We have increased the capital budget from a total of £248 million in 1972-73 to £460 million this year. The deficit on the current budget, as introduced last January, was £125 million compared with £35 million in the 1972-73 budget.
Of course, there are circumstances in which deficit financing can be criticised. But, in the circumstances in which this economy and those of Europe have found themselves in the last 18 months, is it not obvious that had the Government not spent this money on expanding and developing the capital programme the employment situation here would have been far worse? How is that money being spent? It is being spent on helping industry and agriculture, in getting houses and roads built, in improving the telephone and transport systems, in increasing our generating capacity in electricity, in helping to sustain employment and provide conditions in which both employment and investment can flourish.
We have been criticised for not providing more money for housing. In the last two and a half years we have built more houses than in any five-year period of our predecessors' term in office; built more houses at a time when housing costs rose by 58 per cent between May, 1973, and May of this year. In fact, inflation in respect of building costs was even greater here than elsewhere. That is the situation we have had to face over the last 18 months and that is how the Government has acted in order to cope with it.
As Deputies are aware, the current deficit derived, in part, from our efforts to improve social services, to make life better for the sick, the old, the infirm, the unemployed and deprived in society. Spending on social services has risen from a total of £475 million in 1972-73 to £968 million this year. In that area it is indeed obvious that compassion has been the keynote of our policy. But these efforts on the capital programme have succeeded in keeping unemployment at a lower level than it might have been otherwise. We have managed to keep the percentage increase in the numbers unemployed better than in many other countries I have mentioned, though the rate of unemployment here, in so far as it is comparable, is higher.
But the scope for further action to increase both employment and social benefits is subject to two clear limitations. The first of those is the obvious one referred to here yesterday and again this morning, the amount that can be raised by way of taxation and borrowing. In respect of the yield from additional taxes, the increase in yield from the taxes imposed in the January budget is small in comparison with the capital needs to sustain and increase employment. Our borrowing now — and nobody denies it — is uncomfortably high and needs careful management. Indeed, I need only point out to the House that the total amount to be paid to service the debt this year, at £235 million, would exceed the total capital budget in 1971-72. A great deal of the expenditure that has had to be met by this Government was to deal with the legacy of problems we inherited and we are expected to deal with and overcome these problems in a space of a little over two years, with an unprecedented economic depression affecting the whole world, even the strongest economies.
The second obvious limitation in respect of public expenditure is that it is at the point at which it, in itself, is causing inflation; it arises from the very nature of public expenditure. The Government must raise money with which to finance its services. Of course, if the public were willing to accept that the Government would spend money on their behalf and forego a corresponding amount of spending themselves, then the decision to increase Government expenditure obviously would not increase the total amount of demand or spending within the economy. Of course, this does not happen. What happens is that both public and private expenditure press on the same volume of resources, without either giving way to the other and when the capacity of our economy to supply the variety and quantity of goods people require is limited, the consequence is either inflation or an insupportable increase in the balance of payments deficit. Of course public expenditure contributes in a more direct and measurable way to inflation. Increases in indirect taxation tend to increase the consumer price index which, in turn, causes wage and salary increases or expectations, and increases in direct taxation work in a similar way.
There is no source of funds on which the State or anyone else can draw inexhaustibly. To take an example of this, one suggestion has been made that somehow we should use the banks' profits. The banks have made and are making a substantial contribution to the financing and management of State programmes. They are taking the initiatives in relation to housing which the Minister for Finance has dealt with yesterday in his opening speech. They provide finance for agriculture, industry and trade. It is important that everyone should be aware of the contribution the banks are making to the running of the State, and in fairness this should be acknowledged.
What they are dealing with is the money which the people of this State and of other States have left with them, no more and no less. Like other institutions here and elsewhere they make a certain level of profit from their business. That profit is subject to the same rules, more or less, and the same requirements in respect of taxation as the profits of other businesses and I may say, erosion by inflation as the surpluses of any other concern. And these profits are just as necessary, as in other businesses, to the health and well-being of the system, which, so far as the banks are concerned, must safeguard the accounts of tens of thousands of ordinary individuals throughout the State.
Another illusion we must rid ourselves of is that profits may somehow provide the funds for further public expenditure, or, alternatively, that somehow they are inimical to progress. For us, the reverse is true. I say this not in any provocative spirit, but simply to get the facts established. This country depends to a critical extent on the quality and the quantity of the investment it can attract. We must have new factories and new machinery in old factories. We must have farms which are better stocked and better equipped. We must have hotels and offices and shops which are efficient and give value. These things can come about only if industry and agriculture make a profit sufficient to finance new investment and they are left a fair amount of surplus in this way. They can only reinvest and re-equip if the surplus they are left with is adequate to attract and encourage investment and those who have money to invest with them.
It is generally recognised and not disputed that this country cannot provide all the capital it needs. We have legitimate aspirations on all sides of the House and outside it to a higher standard of living, to better economic and social conditions. We aspire to conditions which much wealthier countries have, even conditions which some neighbouring countries have. We have not the same resources or the same natural raw materials. We must therefore attract investment from outside. If we do not provide the right conditions — and these conditions include the ability to get a return on investment — the world is full of countries, some of them emerging countries who will be only too glad to do so. I need not emphasise how employment would suffer if the investment we seek was attracted or diverted elsewhere.
Again, employment here will suffer even in existing industry if the level of profit is insufficient. Nowadays a firm must re-equip almost continuously to survive. It must have within itself the money to pay for this re-equipment and must have the ability, because of its past record, to raise this money. In both ways, it is dependent on its profit record and prospects; and both are endangered by present levels of inflation. It is the firms who did not or could not accumulate a sufficient surplus who are now finding conditions most difficult, and it is the workers in those firms who are suffering as much as, if not more than, anyone from these inadequacies. Profits are an essential precondition of employment. Excessive profits are, of course, different from fair profits which provide a reasonable return, ensure economic progress, increase employment and provide better jobs and a better economy.
But over and above arguments as to the efficacy of public expenditure to get us out of our present difficulties is the incontrovertible fact that this expenditure and Government activity are only part of the picture. Just as trends in international markets can influence this country's future almost as surely as any decision or action taken domestically, so, what we do as a people, the expectations we have and the action we take to realise them, can influence our future more directly than action taken by the Government alone.
Some figures will prove this fact. The total amount of public expenditure with which the Government dealt at budget time earlier this year was of the order of £1,800 million. This includes the current budget, the capital budget, and central and extra budgetary funds. It is a large amount of money by any standard, and it is as good a measure as any other of the influence the Government can exercise on the economy.
On the other hand, the total amount of wages and salaries in the country this year will probably be of the order of £2,000 million. What happens to wages and salaries generally can exercise as big an influence on prices, and employment, and on the whole future of the country, as the sum total of public expenditure with which the Government deals at budget time — or perhaps even a bigger influence.
Last year most of the rise in prices was due to the increase in the price of goods we imported whether they were finished goods or raw materials for further processing. The quintupling of oil prices and the steep rise in the price of food and of many basic materials are examples of this inflationary trend. This year we cannot so easily evade the blame. Most of the inflation, as has been repeatedly said by the Minister for Finance and by commentators, is due to price rises generated domestically. Our rate of income increase is, in itself, now the biggest single cause of our inflation. The rise in prices is, in turn, generating pressure for further wage and salary increases. These, if granted, make firms uncompetitive in comparison with firms in other countries producing competing goods and services and faced with lower rates of cost increases. The net effect is unemployment on the scale we now see, and the purpose and the single major objective of this supplementary budget is to break the vicious spiral of wage pushing price and price pushing wage ever upwards, to the point where our products find themselves priced out of their markets; and the workers, who should be producing them, priced out of their jobs.
These considerations are crucial to the strategy of the package of proposals which the measures introduced yesterday have been worked out to deal with as a contribution towards a solution of our present difficulties. With a home market of three million people—the population of a mediumsized town in a European context— we cannot ourselves provide the conditions for the establishment here and growth of the type of modern industry on which high wages and good living standards depend. We must sell abroad. This means that, as a matter of simple fact, we cannot allow our costs to grow more rapidly than those of the countries with which we compete and in which we must sell.
On this, there are again a number of illusions. It has been argued that we all have an entitlement to income increases that compensate fully for the rising cost of living. That may be so, but an entitlement is useless if the attempt to achieve it destroys the means to realise it. All the entitlements in the world will not reopen a factory which has closed because its costs are too high.
I have put the facts bluntly because they are harsh. As too many people now know only too well, we cannot talk ourselves into jobs or create employment by referring to claims which nobody can meet. The money to pay all of them comes from the willingness of the people to buy what we produce, either the people at home or those to whom we sell abroad.
This same message has been put across in the Report on Inflation issued by the National Economic and Social Council. It says:
All the information which is available indicates that exporters are finding it increasingly difficult to sell abroad at present prices, that the price increases that will follow the increases in money incomes under the 1975 National Agreement will increase the difficulties being faced by exporters, and that investment (domestic and foreign) in export industries is tending to decline.
That is a point, the Report emphasises, that has not been fully stressed or sufficiently emphasised. Inflation destroys employment and, whatever about the merits of some abstract concept of justice, the attempt at all times to keep pace with it, at its existing level, on the part of those in jobs will destroy not only their own jobs but the employment prospects of many thousands of their fellow workers and of their children.
It is a further illusion that higher increases in income mean higher rewards for the recipient. It does not matter to the individual's purchasing power if he gets a pay increase of 5 per cent if prices rise by 5 per cent or a pay increase of 24 per cent if prices rise by 24 per cent. It does matter, however, to the firm employing him and to the country in which he lives. It matters to the firm employing him trying to sell on the export market because other firms, whose wage costs are lower will undersell both at home and abroad what that firm can produce. Other countries whose industries are more efficient and who are more cost conscious will accumulate the wealth that the investment and the talents should be creating at home. The difference for the individual may well be that, with the higher percentage, he loses his job. I can give a further example.
In Germany money wages in manufacturing industry increased by 49 per cent between 1970 and 1974. Prices went up there by 27 per cent leaving workers better off, in real terms, to the extent of 17 per cent. Germany has a massive balance of payments surplus and considerably more freedom to tackle the problems it has. Its rate of unemployment, though high by German standards, is about a quarter of the corresponding rate here.
In this country in the same period earnings in manufacturing went up by 91 per cent and prices by 54 per cent, yielding an increase of 24 per cent in real income. The effect on the real earnings of workers here and in Germany was little different but, partly because of the higher percentage at which agreement was reached, our position is not as healthy or competitive as that of the Germans. We have been protected from the worst features of our falling competitiveness by the depreciation in the value of our currency which, in turn, has added to the price we must pay for imports from countries other than Britain, so giving another twist, if you like, to the vicious spiral of inflation. This obviously is a process which cannot continue.
That conviction is, I believe, increasingly shared now by people in all sections in our community. They can see clearly now the destructive impact of inflation, not only on the cost of what they have to buy but on their jobs and job prospects, on savings, on the value of their pensions and welfare benefits, on confidence and on the whole social and economic fabric of our society.
We all know that it is vital in the national interest to turn inflation back. However, people are now caught on the treadmill of inflationary expectations. Experience tells them that large increases in wages are eaten up by correspondingly large increases in prices. There seems no reason to expect that prices will not continue to climb and they fear that moderation on their part or on the part of their group will only leave them worse off, and so they press for higher incomes in salaries and wages and these, in turn, generate further price rises: to this extent inflationary expectations are fulfilled.
It was in this serious economic and financial situation that the Government introduced its package yesterday to break the cycle. That is the basic purpose of the Government. The measure we propose will have a significant direct effect in moderating the rate of price increases by about 4 per cent. Even more important, I believe, is the indirect effect they can have, if they are reciprocated in the way we seek, in combating the psychology of inflation.
Our measures can lead to substantial reductions in the price of basic goods and services which loom large in the weekly budget of everybody and especially of the less well-off sections, of our community. For example, CIE fares will be reduced by an average of 25 per cent, butter by about 20 per cent, milk by 25 per cent and bread by about the same amount. The Government's objective is to show that prices can go down as well as up, that we can stop inflation gathering more and more momentum. But Government action alone, as I said, cannot restore health to the economy. Within the country we can help by making positive moves to get the rate of price increases down. In order to do this we must have a positive contribution from others whose interest in maintaining employment and living standards is no less real and no less immediate than that of the Government. The beneficial psychological effect of this demonstration can be and, indeed, must be made more potent by a contribution on the part of the various parties to the current national agreement. This can be done in a way which preserves the spirit of the agreement and, in line with the illustrations I gave, involves no change in the real incomes and purchasing power of those to whom it applies.
The suggestion has been made that the Government should have acted earlier. The national agreement was signed in April. Is it suggested we should have taken action before the agreement was signed? Is it suggested we should have interfered before the agreement was negotiated? Is it suggested we should have interfered with a system that has operated up to now? There was only one occasion in the last 12 or 14 years in which a Government interfered with a national wage agreement. What was the effect of that intervention? The effect of that intervention in 1963 was twofold. The occasion was deliberately used to give an increase greater than was warranted at the time, and that sparked off the first inflationary spiral which has enveloped the country ever since. That action was taken by Fianna Fáil in order to win two byelections. That was the reason, and that was the only time. No Government since has ever intervened and the Opposition now suggest we should intervene, conveniently forgetting all the appalling circumstances and consequences following on their intervention on that occasion, not for economic or financial purposes but solely for political purposes.
Our aim must be to reduce the rate of inflation to a single-digit figure within a reasonably short period and thus to bring about a situation where subsidies will no longer be necessary. No one believes that subsidies are a desirable method of dealing with a situation. They are justified in very exceptional and limited circumstances. It has been repeatedly said that they have many and substantial drawbacks. They are a wasteful way of helping those in need because they apply equally to everyone. They involve a substantial increase in public expenditure when its size and financing are already exerting their own inflationary pressures. They increase the proportion of public expenditure devoted to current consumption rather than to investment. In this way, they are, in the long term, inimical to employment. But in the conditions of today, which are unique in our country's history, the Government are convinced that subsidies are essential to begin to get the rate of price increases down.
The measures we announced to stimulate employment were taken in the belief that they can contribute most effectively and speedily where Government action can have the most beneficial and lasting effect. We are providing an extra £31 million for the public capital programme, bringing the total for this year to little short of £500 million, an increase of £100 million on the rate of expenditure in the financial period ended last December. The bulk of the increased capital spending being authorised will be on housing and telephone development, where the effect of maintaining and increasing employment should be felt reasonably quickly.
The extra money for housing is additional to the arrangements which are also being made whereby the banks are proposing to advance substantial sums for the industry over two years. In addition, as indicated by the Minister for Finance, the inflow of funds to the building societies is showing a marked improvement and they will be in a position this year greatly to increase their advances to house buyers. I am confident that the unprecedented injections of funds in prospect and the revival of confidence among those thinking of buying a house which the Government's measures will promote, will lead to a significant improvement in the employment position in the industry, and have significant multiplier effect on other industries.
Despite the rapid inflationary increase in building prices in the last two years, the building programme has gone ahead with extraordinary rapidity. This is an area in which there are valuable spin-off effects. Houses are needed to provide for social needs and to overtake the backlog that was there from the past. In addition, as was announced yesterday, the Government are providing an employment premiums scheme on the basis that it is better to spend money to support increases in employment and re-employment than to sustain people in unemployment. It is better for the economy and for those who are affected by unemployment. As the Minister and others said, it is difficult to gauge in advance what the response to the scheme will be. We are hopeful that with the spur to confidence and revival which our package will give, a significant number of persons currently unemployed will be taken into employment. By mid-1976, as a result of all the measures being taken gross national product could be about 2 per cent greater than it otherwise would be: jobs could be generated for 20,000 people in 1975 and 1976.
It has been suggested in the course of comments by Deputy Lynch, Leader of the Opposition—and I would like to acknowledge the constructive approach he had to the suggestions we made and the support he gave for a revision of the national wage agreement—and other Opposition Deputies, that something extra could be done, while, at the same time, criticising the amount of borrowing and the rate of taxation. We believe we have undertaken the largest amount of borrowing sustainable. We believe also that, in present circumstances, we are raising as much as is fair and reasonable from the taxpayer. The figures which I and the Minister for Finance gave indicate that the taxes which were imposed last January produced less than anticipated. In other words, the increase in revenue from the old reliables was not as great as had been anticipated.
So far as the building industry is concerned, the money already included in the capital programme, the extra money being provided by the banks and announced in the course of yesterday's budget speech, the extra money invested with the building societies, all must have a very significant effect on the extent and the increase in the generation of extra activity. Our proposals will provide extra funds for building.
One of the things that has been obvious not merely in recent weeks but in recent months is the numerous suggestions every week from the Opposition to spend more money on this, that and the other service. There have been demands for more money for an extension of the health services, additional medical cards, demands by way of motion to add extra diseases to the list of diseases entitled to treatment under the Health Acts. All these are desirable in themselves. All are areas in which the Minister for Health and the Government would like to go further. When we look at what has been provided by this Government, how extensive, and indeed reformist, have been the improvements in respect of health and social services, it does not lie in the mouths of the Opposition to criticise it. All they ask in every motion that has been taken, week in and week out, is spend more money on health services and provide more money for housing and amenity grants.
The only change which has been made in the reform of Dáil procedure is that the Opposition are now allowed three hours a week, every week for the whole year, in which they can advocate increased expenditure. Never once has there been a suggestion as to how the money is to be raised. Every time they have spoken here they said we were borrowing too much; that we were raising too much through taxation. Deputy after Deputy stood up yesterday and said that we should provide a subsidy on this, that and the other, everything from bottled gas to blankets. The only thing they did not suggest a subsidy on was beer.
One group in the Opposition are saying we should spend more, reorganise, regroup. Every outworn cliché and phrase that can be used is presented here as original thinking, as a plan which was never produced before. We have to wait until Fianna Fáil are in Opposition to produce it. When they were in Government they produced a plan that did not work. They did not produce a second plan because they recognised it was too bad to be produced even at a comhcomhairle lunch.
I want to deal now with a few remaining matters which were discussed in the course of this debate. We recognise that our aims cannot be settled by any simple or unqualified theoretical formula.
It will depend on a variety of things. It will depend, as a number of Deputies including Deputy Colley said, on confidence. It will depend on the confidence of consumers, of house buyers, of builders, of manufacturers, of lenders of funds to finance the public capital programme. It will depend, in turn, on people's assessment of the prospects for prices and costs. This is where we see the vital importance of the contribution I mentioned of the parties to the national wage agreement. Success in getting employment really moving depends largely on what we do to keep our costs competitive, on investment in new plant and machinery, as well as what happens in world trade.
We hear criticisms, both by those inside the House and some critics outside the House who have no responsibility except to comment and no authority or experience to express views except again to criticise from the easy position of looking on without being directly involved. The suggestions are that we should have acted earlier. The suggestions are that the problems which affect this country are in some way or other peculiar to this country. The fact is that they are common to every country in the world. The fact is that they have affected the greatest economies in the world. The fact, of course, is that some of them have taken much more harsh action. What did that harsh action result in? It resulted in a massive increase in unemployment.
Is it suggested that we should take dramatic, drastic, action, that we should curb or cut Government expenditure to put other people out of work? Of course, it is easy to suggest this if you are in work. It is easy to suggest drastic action provided it does not affect you, to cut Government services, to put people out of work, to dispense with those who are in public employment. The fact is that economies do not work that way. The fact is that we have inherited difficulties built up over generations. Whatever difficulties we have, on top of them we have inherited the legacy of Fianna Fáil mismanagement. We are expected in two years and three months to solve the result of their neglect and to try to solve it in a situation in which the economic climate of the world is the worst not merely since the 1930s but in the history of economic, financial and social affairs.
That is the situation in which we are told by critics in the House and by some outside it that we should have acted earlier, more speedily, more drastically, more dramatically. What do all those critics mean? What do they mean in reality? They mean, but they do not say, that we should cut Government expenditure and put those employed in Government services out of work. They mean we should give less to housing, that we should give less to the Post Office, that we should give less to social services. At the same time, when they think other people are not listening, they advocate here or elsewhere that more should be provided for social services and health services. If they cannot think up enough diseases they go to a medical dictionary and put a list into a motion before the Dáil. If a medical dictionary is not exhaustive enough, they get a natural history one and put down questions about animals which have never been heard of on this side of the globe.
We want our proposals to be accepted for what they are, as the Government's contribution towards dealing with the situation. We want them, as I believe they will be, to be accepted by the trade unions and other elements in the community as a responsible, reasonable and positive contribution to a solution of the problems which affect this country. That inevitably means some modification of the subsequent phases of the national wage agreement or some equivalent adjustment. This which can be achieved under our proposals without any reduction of living standards will, in turn, reduce the rate of price increases and help to provide employment for thousands of workers now without jobs.
It will mean more. It will preserve the jobs of thousands who are now working. As surely as the sun rises they will lose their jobs if costs continue to escalate. The package which the Government have devised puts considerable strains on the Exchequer. If this package is not acceptable, naturally the Government will have to review the position and consider what alternative action can be taken and, indeed, to consider withdrawing some of the benefits.
This is the difference between the Government and the Opposition. The Opposition did not think we could act to deal with this situation, but we have taken action and we will continue to take the necessary action to bring economic health to this country. Even the potential benefits of these measures, significant as they are, probably fall short of what is necessary to get employment and output growing. As I emphasised, success here depends on renewed growth in the world economy and on our putting ourselves in a position to avail of the opportunities this would afford. Here we have considerable strengths on which to build.
Our external reserves this year provide us with a cushion against international uncertainties and unforeseen events. These reserves were markedly higher at the end of April than they were a year previously. Despite the difficulties they faced, our exporters continue to win new markets. In the first five months of this year, our exports expanded by 25 per cent. That is not a phrase about confidence. That is a fact. This compares with an increase in imports of only 3 per cent. Some of this improvement in our payments balance is due to the depression in the demand elsewhere as well as the demand here for imported goods and some to the improved prices being secured for agricultural exports. A great deal of it is due to the efforts of producers and salesmen in producing and selling against competition from all comers. Our exports of manufactured goods are, perhaps, especially vulnerable to recession in markets abroad. Despite that they went up almost 20 per cent in the first five months of this year.
If, therefore, we can keep our costs competitive, we are well set to expand and continue this drive. Confidence is a word which is glibly thrown around. I want to give some financial facts, facts in £s, that display confidence. In 1971-72, the total value of planned investment in industrial projects approved for assistance by the Industrial Development Authority was £60.5 million. In 1972-73 it was £135.4 million. The following year it doubled to £302 million. In the calendar year, 1974, it reached the figure of £510 million. In four years the value of this investment went up eight-fold. These figures represent investments or intended investments by companies of world repute, technologically advanced export-oriented industry, coming or proposing to come here, providing employment and prosperity for whole communities and many thousands of workers.
We should realise that many of these projects, especially those approved for grants more recently, are not yet irrevocably committed to Ireland and that failure to control or reduce our inflation might lose us some of this enormous potential capacity. This potential, added to that of our agriculture, and our existing industrial capacity, provides a base on which we can build when world circumstances permit. We can make the choice, therefore, of high income increases and high prices and price the products of industry out of the markets we have to sell to, or we can break the vicious spiral in which wage follows price and price follows wage ever upwards. If we can moderate the rate of income increase and let our increased competitiveness work its way back through industry in increased employment, we will provide better prospects for all our people.
Of this we must all be sure. The problems with which we are faced are not easy to solve. Despite criticism either inside or outside the House they cannot be got rid of quickly or by any magic formula. They are not capable of solution painlessly or simply, by the wave of a theory, a wand or a pen. The Government have provided the opportunity for the choice to be made between a society in which employment can flourish, or its alternative, where not stagnation but decline is the inevitable consequence. I have enough faith in the goodwill and good sense of the Irish people to believe they will make the right decision.
The contribution we seek is small and temporary, and while the consequences of failure are grievous the rewards of success are great. I believe we have the capacity and the will and we have given the necessary leadership to achieve that success.
