choices instead of having them forced upon us. It is essential that the discipline inherent in the economic package I have presented today should be accepted by all sections of the community. There are substantial rewards to be gained from such discipline. Its rejection would condemn us to economic decline and social upheaval which would imperil the very intitutions on which our existence as a free democratic nation depends.
Effects of the package
The package of measures which I have today presented to the House is one of the most significant ever produced by a Minister for Finance of this State. It should be clear that my primary purpose is to secure an immediate and significant reduction in the rate of price increase. I am confident that the social partners will recognise that this action alone would be worthless without a matching response on their part. If this is forthcoming then today's measures will represent a major step towards breaking, or at least winding-down, the inflationary spiral in which our economy is trapped.
The immediate effect of the subsidies and tax reductions will be to reduce the rise in the cost of living for the average household and therefore the consumer price index by four percentage points. Before these measures, the prospects were for a price rise of the order of 24 per cent by the end of the year; now, provided there are no untoward developments in external prices, we can hope that prices will not rise by more than 20 per cent. This is still, of course, an excessive figure but no one will disagree that we will be moving in the right direction. The longer-term benefits could be of greater significance. Instead of a steadily worsening and increasingly demoralising flight to higher and higher levels of inflation, we have now the opportunity to bring our price rise to a tolerable level. There should be no doubt that the Government's measures depend for their success on the full co-operation of all sections of the community, and that includes the Opposition. It is my earnest hope that this will be forthcoming. If the spirit of partnership, which the Government are seeking, prevails, then we can look forward with confidence to a steady, even if not dramatic, improvement in our economic situation.
While the achievement of a reduction in our rate of inflation is unquestionably a pre-condition for continuing progress on the employment front, the Government have not been content to concentrate all their fire on inflation. While the economic environment has radically altered—for the worse unfortunately in the world— since the Government entered into their commitment to maintain employment and preserve living standards, we have no intention of reneging on this commitment.
The aim of the Government's measure is, therefore, two-fold in nature. Priority is being accorded to tackling the problem of inflation and to stimulating economic activity. The stimulus provided by my January budget has, in the light of subsequent developments beyond our control or prediction both at home and abroad, proved inadequate. There is, as mentioned in my Department's publication, "Review of 1974 and Present Outlook—June, 1975" a very real possibility that the volume of national output this year will, in fact, be lower than in 1974. The fall in output in the first half of the year was so marked that the rise expected in the second half could well be insufficient to offset it.
The need for a further stimulus to growth is, therefore, clear. The Government's measures, I am confident, meet this need.
The elements of the package have been carefully chosen with a view to producing the greatest possible benefit to domestic employment. While estimates of the employment effects are difficult, because of the lags involved before some of the measures take effect and of uncertainty about the response to the premium employment programme, we are hopeful that these measures will have the effect of raising employment over the next year by 15,000 to 20,000 more than it would otherwise have been.
Conclusion
It is essential that the discipline inherent in the economic package I have presented today should be accepted by all sections of the community. There are substantial rewards to be gained from such discipline. Its rejection would condemn us to considerable human misery as a consequence of economic decline and social upheaval. Its rejection would imperil the very institutions on which our existence as a nation depends. This debacle can be avoided by our joint resolve as a people to act reasonably in the most severe economic conditions to threaten this State since she achieved independence 54 years ago.
If we persevere in the course which we now set, the journey to recovery will not be unduly long or onerous. The goal of a return to economic growth and real improvements in living standards is surely worth the discipline which the Government are seeking.
Government action alone cannot ensure that jobs will be provided and preserved or that the wild horses of inflation will be harnessed and brought under control. They need the assistance and co-operation of all sections of our people, workers, trade unionists and management, farmers, businessmen and professional men. Every man, woman and child in this country has a vested interest in having inflation brought under control as quickly as possible. The package being offered by the Government is not and cannot be a one-sided bargain. It involves the principle of "give and take" and this principle must be recognised and accepted by all if the package is to succeed. This is neither the time nor place for the "I'm all right, Jack" mentality or for pressing sectional interests. The crisis affects us all and the plain truth is summed up in the sean-fhocal "Ar scáth a chéile is ea a mhaireann na daoine" and the same sentiment is echoed in G.P. Morris's oftenquoted phrase" United we stand, divided we fall". Leaving aside all considerations of patriotism and consideration for others, enlightened self-interest and common sense, which do not move everybody, should make us all recognise that the only way out of our current dilemma is to cooperate fully with the programme for economic recovery announced here today.
TABLE EXPLANATORY OF THE REVISED CURRENT BUDGET, 26 JUNE 1975
(Figures in brackets refer to budget presented on 15 January, 1975)
|
REVENUE |
£ million |
EXPENDITURE |
|||
|
1. Tax revenue (excluding motor vehicle duties) |
931.50 |
(942.90) |
1. Debt service and other Central Fund charges |
210.00 |
(200.00) |
|
2. Motor vehicle duties |
27.70 |
(28.70) |
2. Payments to Road Fund |
18.44 |
(19.10) |
|
3. Non-tax revenue |
156.20 |
(154.75) |
3. Supply services (non-capital) |
1,114.60 |
(1,038.60) |
|
1,115.40 |
(1,126.35) |
1,343.04 |
(1,257.70) |
||
|
4. Add: Net cost of new measures |
20.00 |
||||
|
1,363.04 |
|||||
|
5. Deduct: Estimated departmental balances |
-6.00 |
(-6.00) |
|||
|
4. Deficit |
241.64 |
(125.35) |
|||
|
1,357.04 |
(1,251.70) |
1,357.04 |
(1,251.70) |
||
SUMMARY of Revised Capital Budget (including Current Budget Deficit), 1975
|
Requirements |
£million |
|
|
Estimate 15 January, 1975 |
Estimate 26 June 1975 |
|
|
1. Public Capital Programme |
458.9 |
489.8 |
|
of which: (a) Voted Capital Services |
134.4 |
138.7 |
|
(b) State Bodies, etc. |
204.7 |
219.3 |
|
(c) Local Authorities |
119.8 |
131.8 |
|
2. Non-Programme Outlays |
190.1 |
334.3 |
|
of which: (a) Exchequer-financed |
||
|
(i) Current budget deficit |
125.4 |
241.6 |
|
(ii) Net advances to EEC Intervention Agency |
— |
38.0 |
|
(iii) Debt redemption |
40.0 |
30.0 |
|
(iv) Miscellaneous |
21.4 |
21.4 |
|
(b) Non-Exchequer financed |
3.3 |
3.3 |
|
3. Total Requirements |
649.0 |
824.1 |
|
Resources |
||
|
4. Non-Exchequer Resources of State Bodies and Local Authorities |
148.0 |
149.4 |
|
of which: (a) State Bodies |
140.5 |
141.9 |
|
(b) Local Authorities |
7.5 |
7.5 |
|
5. Exchequer Normal Resources |
243.0 |
298.0 |
|
of which: (a) Loan Repayments |
15.0 |
15.0 |
|
(b) Sales of securities: |
||
|
(i) to the public |
80.0 |
120.0 |
|
(ii) to commercial banks |
85.0 |
100.0 |
|
(c) Small Savings |
24.0 |
24.0 |
|
(d) Sinking Funds |
36.0 |
36.0 |
|
(e) Miscellaneous borrowings |
3.0 |
3.0 |
|
6. European Regional Development Fund |
8.0 |
4.0 |
|
7. Residual Resources (including Foreign Borrowing) |
250.0 |
372.7 |
|
of which: (a) Commercial Bank Advances to finance the Intervention Agency |
— |
58.0 |
|
(b) Other (including foreign borrowing) |
250.0 |
314.7 |
|
8. Total Resources |
649.0 |
824.1 |
|
Item 6: |
The January 1975 Capital Budget estimated receipts from the European Regional Development Fund at £8 million and included them under the heading “Residual Resources”. Under the EEC budget, since adopted, receipts in 1975 will total £4 million; the balance will be payable in 1976. |
|
Item 7 (b): |
On the assumption that the Banks will provide the additional amount £38 million required for intervention this amount will become £276.7 million. |
