Dáil Éireann debate -
Thursday, 3 Feb 1977

Vol. 296 No. 6

Financial Statement, 1977: Motion (Resumed).

Debate resumed on the following motion:

That Dáil Éireann takes note of the Financial Statement made by the Minister for Finance on 26th January, 1977.

—(The Taoiseach).

Mr. M.E. Dockrell

When I was speaking last week I began by saying I welcomed many, if, indeed, not all, the aspects of the budget and, in the ensuing week, I have seen no reason to change my opinion either by virtue of what has emerged on further reading of the budget statement and considering its implications or as a result of public or Press comment. I have not referred to Opposition comment because, of course, one naturally does not expect bouquets from the other side of the House.

The outstanding feature of the budget is that it has endeavoured to relieve both industry and individuals from the crippling taxation they have had to endure for many years and, at the same time, help in every possible way we can afford those sections who cannot help themselves. We have been helping, and very rightly, the less fortunate among us, the less well-endowed, with this world's goods. They have been getting a tremendous amount of help and they will continue to get it under this budget. Simultaneously some hope and some help has been given to industry and to higher paying taxpayers. I will not say wealthier people because I do not think we have very many of what one might call wealthy people, but there are people who have felt the tremendous impact of taxation, felt it to such an extent that they have been unable to use any portion of their income to provide employment. This is one of the things from which we have been suffering because of inflation and high taxation. The two together have meant people have been unable to have a surplus after their year's work, if one may put it that way, to plough back into undertakings designed to create employment. Any possible surplus has been taken away in taxation. That has been the fashion in many countries.

I think the tide is now beginning to turn inasmuch as it is realised now that the goose that lays the golden egg, to use a cliché, can very easily be killed. Something akin to that has been happening not only here but in a number of countries in Western Europe but we have borne the highest burden of taxation in the whole of the EEC and, by a strange anomaly, that has not helped to make the country any wealthier. It has helped the country and the Government to provide welfare services running at a very high level and running in the main in a direction which is highly effective from the point of view of the objective.

To my mind the most important aspect of this budget is the underlying ideology. As the ideology is fair so is the concept. Whilst we must help to the greatest extent possible the people who are least fortunate—the widows, the children, the sick, the poor generally, the unemployed—we recognise that high taxation is not the best way to help the State to move forward towards a higher standard of living for its people. I think I am reading correctly that the pleasure that this and the budget have brought about and the degree of welcome from all sections arise because the public have realised that at least that day has dawned here when it is not just a case of higher taxation being the answer to everything. In that respect the Government have got and will get a lot of unnecessary blame for the fact that we are living in a state of high inflation. We are what is called an open economy and I understand that phrase as meaning that what happens outside affects us immediately. We are small and we are in western Europe. We are part of the most highly industrialised portion of the world for its size and we are not an overwhelmingly industrial country. Indeed, we are barely industrialised, so that any change in economic circumstances is immediately felt by us and—this is the point—is outside the control of our Government. Take two simple matters which have happened in the last week or two, the rise in the price of coffee and the rise in the price of cocoa, and I imagine, although I do not know, that we will see a rise in the price of tea not far behind. I believe it is frosts in South America and Brazil which have caused the shortage and the rise. Those are two examples that we may hear about in the next few weeks. A small country like ours cannot do anything fundamentally to affect that. We cannot start growing our own coffee, cocoa or tea.

We all know the terrible effects— and they have been terrible in their implication—of the enormous increases in the price of oil. We as yet have found no worth while oil. I hope we will. It will be a great help to us if we do, but we have not found any so far.

Mr. Haughey

Exploration has practically stopped.

Mr. M.E. Dockrell

Yes—well, it would stop in the wintertime anyway. We hope that next summer they may find something out on the Continental Shelf. Gas has been discovered but gas is not oil and, whilst gas may be a great help to us, it will not yet run our motor cars. I say "yet" because one never knows what the future holds.

At any rate, those are examples of what this Government have had to face and will have to face. Any future Irish Government will have to face that, but owing to our size there is no point in blaming the Government for that although I daresay there will be people who will endeavour to do so.

I referred earlier to the Minister's statement about the recruiting of 500 new gardaí. That will put costs up and will have to be paid for, but it is necessary. We know about the crime wave which is sweeping the country, some of it coming down from the North, some of it, I regret to say, engendered here on the spot. We must protect life and property and the Garda have done and are doing a splendid job in detection and in the general work they do, but we must have more of them. The troubles in the North and the difficulties on the Border have been explained. I am merely emphasising the cost to us of those very terrible troubles that beset the other part of this island.

I will refer briefly to the taxation of the farmers. That can be better dealt with in depth by other people, but I say that this country is overwhelmingly agricultural. We have followed very much the taxation system of Britain and we still follow the general framework of it. It is all right in a highly industrialised country like Britain to tax industry and individuals very highly. In this country our small actual industrial capacity and existing number of firms and manufacturers generally cannot bear the same proportion of the welfare services that other highly industrialised countries can. Yet we must, and wish to, follow welfare policies to the extent that is taken as the reducible norm in civilised countries. We know the scandal and pain caused to many of us here in Dublin when we see small children begging in the streets. There are really very few of them and we know that, whilst in a way it comes from poverty, it comes more from people who will not look after their children and from a certain very small section of the community. There was a time when we and other countries had that problem to an overwhelming extent. Now we do not tolerate that to any large degree. We try to eradicate it to the best of our ability by various welfare schemes which we pay for.

About 100 to 150 years ago millions of people took to the roads in the wintertime. Now we organise ourselves and we pay tax. With inflation, industry cannot carry on and provide the profits for the Government to take and use for welfare. We now have to turn to part of the agricultural sector. As a representative of a Dublin constituency it does not give me any pleasure any more than it gives the Government pleasure to tax sections of the community. This is an inescapable burden which has been rightly placed on us to build up the economy to a level at which poverty and want will be eradicated. The overwelming majority of farmers see this 20th century problem in the light of the Government's successful efforts and their duty to raise money to eradicate poverty, want and sickness and to provide higher education.

I should like to turn briefly to some of the advantages for individuals and companies in the budget. Generally speaking, there have been increases in some of the tax allowances and in children's allowances. The personal allowances have gone up for married couples and for individuals. Some company taxation has been reduced and corporation profits tax has been reduced. The Government have promised sympathetic consideration of stocks relief. They have promised to help in every way they can. The Government have also promised to help people and have helped them in the budget in the matter of inflation accountancy. The second moiety of the rates will be reduced by half. That will be a great help to individuals. Self-employment retirement assistance is also given and higher education grants. The pensions of public service widows have been increased. A whole host of things has been done in the budget as well as giving relief to industry and individuals.

Successive Governments have helped individuals and this thrust forward has been carried on. At the same time, the taxation stranglehold on individuals and companies has been relaxed somewhat. I hope in successive budgets that stranglehold will continue to be relaxed. Through the increased activities and business which will be engendered, employment will be created and a climate of opinion will be engendered which will make it possible for people to put their money at risk in gainful occupations in the knowledge that if they make a profit it will not be taken from them by the Government.

I congratulate the Minister and the Government on this budget. He has made a concerted effort to implement a policy of loosening the financial shackles which have been put on industry and, at the same time, he has improved the welfare schemes which cost us a great deal but of which we are very proud and of which the people can feel proud. Apart from disliking the burden of taxation, we all like to see welfare schemes continued and strengthened. We do not want to see waste. There are people who think certain aspects of our welfare schemes are unduly wasteful. If it can be shown that there is waste, I hope it will be eliminated. We cannot afford to pay welfare benefit to unworthy people. In the overwhelming majority of cases there is no waste and the majority of our welfare schemes are very well administered and the State is getting value for its money. There probably are loopholes which could be closed and I urge the Minister to do that.

Mr. Haughey

The budget presented by the Minister for Finance to the Dáil last week makes no significant contribution to the major economic difficulties facing the country. Its author, because it does not do so, stands condemned of failing to discharge one of the principal duties of his office, to use the opportunity of the annual budget to promote the economic welfare of the country to the greatest possible extent that circumstances permit. He has failed to outline any positive programme of effective measures to get the economy moving in the right long term direction, to get at the deep-rooted, underlying causes of our present difficulties. Because the entire structure of the budget is based on a fraudulent premise it cannot be accepted as a serious effort to do that.

The Minister began his budget address with the words:

Nineteen seventy-six was an encouraging year. Things are looking up again.

That, regrettably, is not so. The fact that the Minister should so seriously misread our situation and so erroneously describe it has the most depressing implications for all of us in the year ahead. Nineteen seventy-six was not a good year. It was not an encouraging year. It is gravely perturbing to learn that the strategy of this budget should be based on such a mistaken analysis.

The Minister's economic policy for 1976 failed to achieve any one of its objectives. The year drew to a close with inflation still raging out of control and unemployment at the same unacceptably high level as it was at the start of the year. This budget ignores those two basic elements in our situation. It ignores the fact that other countries are well out of the recession by now while we are not. We are being left behind. This whole emphasis is wrong. It has concentrated on creating a wide spectrum of benefits and reliefs, of pushing out the boat in as many directions as possible, to the complete neglect of the basic needs of the economy at this time and, to that extent, it represents a sad lost opportunity.

The three stated objectives of Government economic policy in 1976 were: (1) to reduce inflation, (2) to safeguard employment and (3) to limit the growth in public expenditure. None of those objectives has been achieved. The rate of inflation continued at around 20 per cent throughout 1976 and the unemployment situation disimproved steadily throughout the year. The only curtailment of any significance in public expenditure was on the capital side, the one place where it should not have been made. The Minister's budgetary policy did not fare any better. The economic review paper states:

The main features of budgetary policy were the increased emphasis given to investment and the pruning of current expenditure where it did not contribute significantly to employment.

In the event, that objective was not achieved. It was investment expenditure that was curtailed by £52 million out of a total budget estimate of £596 million.

The Minister has to record total failure in the fight against inflation. His budget speech makes pathetic reading in this respect. Despite his declared intention of getting the rate of inflation down he, in fact, pushed it up by 5 per cent by his own actions in the budget of last year. It is unanswerable that by accepting a budget deficit this year of at least £28 million, 4 per cent of gross national product, he is certainly and surely contributing again to increasing the rate of inflation during 1977.

What has happened to the Minister's declared intention of eliminating these budget deficits over a three-year period? I am afraid election year has put paid to that good intention. Despite the gloss the Minister has attempted to put on it the eliminating of these crushing budget deficits is as far away as ever. To eliminate these deficits would, of course, represent a significant step in getting inflation down. As he has not made more than a token attempt this year the Minister's protestations about winding down inflation in his budget speech have to be discounted. Unless inflation is brought under control the apparent benefits which were so cleverly dispensed over such a wide area in this tinsel budget will vanish like melting snow. They will be overwhelmed by price rises like the CIE one already announced.

The fatal flaw, in my view, in the approach of the Minister for Finance to budgetary policy is reliance on current expenditure financed by deficits to generate economic growth. He does not, even yet, seem to have learned the lesson of the last four years in that respect. In his period of office we have borrowed heavily at home and abroad to finance Government spending to promote economic growth. We have not got the growth but we are left with the crushing burden of financing the borrowing. The cost this year of financing that borrowing will be £448 million out of a total budget of somewhere in the region of £2,200 million.

The two aspects of that borrowing which are particularly unfortunate—I do not blame the Minister entirely for them—is that a great deal of it was done abroad and the real residual burden has been multiplied by the fall in sterling. The second feature was the high proportion of the borrowing that was wasted in meeting current budget deficits. This was £259 million in 1975, £211 million in 1976 and a projected figure of £218 million in 1977, a staggering total of £678 million for three years. The accumulated budget deficits come to £678 million in a three-year period. The real tragedy is that the country has obtained no benefit from this vast amount of borrowing, this tremendous increase in real current Government spending.

The outcome of these policies is that the public finances are left in a state of dissarray without any benefit to either growth or employment. I am not outlining that gloomy and depressing picture merely to castigate the Minister for Finance and the Government. I am primarily concerned in pointing out a lesson must be learned from this unfortunate chapter in our financial and economic history. That lesson is clearly that in our circumstances increasing current public expenditure, which is financed by borrowing, does not produce either growth or employment.

A Government can print money but it cannot print jobs and, unfortunately, this budget would seem to indicate that the Minister for Finance has not yet learned this costly lesson or if he has learned it he has been prevented by other considerations from acting upon it. The radical change which an appreciation of that lesson which is to be learned from the experience of the last four years would dictate in the emphasis and the direction of public expenditure has just not been made in this budget. The pattern which has so clearly failed to achieve the desired results over the past four years is being followed once more in this budget. We have had the expenditure and the deficits without the jobs. We should have changed over this time and taken the only course of action that every aspect of the situation indicates as the only way out of our present difficulties. This budget should have had two basic constituents. Firstly, it should have set out to maximise the State's investment in employment—giving activities of every sort. This, of course, would have called for a considerably greater public capital programme than the Minister has set out with a different emphasis, an emphasis on infrastructural investment. Secondly, it should have concentrated on creating the tax climate and the general environment in which private investment will expand and provide the only ultimate solution to this stranglehold of persistent unemployment in the grip of which we are at present.

This budget does not contribute significantly towards either of these two objectives. In fact, in a number of significant ways it inhibits their achievement. The budget has been called an incentive budget, an election budget, but it should have been an investment budget. To provide the job opportunities we need there must be a major upsurge in investment. That is the only way. Investment today means jobs tomorrow but there is no real investment thrust in the budget. The opposite is the case. The public capital programme which is the Minister's basic investment mechanism amounts to £663 million compared with last year's budget estimate of £596 million. That increase in money terms does not even keep pace with inflation. The naked fact of the situation in regard to this year's public capital programme is that it represents a fall in real terms in public investment spending.

The public capital programme represents the same percentage, 24.5 per cent, of total Government expenditure as in 1976, when one takes account of the £52 million shortfall in the 1976 accounts. There is no increase in the proportion of the budget which is devoted this year to the public capital programme and, therefore, we are again relying on the mechanism that has failed totally so far; we are relying on current Government expenditure financed by deficits to create economic growth. Our real problem is unemployment and, therefore, it clearly follows that the top priority should go to provide employment. That may seem simplistic but one has to recognise that with the pressures and problems which confront governments and Ministers for Finance that that simple central truth can become overlooked. This is the time and place to reassert that the central aim of Irish government economic policy must be the creation of jobs and the provision of employment. That is where this budget fails. It pays lip service to that objective but the practical provisions in the budget designed to that end are minimal.

The budget talks about 7,000 new jobs and that very unreliable man, the Minister for Labour, could not resist the temptation, subsequently, to up the ante to 20,000. Even accepting 20,000 and against the measure which the budget provides to create employment, there is the positive increase in the tax on employment in the form of the employer's contribution to social insurance, another 42p after the greater increase imposed in 1976. This tax on employment and particularly this decision to increase it is the biggest single factor limiting job opportunities in our situation at this time. I would be prepared to make an assertion that the increases which have been made in this tax on employment will more than counteract the positive measures taken by the Minister in the budget to provide employment.

The real opportunity available to the Government this year has been missed, perhaps sacrificed to political expediency. Our unemployment problem is largely a structural one and Government expenditure should have been decidedly oriented to capital expenditure but there is no change in the proportion of the budget devoted to capital expenditure. We need a tremendous increase in infrastructural investment if we are to get the environment in which private investment enterprise can expand. In fact, in each of the last two years actual capital spending in the public sector fell well below the amounts provided and that is something the Minister has not yet explained to the House or the country. Why did he not maintain in 1975 or 1976 the level of capital expenditure which he provided for in his budget estimates? Last year there was a sharp fall in the volume of the public capital programme even though the economic background paper, the White Paper, stated that the main feature of budgetary policy in 1976 was the increased emphasis given to investment. In fact, the emphasis was on current expenditure in 1976 and not on investment. There was a fall in the volume of the public capital programme in 1976.

It is incomprehensible to me on that score why the building and construction industry has not received a much greater allocation in this year's public capital programme. That industry, I understand, accounts for about one-third of our unemployment. As an industry it has a high multiplier effect and a relatively small import content but the amount provided for that industry in the public capital programme, despite the £12 million which was added in the budget, is less than last year's budget estimate. Even in money terms the fall in real terms below last year's estimate is more than 15 per cent. Here is the Minister confronted with this dire and pressing need to procure employment wherever he can proposing a capital budget in which the actual expenditure in the building and construction industry is going to be 15 per cent less in 1977 than it was in 1976.

In so far as public sector expenditure is concerned the prospect for housing is even worse. There is no extra provision for housing in this year's public capital programme even though there was a big fall in the number of houses built last year. The public capital programme estimate for housing this year is £101 million as against an estimate of £119 million in 1976. The outturn in 1976 was £105 million and I suppose the most realistic thing is to compare last year's outturn of £105 million with a budget estimate of £101 million this year for housing. To me, this is incredible. Of course the smaller amount of money will build an even lower number of houses because of rising costs. I suggest to the Minister that this is economic and social madness.

One would have thought that the development of our natural resources would be a major priority of any Irish Government at this time. Deputy Dockrell referred to it. In fact, the attitude of this Coalition Government and particularly of the Minister for Industry and Commerce to date has been almost totally negative as regards our natural resources. The recent Green Paper published by the Government clearly illustrates that negative approach on this question of developing our natural resources. It is dismissed in the most laconic way. The Government's approach to offshore oil exploration is typical of their general approach in this area. The policy of the Minister for Industry and Commerce for the development of offshore oil has been a total and complete catastrophic failure. That failure will be revealed very shortly to everybody concerned when it becomes known that at the very outside four or five wells will be drilled this year in our offshore waters when we would need to have 30 or 40 wells drilled if we were to get anywhere with this exploration. And we would have those 30 or 40 wells drilled if the right policy had been instituted by the Minister for Industry and Commerce.

The Minister for Finance in his budget speech complimented the Department of Finance on their record in economic forecasts. I shall not quarrel with that; I have a deep and abiding respect for that Department and I believe when the history of this Coalition Government comes to be written the Department will come out of it very well because they succeeded in maintaining some semblance of order in our public finances, in spite of the buffeting those finances received from the lunatic fiscal and economic policies of this Government in the past four years. But there is one alarming aspect of the control and management of the national finances to which I must direct the attention of the Dáil. The budgetary arithmetic has gone seriously awry in the past two or three years. Last year, for instance, tax revenue was very seriously underestimated. This was particularly so in the case of VAT. The 1976 White Paper forecast an increase of 2.8 per cent. Then in the budget the rates were adjusted to bring in an estimated increase of 20 per cent. In the event, the increased return from VAT was 44 per cent.

The Minister may recall that I suggested when speaking on the budget last year that I thought that estimate understated. Of course my suggestion in that regard was ignored by the Minister. It has turned out that he under-estimated revenue last year so much that he imposed very severe additional taxes to make up a shortfall that was not really there. The imposition of those taxes pushed up inflation by 5 per cent in 1976 although a stated aim of the 1976 budget was to reduce inflation. We cannot escape the conclusion that the error in the estimation of revenue receipts last year was ultimately responsible for pushing up inflation by 5 per cent.

This year I suggest the revenue estimates are bent the other way. My instincts tell me that the budget deficit this year is under-estimated. What are we to make of this budgetary device of putting into the credit side of the budget a figure of £60 million for revenue buoyancy? Before the budget the Government, in accordance with Article 28 of the Constitution, presented to Dáil Éireann a White Paper giving estimates of receipts and expenditure for 1977. That is a constitutional, not a parliamentary requirement. Is it now suggested that those constitutional estimates were incorrect, were understated? Or is this nice round sum of £60 million for revenue buoyancy not mentioned in the constitutional figures? Is it simply a piece of presentation by the Minister?

The Department of Finance estimate of growth in 1976 was 3½ per cent. The Minister congratulated himself and the Department on their forecasting in that respect. It is on that figure of 3½ per cent principally that the Minister based his 1976 "encouraging year" statement and consequently, presumably, it is on that figure of 3½ per cent that he relies to justify his whole approach to this budget. But I question whether in fact that calculation of gross rate of 3½ per cent represents any underlying real growth in the economy. I suggest there is very real ground for saying that it almost certainly does not reflect any such growth but is mainly the result of changes in stocks. If it did represent real genuine underlying growth why has that not been reflected in our employment figures? When the depletion of stock levels has been made good that apparent growth may well disappear. I want to know how firm in these circumstances does the Minister state his estimate of 4 per cent growth is for 1977.

If I am right in my suspicions about the reality of the 3½ per cent growth rate late in 1976 I am more dubious about this projected growth of 4 per cent in 1977. If it is based on exports, it is not all that certain. Britain's rate of inflation is likely to be lower than ours in 1977 and the boost our exports got in 1976 from the fall in the value of sterling cannot be counted to recur in 1977.

I want to suggest to the Minister that if the 4 per cent growth rate he is counting on does not materialise, then that revenue buoyancy figure of £60 million will not materialise either and we will be left with a much greater budget deficit than forecast and therefore, with much greater inflationary pressures generated.

Public service pay has become a major budgetary item. In the 1976 budget it was estimated at £532 million for the year. In fact, it worked out at £679 million. That, again, represents a very serious miscalculation in budgetary arithmetic. This year the Minister is providing an extra £46 million in the budget to meet the estimated increase in public service pay. Is that adequate? Are all the various grant-aided bodies included in that figure? Recent experience must make us very apprehensive about that kind of estimate in regard to public service pay.

In regard to budgetary arithmetic, I must direct the attention of the House to two extraordinary statements made by the Taoiseach in this House last Thursday. They are parliamentary gems in themselves. At column 365, Volume 296, of the Official Report, he said:

...Increases in income tax up by 14p in the £, more taxes on beer, spirits, tobacco, petrol and every item would be necessary to provide money to do this ...

That is the Taoiseach talking about the Fianna Fáil proposal to abolish rates on private dwellings. The cost of that proposal is £57 million approximately. The Taoiseach was speaking to a budget in which deliberately credit was taken for revenue buoyancy of £60 million, perfectly adequate to meet the cost of the Fianna Fáil proposal from revenue buoyancy alone. At column 367, criticising Fianna Fáil, he said:

... It is not possible to provide more expenditure without getting revenue. We have made that clear.

The man was speaking to a budget that provided for a variety of new expenditures which are all going to be met out of a budget deficit of £218 million. If that is the sort of muddled thinking behind the preparation of a budget by this Government, it is a very depressing situation.

I want to look at the emerging economic situation with which this budget is supposed to deal. It seems to me that that situation is dominated by two principal elements, first, the current pay talk situation and, second, the farmer income taxation situation. The Government's handling of the relationship of these two elements in the economic situation to each other has been particularly inept in my view. The simple truth of the matter is that the Government have not played fair with the farmers this year. The pay proposals worked out after a great deal of negotiation represent an overall increase of 9.2 per cent and seem reasonable in the circumstances. We can all hope that in the interests of industrial peace both sides will accept this settlement which has been worked out after such long and arduous negotiations. If these proposals are adopted, they should certainly help to combat inflation, especially if there is no drift, and if productivity can be increased in the period of industrial calm which hopefully will follow their adoption.

The Government have come through with the necessary reductions in taxation to complete the deal. As far as that is concerned, one cannot be critical of the Government's role. The question must surely arise: why, in the interests of overall peace, were not provisions in regard to farmer taxation included in that general package, instead of leaving it to be dealt with in the abrupt, ad hoc, unilateral way it was in the budget? That is the question I want to ask. If that had been done, one feels that the risk of confrontation and disruption which is there now could have been avoided.

I want to make it clear that Fianna Fáil policy in regard to farmer taxation is quite clear. We believe farmers should contribute their fair share to the running of the community. We know farmers accept that simple straightforward proposition. We believe there are some principles which must be adhered to in determining what that fair share is.

The first thing I would suggest is that as Irish agriculture still remains our greatest potential source of economic growth and development, the system of farmer taxation must be designed to encourage output rather than act as a disincentive. Secondly, the system must be based on the factual situation in regard to farm income and not on some vague impressions which are created about the level of that income. For instance, I have not seen anywhere a reference to the fact that farm incomes in 1976, according to the Central Bank, increased by 11 per cent while, in the same period, inflation ran at a rate of 18 per cent. I have not heard that fact mentioned in any of the present discussions on this issue. It seems to me that it is essential that in designing a system of taxation for farmers, that system should be based on the actual facts and realistic assessments of the situation and not on vague impressions of how well farmers are doing.

Thirdly, regard must be had to the fact that farmers pay agricultural rates and the taxation system must give due weight to that fact. Fourthly, the system should be comprehensive and it should be relatively stable over a reasonable period. That is axiomatic. If you want to procure the maximum development in agricultural industry, your tax régime must have a certain amount of stability over a reasonable period. In other words, those who are planning their agricultural production programmes must know for a reasonable period ahead what the tax situation is going to be so that they can take it into account. In that regard the same considerations do not apply to taxing farm income as they do to taxing industrial and commercial earnings. Farming programmes have to be planned further ahead. Therefore, it is important that the taxation system should be known as far ahead as is reasonably practicable.

What the Minister has done this year offends every one of those principles. Farmers must be forgiven for thinking that the Government have sought in a political opportunist way to pander to the urban voter who feels vaguely resentful that farmers were escaping their fair share of the tax burden. I believe that farmers have some justification for feeling that that is what the Minister has done by the manner in which he has extended the income tax net in this budget.

The very words used by the Minister in the speech contribute to that suspicion. I quote the Minister's words: "The extension of the income tax system, in the Government's view, is the fastest way of bringing farmers into line with the rest of the community as regards their contribution to the national finances...." Those are reckless words. What about equity? What about avoiding disincentive effects? Was the only thing in the Minister's mind to do it the fastest way possible? The ad hoc nature of this proposal is to be deplored. This threshold has now been brought down from £100 to £75. Are the farmers right in assuming that it is the Minister's intention to lower it step by step until there is no threshold at all? That is a reasonable question and it would be honest if the Minister stated the position. Is every budget going to be a gamble in so far as the farmers are concerned? Next year is it going to go down to £50 and to £25 the following year, and so on? The Minister should make a clear statement about the position.

Why, one must ask, is there this particularly harsh provision for payments in advance this year? Again, it is difficult to escape the suspicion that he is pandering to the urban voter. That the Minister would embark on that sort of mechanism in regard to taxation can be accepted by us all where there is a dire compelling need for the Minister to raise revenue. We would deplore the introduction of such a mechanism but if the need to get the revenue is compelling, then that mechanism can be justified. Revenue is not a high priority in this year's budget and I have no doubt that the Minister would accept that the provision of revenue was not a top priority in the framing of his budgetary proposals. Why has he deemed it necessary, if revenue is not a primary consideration, to make this special draconian provision in regard to the payment of farmer tax this year? The unpalatable truth is that the economic outlook at present is far too bleak for the Government to have allowed themselves to play politics with this year's budget.

The positive alternative of an investment budget was potentially rewarding had they had the courage and foresight to go for it. Our economy is still basically sound in spite of all the mistakes and mismanagement. Our external reserves at £955 million are adequate for our purposes. Our balance of payments deficit gives no particular cause for concern. Our population is increasing. Our national resources— agriculture, forestry, fishing, minerals, tourism — offer enormous potential for employment-giving development. What we need is the right domestic economic policy. Unfortunately, that seems to be the one thing we cannot get from this Government. In a modern democracy the elected Government should not seek political popularity at any cost. I believe that the Government must play the part of the wise and firm parent. When the family become petulant and envious they must take a strong stand against short-sighted selfish agitation and must point out what the ultimate welfare of the community requires.

I appeal to the Government to stop playing the politics of envy; stop giving one section the impression that they can gain and benefit by taking from some other section. The Government will not unite our people for the massive effort that is needed to win our way out of our current difficulties on that basis. Our economic difficulties are widespread and deep-rooted but they can be overcome if we face reality and do not proceed on the basis of the sort of illusion with which the Minister began his budget speech this year. If we face the reality and acknowledge that in this modern Europe, if we want to keep up, we shall have to work harder to organise our farms and factories more efficiently and, above all else, to resist the temptation to use budgetary devices to award ourselves standards of living that our economic performance does not justify.

Minister for Posts and Telegraphs (Dr. Cruise-O'Brien)

I am contributing to this debate for one specific purpose—to discuss and develop those aspects of the budget speech of the Minister for Finance which deal with the area of responsibility of my Department, especially with telephone development and the closely related question of telephone charges.

I should like to make one brief comment on the interesting speech we have just heard and to which I listened with attention throughout its course. It left me puzzled in that I do not quite see how to fit together what Deputy Haughey has said and what his party appears to be urging. Deputy Haughey chided the Minister for Finance for failing to proceed with sufficient urgency with the progressive elimination of deficits. Deputy Haughey's party have put forward a large attractive-sounding programme. When they have been asked how they would finance that programme they say that a lot more money could be borrowed. I am not an economist and, perhaps that is why I do not understand how you can proceed towards the elimination of deficits by borrowing a great deal more money. Perhaps that point will be cleared up for me in the remaining stages of the debate.

I should like to come now to the statement of the Minister for Finance in relation to telephone development and telephone charges. The Minister promised £2.5 million extra for telephones and he also had news, necessarily unpalatable, to consumers, about Post Office charges. I would like to read again that part of his speech at column 256 of Volume 296 of the Official Report where he dealt with this:

Post office services, which should be self-financing, are running at a substantial loss on their commercial accounts. The telephone service lost £8.8 million in 1976 and now is losing almost half a million pounds a week. The loss in prospect on the postal service is £3.7 million this year. These losses have to be made good by taxpayers through general taxation.

The Post Office's financial difficulties can be attributed to sharply increasing costs which were not matched by corresponding increases in traffic and charges. Between 1971 and 1976 while increases in expenditure on the postal and telephone services, respectively, amounted to 144 per cent and 273 per cent, the charges increased in the same period by only 115 per cent and 88 per cent respectively. Those increases were in fact less than the general increase in the cost of living in the period. Inevitably, therefore, heavy losses arose on these services.

The major factor in the increased costs has been pay increases. In addition, in the case of the telephone service a significant but necessary growth in the number of staff employed reflected the very substantial development of that service.

The second important factor has been the increasingly heavy capital cost of telephone development: the cost of interest and depreciation has increased from £7.6 million in 1971 to an estimated £26.4 million in 1977, an increase of 247 per cent and now represents 38 per cent of expenditure on the telephone service. The country is now obliged to pay the cost of culpable and under-investment in the sixties and early seventies when the potential for growth in traffic to service the investment was considerably greater and when capital costs were much lower. Notwithstanding the enormous capital cost of improving the telephone service at present, the truth is that any further delay would be not merely an inconvenience but an intolerable handicap to business and industry.

Mr. Haughey

The Minister has been quoting.

Dr. Cruise-O'Brien

From the speech of the Minister for Finance, yes. I would like to say that I fully subscribe to what the Minister said.

Mr. Haughey

He described the Minister as his respected colleague.

Dr. Cruise-O'Brien

The respect is mutual. We are a band of like minds. There was a request by a distinguished industrialist, Mr. Liam Connellan, following these increases. He wanted to know the justification for them. The justification was, of course, given in succinct form in the course of the budget speech by the Minister for Finance but I can appreciate that both industry and the public can properly ask for an expanded statement and that is what I propose to supply now.

A large part of the justification for these increases has been supplied by the Confederation of Irish Industry itself through its fully legitimate demand for a massive improvement in and extension of the telephone service. We have been setting about doing just that. It has, of course, to be paid for. That is the short answer. We are making the effort industry requires of us and that effort requires money, large amounts of money which have to be borrowed at high interest rates. That effort could have been made in the past at much lower cost. Equipment and materials were cheaper and interest rates were lower. But that effort was not made. Instead the telephone service was the object of economy cutbacks. We have just heard Deputy Haughey preach the gospel of investment and we may well agree with him, but the fact is that gospel was not practised and followed by his Government in regard to the telephone service and we are still suffering from that.

There were, of course, adequate reasons for that of much the same order as those of which Deputy Haughey has just accused this Government which are notably wide of the mark from the point of view of the subject I am discussing. There are no political dividends in telephones. You have to spend a great deal of money and increase charges and the results of that investment in terms of improved service will not be manifested for a long time. Conversely, if you fail to invest, as our predecessors did, the effects of that dereliction will not be felt for a long time and, when they are felt, few will be interested in your responsibility for that situation. The temptation to neglect telephones and spend the money on something with a quick pay-off is very strong indeed, and I am afraid the previous Government succumbed to that temptation. This Government did not do so, as the record shows. We have, in fact, made the greatest effort in telephone development in the history of this State. Some of the results of that are, unfortunately, unpalatable. The rise in telephone charges is higher than it would otherwise have been because of high interest rates on capital borrowings. That is inescapable if there is to be development, the development for which industry and the public have called. This Government are answering that call.

The Government and the Minister for Finance have been accused of electioneering by Deputy Haughey and others. I am not going to be sanctimonious about electioneering, as Deputies opposite feel entitled to be, but there is nothing of less electioneering value than telephone expenditure.

Mr. Haughey

I did not call it an electioneering budget.

Dr. Cruise-O'Brien

I think the Deputy referred to electioneering packages.

Mr. T.J. Fitzpatrick

(Dublin Central): There are a great many of those.

Dr. Cruise-O'Brien

There may be electioneering dividends in complaining about the service and loudly demanding that someone does something about it but, in doing something about it, there is just no immediate political bonus, no short-term gain, no electoral or political gain.

Here I should like to pay tribute to the Minister for Finance not just in relation to this budget but in relation to the policy steadily pursued over the years since this Government took office. In these most difficult times through which we have been passing he did not grudge the money for telephone development. He knew he would get no thanks for that. None of us would. The budget could have been more popular and more attractive if in the past he had followed the policy of his predecessors and let the service continue to run down, but he and the Government saw that a major and consistent effort in telephone development was vitally necessary to the future economic development of the country. We have been furnishing that effort and we will continue to do so. In their telephone policy the Government have consistently placed the interests of the country before any consideration of short-term political advantage and I am proud of that.

On assuming ministerial responsibility in 1973 for the Department of Posts and Telegraphs one of my first tasks was to take stock of the situation so far as the telephone service was concerned in order that I could recommend to the Government the scale of the effort and consequently the level of capital investment needed to modernise and expand the system to meet the needs of the economy. The telephone system as it stood in 1973 was seriously deficient in every sphere and large arrears of work had built up over preceding years mainly because of failure to provide an adequate and regular supply of capital for development.

I do not wish to be taken as criticising my predecessor too strongly for this situation. I am sure he and his predecessors had tried hard to secure the capital required. Indeed, the need to develop the telephone system was fully accepted by the previous Government but, unfortunately, although they willed the result they did not provide the means. It had been the recurring experience that at times of scarcity of money for the national capital programme the allocation of telephone development had been restricted. The most recent example had been in 1970 and 1971 when severe capital restrictions had necessitated the laying-off of construction staff, reductions of purchases of engineering stores and deferment of placing of major contracts. That was at the time which we are now urged to regard as a halcyon period of economic progress. Planning staffs who should have been pushing ahead with schemes for major expansion had to be diverted to seeking ways and means of conserving capital. Planning was also hampered by uncertainty about the future availability of capital.

The position as a whole was fully reviewed in 1973 and it was clear then that an immense effort sustained over a period of many years would be needed to raise the quality of service to a satisfactory standard. But this was only part of the task. The programme to be undertaken should also be sufficiently comprehensive to establish an infrastructure for expansion which could cater for more rapid growth than had ever previously been achieved. It is evident that, despite good intentions, not enough had been done at any time in the past to develop the system sufficiently to meet requirements of rapid expansion. At no time in more than 30 years had the Department been in a position to meet promptly even normal demands for telephone service, much less than of any sharp rise in public demand.

There can be no doubt—and the evidence is there in all other developed countries—that there is an enormous potential demand for telephones which will become actual demands as living standards rise.

Not merely does such an unexpressed requirement exist but the telephone is exceptional among modern amenities in that the more people get it the more useful it is to previous subscribers. This fact produces a snowball growth when economic conditions are favourable and when the administration is able to meet promptly the public demand. What has happened in Ireland is that we have been unable to respond to the public recognition of the value of telephone service. The surges of demand for it have not been met and one might almost say have been repressed. Ireland is far behind most other western European countries in the level of telephone density so far reached, and in some ways in the quality of service given to subscribers. This fact is partly due to historical reasons and also reflects the lower level of wealth per head as compared with the other countries. Apart from these causes we must face the fact that not enough was done over a long period of years to develop the telephone service here on a scale adequate to meet requirements. At no time for a generation past has the administration been in a position to sell the telephone as they should be doing so as to increase its value to subscribers and bring its benefits to people who could be attracted to become subscribers.

Mr. T.J. Fitzpatrick

(Dublin Central): Hear, hear.

Dr. Cruise-O'Brien

This being the position in 1973, the Government decided to enter on the task of overtaking the arrears of past underdevelopment, establishing a good quality of service and laying the foundation for large-scale expansion with a view to achieving a position where not merely could all demands be met but where demand would be stimulated so as to attract additional subscribers.

It has often been explained and is now, I think, fairly generally accepted that large-scale expansion of the telephone service cannot be brought about quickly. That is not just the experience of one country but of all telephone administrations everywhere. The most severe limitation on speed is imposed by the need for buildings to house equipment and in some cases staff. Experience shows that where a site has to be found and acquired, a building planned, contracted for, and built, and the equipment to be housed, designed, manufactured, installed and tested, a time span of seven years is often exceeded from the decision to provide an exchange to the time when the equipment is in service. Even when a new building is not required more than four years will usually be required for the other stages mentioned; and of course if at any time during this process there is a cut-back in capital inflow and the Department have to pull back in the many ways that that requires, those periods are exceeded.

Another important limiting factor on speed is the need for an expanded force of experienced engineers and technicians. Professional engineers come from the universities and technological colleges with basic technical knowledge and training, but it takes a considerable time before they have sufficient experience of telecommunications to give their full value. Technical trainees are recruited from school and are given close on four years training before being passed out as skilled technicians. In passing I am glad to say that the number of technical trainees has risen by 248 to 694 and the total engineering labour force by 1,568 from 4,561 to 6,129 in the past four years. I think those figures are a significant index to the scale of the effort that is being put in here now.

But whatever the practical problems and inescapable delays involved in rapid expansion, clearly the first requirement was that the capital needed be made available on an adequate scale and its availability assured over the years ahead. It is not enough for us to put in a lot of money and then wait. This requires sustained capital inflow. The Government agreed to make available £175 million which it was expected would be needed, in 1973 money values, for a period of five years ahead and the Telephone Capital Act, 1973, gave effect to this decision. This was clearly a massive sum by reference to amounts provided previously, the largest of which has been £50 million provided in the last previous Telephone Capital Act, 1969. Nothing could more clearly have expressed the determination to press forward so far as money enabled it to be done to a situation where we would have a telephone service of high quality and on a scale adequate to meet the growing public demand which rising living standards would require.

Solid and substantial progress has been made since then. For the reasons to which I have already adverted the benefits of the work done will not show up fully for some years yet, but the immense effort that has been made and which will continue will yield commensurate benefits to the community and will come into view more and more from now on.

It is not practicable or desirable in the discussion on the budget to go into the details as against the broad outline of a telephone programme, but I would like to mention here some projects either completed or far advanced in the last four years. Some 134 new exchange buildings have been erected and 41 buildings have been extended. A further 52 new buildings are in course of erection at present. The spare capacity of subscribers' line terminations at automatic exchanges, available to meet new demands for telephones, has been doubled. Three new transit exchanges have been provided in Dublin which will make switching of calls more efficient and will reduce and eventually eliminate difficulties in making local calls, despite the increasing complexity of the network. The new 20,000 line Crown Alley exchange opened in December has greatly improved the service for subscribers whose lines are connected to it, including some of the busiest lines of the city, and the exchange will indirectly bring improved service to all other Dublin city subscribers.

The trunk service network has been greatly enlarged by the addition of some 8,000 trunk circuits totalling 340,000 miles. A new major trunk exchange was opened in Dublin in December, 1976, which will enable some thousands of extra trunk circuits to be brought into service this year, many of them within the next two months. The works already completed or which will reach completion in the coming months will give a steadily continuing improvement in subscriber trunk dialling in both directions between Dublin and the provinces. Equipment is on order to provide 17,000 additional trunk terminations at various exchanges. A new telephone building complex in Cork is in course of erection which will accommodate, among other services, a main trunk switching centre for Cork city and county. The international service has been greatly improved and there is now little or no delay on international calls. International subscriber dialling was established from certain Dublin city centre exchanges first to Belgium in 1975 and since then to 12 other European countries. In January of this year international subscriber dialling became available to eight countries beyond Europe, including the USA, Canada and Australia and it will be extended to additional countries later this year. The facility will be made available this month to all non-coinbox subscribers in the Dublin (01) area and Shannon. In December, 1976, the STD service from "01" area to Britain was extended to Birmingham, Liverpool, Glasgow and Manchester areas. In April next, Cork, Limerick, Waterford, Galway and Sligo will be provided with similar STD facilities to Northern Ireland and Britain as now are available in Dublin.

There has been heavy capital expenditure in recent years on providing cables through which new subscribers' telephones will be connected to exchanges. As is generally known, each subscriber's telephone is served by an exclusive pair of wires and proper forward planning requires that when cables are being laid sufficient spare circuits should be provided for connection of subscribers' lines likely to be needed some years ahead. The trend of city office development and the spread of suburban housing have necessitated very extensive cabling. The interconnection of new and extended exchanges also has required extensive cabling and provision at the same time for further growth.

While mentioning briefly the main lines of development and the policies being followed, I want to make quite clear that I am far from suggesting the service is now satisfactory. It is not, and no one would pretend it is. What I am saying is that we are moving forward on the right lines to improve the service and, while it will be some years yet before the work programme on which we are engaged will be completed, some of the benefits from it are beginning to show and more will show increasingly during this year.

I have described the lines of telephone development programme which the Government decided upon in 1973 and which met with general support. The cost is heavy in real terms and heavier in current money terms because of inflation. The investment required is large but it is far less costly in the long run to do the job thoroughly than to make a succession of inadequate bites at it. At this stage, while the areas are being overtaken and extra rapid expansion provided for concurrently—we have to do these two things at the same time—the finances of the service are subject to special strain.

It has to be remembered that, because of the large fixed capital involved and the long and complex task involved in, for example, equipping an exchange, there is no early return on telephone investment. There is inevitably a long gap between the moment the capital is borrowed and the moment when the relevant subscribers are connected. In the mean-time, the interest charges on the capital borrowed have still to be met. This is what makes telephone development such a peculiarly thankless task as well as being an urgently necessary one. The investment in the past four years has exceeded £139 million. This entails very heavy charges for interest and depreciation, amounting in 1977 to more than 40 per cent of revenue.

In his budget statement the Minister for Finance referred to the growth of expenditure necessitated by the programme for developing the telephone service. Since 1973, the annual cost of interest alone arising from this programme has grown from £5,700,000 to £22 million. That is a direct reflection of the scale of effort involved both before and after. The remuneration of staff has grown through the operation of the national wage agreements. In addition, more staff have been needed for the manual exchanges for trunk and assistance traffic and extra maintenance men for the larger network. Annual staff costs have in total risen from £12,800,000 to over £34 million: greater numbers with greater pay. Other costs have also grown, as was to be expected.

Clearly such cost increases cannot be met without increases in charges. Indeed, it has been suggested that increases should have been larger and made at more frequent intervals so that the service would not have been in deficit. There is a strong case for arguing that the whole cost of the telephone service should be met by the users instead of part being borne as it has been in recent years by the taxpayer. Be that as it may, the fact is that telephone charges have not advanced to the same extent over the period as either the wholesale price index or the consumer price index. The cost of telephone service has not increased in constant money terms despite the scale of expansion. In view of this and of the fact that at this stage of rapid development of the service, growth of capital charges is certain to outrun growth of revenue, the increase in tariffs imposed in the budget must be considered moderate.

They are, at any rate, as I have indicated, inseparably related to the cost of expanding the telephone system and making it more efficient. The modernisation of our communications is a vital integral part of the economic development of this country. Future industrial investment depends on it, jobs depend on it, the development of handicapped regions depends on it. It is a difficult, long and costly task. I believe in the future it will be recognised that the investment effort begun in 1973 was the turning point in communications policy and the beginning of the necessary, serious, large-scale, sustained commitment to building a modern and efficient communications system.

Mr. T.J. Fitzpatrick

(Dublin Central): Now that the euphoria with regard to the budget has been cleared away we can look at its contents in a more realistic fashion, and see exactly what measures it contains to rectify the economic situation and what benefits are in it for the average taxpayer and wage earner. Before we look at the contents of the Minister's speech, it is important to look back to the 1976 budget and see the Minister's strategy at that time. Against that background we can judge if this budget is genuine.

This is an opportunist budget. It was drafted with one purpose in mind, that is, to win the next general election. Its presentation leaves a sour taste where honesty and integrity in the management of our financial affairs are concerned. Twelve months ago the Minister announced the stiffest budget in the history of the State. He claimed that every penny he sought in the measures he imposed was necessary for the financing of the budget in the coming year. As well as the Minister, the Taoiseach made speech after speech about the dire state of the economy and stressed the need for stringency at a time when they must have known about the increased revenue accruing to the Exchequer which was literally wrung from the taxpayers.

The results of the Minister's strategy are plain to be seen now. If we try to judge the development of the economy over the past 12 months we see that inflation has risen to 20.6 per cent. The strategy embodied in the last budget was to expand our economic base and bring down inflation.

Now we see the consequences of either the misguided policies of the 1976 budget or the deliberate policies at that time to try to be in a position to bring out a budget statement like the one we had last week. We are now told that the Government over-estimated by £129 million. This shows a callous disregard for the nation and our people by the Minister for Finance because he knew the money was available and failed to take the measures that would help the economy during the year. The Minister for Finance was perfectly aware that this money was available. It may be good political strategy to store up for distribution in an election year, but it is not honest, it is not good Government and in the long term not in the interests of the country.

The Minister in his budget has distributed something which he has wrongfully taken from the taxpayers over the last 12 months. Anybody who listened to the Minister and the Taoiseach in mid-1976 will find it hard to reconcile what they said then and what we heard during the past week with regard to the state of the economy. We know economists, the EEC, the FUE and every responsible section of the economy were telling the Minister over the past 12 months that his policies were wrong. The Minister was told that if he continued on this taxation policy he would bring economic ruin to the country.

The Minister persisted in that approach for almost four years. The first movement away from that philosophy was a speech he made to the Chamber of Commerce shortly before Christmas. He admitted at that time that our taxation was too high. He also referred in that speech to the endeavour of private enterprise and what should be done for it. That was the first occasion on which anybody on this side of the House saw any indication that the Minister or any member of the Cabinet was at last seeing the light regarding the economic policies they were pursuing. We would accept that if we thought it was a genuine conversion, that the Minister had seen the light, was going to pursue a future path of expansion and that he recognised the efforts of our taxpayers, who have been absolutely crucified over the past four years. I do not have to speak about industry and what has happened in the private sector. One has only to look at investment and retained profits in companies and one will see that the Government have been on the wrong line. The Minister seems to be under the impression that you can cure inflation by increased taxation. I have never held that view. I would like to point out to the Minister for Posts and Telegraphs that increasing telephone charges will not expand the business.

Dr. Cruise-O'Brien

Was that electioneering?

Mr. T.J. Fitzpatrick

(Dublin Central): I did not say that about the Minister. I said it about the Minister for Finance. I blame the Cabinet for the financial policy. I would like to point out to the Minister for Posts and Telegraphs that increasing postal charges will certainly not obtain the result he requires, especially in a declining market. The purpose of this budget will not mislead the public. Many of its proposals will not be achieved. The Minister in his speech in the Gresham Hotel some time ago said that we had pulled out of our recession. He must not have looked at inflation rates throughout Europe and he must not have looked at our borrowings in the Central Bank before he made that statement. I believe no Minister could possibly make that statement if he looked at the inflation rates prevailing throughout Europe and compared them with the inflation rate we had up to the 31st of December. He also said in that speech that we had created a climate for economic advancement.

What climate was created for economic advancement over the past four years? The answer is absolutely none. A negative policy was followed that practically ran down every investment in the country and discouraged investment. I have the last Central Bank report which gives the inflation rates for the 12 months ending December, 1976. We are told there that the inflation rate in Germany was 3.8 per cent; in France, 9.9 per cent; Ireland, 20.6 per cent; and the United Kingdom, 14.8 per cent. The inflation rate in the United Kingdom for the 12 months ending 31st December, 1975, was 25.8 per cent. They have now succeeded in bringing it down to 14.8 per cent. Up to 50 per cent of our exports still go to the UK, so we are at a great disadvantage in relation to the inflation rates in both countries.

I do not see how the Minister for Finance could address the Confederation of Irish Industry with the statement that we have pulled out of the recession when we have that type if inflation rate facing us in 1977. We know that were it not for the devaluation of sterling against our exports to non-EEC countries our exports would not have reached the level they did during 1976. Our exports to the United Kingdom dropped by 6 per cent. Our inflation rate is bound to affect our unit costs, so there is every likelihood that we will be at a disadvantage when exporting to the United Kingdom during 1977. This is all because of bad management, bad budgetary policy and bad fiscal policy. Any Government which tries to buy popularity is bound to bring the economy and the financial situation of the country into this type of situation.

We have been told about the great expansion in exports last year. Any expansion was confined to 10 per cent of high capitalised industry, which was of really no significance to the intake of labour. We know that 90 per cent of industry in the country had a reduction in manufactured goods and reduced their labour content. Despite this the Minister told the Confederation of Irish Industry that we have created a climate for expansion. What one man who attended that said afterwards about economic expansion could not be repeated here. The expansion the Minister spoke about will not take place. An American expert recently reported that we were one of the worst countries as far as capital investment was concerned. He pointed out that although tax concessions were important other factors would have to be taken into consideration if investment was to be encouraged here. He said that the political situation would have to be considered and the stability of the Government. An investor will always research these matters before making a decision. He will always inquire about the availability of capital, of skilled labour, location available and the stability of the Government.

Dr. Cruise-O'Brien

Have we not got stable Government?

Mr. T.J. Fitzpatrick

(Dublin Central): We have neither a stable nor honest Government and this financial statement proves my point.

Dr. Cruise-O'Brien

The Deputy wishes the Government were unstable but it is not.

Mr. T.J. Fitzpatrick

(Dublin Central): This Government are coming to an end and the only consolation I get from reading this financial statement is that it is the last time I will have to read such a statement from a coalition government. I look forward to economic expansion but I know that people, having followed the trends of the Government over the past four years, will not change their minds after reading this financial statement. The conversion to recognition of the private sector, giving the taxpayer a fair return for his labour and recognition that profits are necessary for the expansion of industry is of recent origin. There is nothing genuine in that type of conversion not like that which occurred on the road to Damascus. We all know that St. Paul had a system of persecuting people until his conversion and I am convinced that the persecution inflicted on our people by the National Coalition would be resorted to again if they are returned to power. The budget represents an interim relief in an effort to convince the people that the Government are making a genuine effort to relieve them of the enormous taxation imposed in the last 12 months.

In connection with the 1976 budget I should like to know how it is possible for the Minister for Finance to be £129 million out in his calculations? A child in second class in the primary school would not accept that. The Minister made many projections about revenue in the coming year and its buoyancy but I believe he knew that the taxes imposed in the 1976 budget would result in a huge amount of money accruing to the Exchequer. The national pay agreement would not have been fixed at such a high level last year were it not for the excessive taxes imposed by the Minister in that year. Had the Minister pitched his taxation at a realistic level, many of the ills which confront us could have been avoided.

We are all aware that the 1976 budget contributed 4 per cent to the cost of living and nobody can blame the trade unions for trying to recoup that. It is tragic to think that in the past 12 months we could have reduced our inflation rate to about the same as the British rate, 14 per cent, if the correct decision had been taken. It will take a long time to restore the confidence that is necessary to boost our economy. The increased taxation imposed in that budget had serious repercussions on tourism and from the point of view of breweries there was a decline of 4 per cent. We have heard a lot of talk about what will be done to help industrialists to expand but we all know how difficult it is for firms to carry on because their profits have been very slender. The severe increases announced on telephone and postal charges will cripple many businesses. Although there has been a huge increase in capital expenditure, there has been a sharp decline in telephone traffic since 1974. It is ludicrous to now impose an astronomical increase in an effort to balance the account and it is only logical to ask what effect increases will have on an already declining business. An increase of 25 per cent on telecommunications and 13 per cent on postal services must surely be counterproductive and does not make economic sense. Indeed, the attempt of the Minister to expect the public to heed his exhortations for restraint is foolish when a Government Department leads the way in massive increases. As I told the Minister for Posts and Telegraphs, I do not believe you help a declining industry by increasing prices. The Minister for External Affairs as an economist might have an answer to that but I cannot see that it is good economics.

The Minister has stated that there has been a decline in telephone receipts. This increase of 25 per cent is bound to cause a further decline because, especially where the telephone is used in the private sector, it is now becoming a luxury. Many people expected to be entitled to such an amenity at a reasonable price. I believe they are entitled to it. A man returned from America to whom I spoke recently could not believe that you had to pay a rental for a telephone in this country; it is otherwise in America. We are reaching the stage where the telephone rental is now practically £1 per week. With the new increases, it will, in fact, be nearly £49. The average household does not make very many calls and the objective as the Minister himself said some time ago should be to sell the telephone to the public as much as possible and get them to use it. We must realise how costly it has become with the rental almost £1 a week in the private sector where a renter may make two calls a day and will have to pay about 4p for each call and £1 a week rental. This will certainly lead to a further decline in use and will inhibit people from installing telephones. The Minister has said that the increases are coming into operation immediately. I believe this will mean fewer people will take in a telephone.

In the industrial sector the increase will affect unit costs and overheads. A businessman with 250 employees recently told me his telephone bill in 1975-76 was approximately £20,000. The increase will impose an additional £5,000 on his company for telephone charges alone. This man will now also have to bear the additional cost of the insurance stamp which will amount to another £5,720 per year. Postal expenses will go up by 13 per cent and his 190,000-200,000 letters per year will cost £1,862, a total of £12,582, in extra charges on that business. The Minister should balance those charges on industry against the benefits given and he will find there is very little in the difference. In this case it meant that £1 was charged on every employee in that business by virtue of the increased charges. Many industries must face this situation in the coming year. Many businesses operate on a very tight margin and in my opinion the help given to industry is not sufficient to give the necessary encouragement.

The responsibility for providing employment rests on the Government of the day. The task up to 1980 is enormous if they are to supply the necessary jobs in that period. Mere recital of numbers is of no avail if we are to grasp the magnitude of the problem in the Ireland of the future. Those seeking work will be young and educated and will demand the right and opportunity to work in Ireland. Long term plans must be drawn up regarding creation of jobs. This in turn depends on increasing substantially the growth rate of the economy which depends on productivity and thrift. If we are to solve our problems, we must use our own resources to the limit. Full employment will not be achieved by a Government that cannot decide on any economic policy because its members are drawn from parties with totally different ideologies. Ireland in the future will require a Government with a common purpose and a firm commitment to progressive planning in order to achieve social and economic independence.

Planning has been one of the major factors lacking in the present Administration. They are now entering their fifth year in office and we have no long-term economic plan as to how we will solve the chaotic employment problem now facing us. It is not fair that our people should be neglected in this way. There is nothing in the budget about long term planning, no mention of how we may tackle the problems of the early or middle 1980s. One does not plan any business on a six-months basis: you get projections as to income and capital required and how you will service it. There is nothing like that in the budget statement. I think this results from a conflict of ideologies between the two parties. They have failed to find common ground on economic policy.

The lofty socialist attitude of the left and the conservative attitude of the right will never find a common economic policy but it is not fair that the citizens should suffer as a result and the country be allowed to stagnate while other European countries are advancing. I believe that with about eight years in Opposition for Fine Gael and Labour, they might then be able to reconcile their ideologies and find a common ground. But we have no time to wait for a policy while they are in Government. Nobody has time. There will be no proper economic advance until a comprehensive policy is produced. The present Government cannot produce it. You hear one group from the Labour Party in Galway pontificating on the great role of State bodies and calling for more State enterprise.

I have always made my position clear. I believe one can complement the other. I am convinced the private sector can play a major part in expanding our economic base. Of course it can be complemented by the public sector, but the private sector must be encouraged if we are to make any inroad on the unemployment problems confronting us today. It is because of this type of double-think that the people do not know what to make of this Administration. They do not know if they should invest money here because there is no firm commitment, even in this budget speech, in regard to their policies. I do not know what they are. One day I read the policies of Deputy Halligan and another day the policies of a Fine Gael Minister. If this is confusing for me, it is bound to have the same effect on international investors. That is why I am convinced there will be no upsurge in our economic base as long as this Administration remain in office.

A few days ago I was discussing the budget with a businessman. He said "I do not trust them". If you ask any ratepayer in this city about the Coalition, you will hear the same remark. The Minister painted a glowing picture and said that the recession was over. A few days later we read the EEC report which said that our economy is far from out of the recession and is in serious trouble. That businessman said "I prefer to believe the EEC than Richie Ryan". Excuse me for addressing the Minister in such terms but I am paraphrasing what the businessman said.

Minister for Finance (Mr. R. Ryan)

That does not upset me but the Deputy might tell that man that the report was written last December and based on statistics for October and November.

Mr. T.J. Fitzpatrick

(Dublin Central): Can the Minister convince me that this budget has improved the Irish economy? I do not believe it has. I also believe inflation is running at 20.6 per cent today. The budget is one week and one day old. It contained glowing promises about bringing down inflation with reductions in prices to follow. We did not have very long to wait. Yesterday a 25 per cent increase in bus fares was announced. That will have an adverse effect on wage-earners. I am told it costs 16p to travel from Terenure, where I live, to the city centre. A 25 per cent increase will mean 4p each trip. A person going to and from town will pay an extra 8p daily and 40p per week. This money will be taken out of the concessions given in the budget.

We were told this morning that paraffin oil has been increased by 3½p. When I see such raging price increases I have no doubt whose word I accept, the Minister's or the EEC. I will accept the opinion of the EEC because their data is researched and there are no political overtones attaching to it, which is far more important. That is why the majority of the population accept the EEC facts and figures.

We made a genuine effort to get the country moving in our policy statement. The Minister paid us a compliment by taking many of our proposals as a solution to our economic situation. We were frank and fair and not afraid to produce an economic policy document, something the present Administration never tried to do, except in a piecemeal manner.

Minister for Foreign Affairs (Dr. FitzGerald)

I have that document here. I am going to talk about it and right up to the election campaign we will put the figures in it to the people.

Mr. T.J. Fitzpatrick

(Dublin Central): The figures can be proved and no economist that I know of has criticised them. They have met with general approval.

Dr. FitzGerald

£950 million borrowing in the current year in 1977 money terms. Nobody is against that? A current deficit twice the size of the one we propose, do you defend that?

Mr. T.J. Fitzpatrick

(Dublin Central): I do.

Dr. FitzGerald

I hope the Deputy goes on talking about it.

Mr. T.J. Fitzpatrick

(Dublin Central): I will go on talking about it and I will tell the Minister why we had to put it in.

An Ceann Comhairle

Interruptions must cease.

Mr. T.J. Fitzpatrick

(Dublin Central): The deficit proposed in our policy document is large but we have to tackle a serious situation because this Government let the economy go down. We need an extra £100 million capital to get the economy moving and to get an injection of capital into it. We will be taking over an Administration that has let the economy completely run down and allowed deficit budgeting for current expenditure.

Dr. FitzGerald

You are proposing to double the current estimate.

Mr. T.J. Fitzpatrick

(Dublin Central): I am proposing to do it for capital investment.

Dr. FitzGerald

The Deputy has not read his document. It says in regard to the current deficit £400 million for 1977 in 1976 money terms. The Deputy should read his own policy document because it makes fascinating reading.

Mr. T.J. Fitzpatrick

(Dublin Central): We will require an additional £100 million and part of that will make up the current deficit. We intend to give a badly needed impetus to the construction industry. I do not believe this Government realise the significance of that industry in our economy. If the American Government were talking about getting their economy moving they would immediately direct their attention to the motor industry, because they believe that is their major job creation industry. The construction industry can give immediate relief and create new jobs in this country. That is why we are conscious of the fact that any encouragement that can be given to that industry should be given.

The Minister's proposals do not go far enough in that regard. Last year the construction industry did not measure up to expectation and this year there has been no effort to rectify the situation. The Minister is under the false impression that the banks and building societies will help. At the end of the year we will find that much of the money available will not have been used.

We put forward proposals because we realised that we would be taking over a run-down economy, that additional money would be necessary to get the economy moving. Our policies will be implemented when we return to office. We do not object to the stealing of some of our policies. If the Minister had accepted our entire policy the budget would have worked. Any increase in deficit budgeting would be quickly reduced as the economy expanded.

We must view income tax in conjunction with the national wage agreement. I sincerely hope that there will be a general acceptance of the national wage agreement. I believe that the wage earners will shoulder their responsibilities in regard to the present national wage agreement. The Minister should have stated that he would expect them to take a slight cut in their standard of living. Instead of doing that the Minister forwarded proposals that were confusing. The Minister should have informed the public that we must all cut our standard of living. He should have been honest and admitted that any reduction in standards of living is due to the Government's mismanagement.

The Minister seems to have forgotten one section of the community, a section which has not been subject to any income tax in the last three or four years. He has forgotten the man earning £50 per week who has a personal allowance of £110 for himself and his wife and an allowance of £1,200 for his children, with a bank loan of £4,500 plus £400 interest. His net tax-free allowance is £2,610, a little over £50 per week. The lower paid worker should be given more consideration in regard to taxation. The Minister has produced a chart which sets out the concessions to be given. It strikes an average of £2,500 to £3,000. The Minister should have increased the figure to £4,000. Our duty is to encourage people to work and to give them a fair reward for their efforts. There is nothing in this tax concession that people are not entitled to. This is a tax concession in lieu of wages and for that reason it is unfair of the Minister to try to sell the idea to the public that it is a benevolent gesture. It is no such thing. People are entitled to it because it compensates for increases in the cost of living.

The Government are responsible for allowing inflation to reach such a high level. They have scant consideration for the economic and social consequences of their misbehaviour. If the Government had reduced the inflation rate to 12 per cent or 14 per cent the people would not have to endure extra taxation and a reduction in living standards today. I do not know why there was such euphoria in regard to this budget. If the budget is analysed in regard to investment, taxation and wages—and it will be analysed in regard to taxation and wages before many more trade union meetings are over—we will see what is contained in the Minister's budget speech in regard to wage earners.

These are some of the faults of the present Government and the Minister for Finance. There is no planning and no effort—good, bad or indifferent—to check inflation. We simply cannot have planning and I am sure nobody would agree with me more than the Minister for Foreign Affairs when I say that there is no possible way one can plan effectively today. No one has a better knowledge of how necessary it is to have a census in order to plan for the social and economic development of the country.

For the benefit of the Minister for Foreign Affairs I should like now to repeat a story a friend told me recently. He was an undergraduate when the Minister for Foreign Affairs was lecturing. He is now an economist in his own right and he told me that during the time the Minister for Foreign Affairs was lecturing him the one thing he always pointed out was how necessary it is to have a census; it was the most important thing if one was to have proper economic planning. Furthermore, he said if there was one criticism the Minister for Foreign Affairs had it was that the census was taken only every five years and so it was distorted because of the length of time.

Dr. FitzGerald

I never said that.

Mr. T.J. Fitzpatrick

(Dublin Central): That is a statement of fact.

Dr. FitzGerald

I was never so foolish as to say it should be taken oftener than five years. It is ten years everywhere else.

Mr. T.J. Fitzpatrick

(Dublin Central): The Minister's one regret was that the census was taken only every five years. He would have liked a shorter period. That just shows how a man can go back on his principles when he comes into Government.

Dr. FitzGerald

Even the United States takes a census only once every ten years.

Mr. T.J. Fitzpatrick

(Dublin Central): Then the Minister should not have told his pupils that.

Dr. FitzGerald

We will leave the Deputy to his delusions.

Mr. T.J. Fitzpatrick

(Dublin Central): That is fact and I stand over it and I will bring the Minister face to face with the particular person who told me. We cannot plan. There are no proper statistics available and no one knows that better than the Minister for External Affairs.

Dr. FitzGerald

Foreign Affairs.

Mr. T.J. Fitzpatrick

(Dublin Central): There is no census for the sake of saving £1.5 million necessary to collect vital information for the economic development of the country. It is extraordinary how people change when they get into Government. I have often said here that I never regret borrowing for capital purposes. Indeed, I regret that when we were in Government we did not borrow more for capital purposes to expand our economy, build up our hospitals and roads at a time when money was much cheaper than it is today. I would encourage borrowing for capital purposes. Unfortunately, all the borrowing over the past four years has been for current expenditure and at the end of 1977 we will reach a deficit of £764 million roughly in current expenditure. We will have to pay that back. Meanwhile, the spending will have to be serviced and ultimately redeemed. It has not been invested in the country. If it had been, it would service itself. Servicing will have to come out of future capital investment, and how that will come about I do not know, to redeem that huge deficit in current expenditure.

When one looks at the loans one wonders how we will get the necessary finances to create about 30,000 jobs in the 1980s or how we will secure the necessary finances. We will require something in the region of £800 million capital investment in 1976 prices away into the 1980s. We have a sum of £781.6 million foreign borrowing without taking into consideration at all borrowing within the State and by the semi-State bodies. When Fianna Fáil were in office there were only nine small loans due to foreign countries. Today there are 29. Many of these are maturing at a very short term. We got long term loans. The loans negotiated by the present Government will have to be redeemed in the early 1980s.

An Ceann Comhairle

The Deputy might now make his concluding remarks.

Mr. T.J. Fitzpatrick

(Dublin Central): We can only look forward to the day when this Administration will be removed from office. Ireland is in a state of economic chaos. Almost four years of Coalition misrule has brought the country and the economy to a state of complete stagnation. The notorious Coalition promise of price stability has been replaced by the worst inflation in Europe. Prices have risen by almost 80 per cent since the Coalition took office and some of the most savage increases have been made by the Government themselves. Debts have piled up at home and abroad at an astronomical rate so that interest charges alone are beyond our capacity to pay. These constitute the most serious economic challenge since the foundation of the State. Bad as the position is, Fianna Fáil believe that rapid and decisive action can overcome these difficulties——

An Ceann Comhairle

I am sorry, Deputy. The time is up.

Mr. T.J. Fitzpatrick

(Dublin Central):——provided the correct policies are chosen and pursued singlemindedly and firmly. The most urgent need is a restoration of confidence brought about by a change of Government. When Fianna Fáil are returned to power, they will initiate an immediate programme of economic reconstruction and recovery designed to bring the country back to economic stability.

Minister for Foreign Affairs (Dr. FitzGerald)

The budget debate provides a useful opportunity to review the state of the economy and the events of the preceding year and see how the budget relates to these past events and how relevant and useful it is in regard to future needs. I heard some of the remarks made by Deputy Haughey, though I was, unfortunately, not able to hear them all. I heard him suggest that the Minister for Finance in saying 1976 had been a good year as far as economic growth was concerned had, in fact, been misleading the House and the country. I do not understand how he could arrive at that conclusion. The statistics with regard to our economic performance in 1976, our industrial performance in particular, are conclusive and quite remarkable. It was, in fact, a much better year than most commentators expected.

In 1976 in the budget debate I expressed some optimism about it myself and, perhaps, because I have a reputation for optimism, I was criticised for that. I did, however, I think, grossly under-estimate the increase in industrial output. Even in my most optimistic moments I did not envisage the kind of industrial boom that occurred in 1976. The latest figures we have suggest that our overall GNP rose last year by 3½ to 4 per cent. The figure is a bit misleading because in this country an important component of gross national product is agriculture and the most important single component of agriculture is cattle and beef and the figure which determines cattle and beef output when you examine it and get down to bedrock is, in fact, the number of calves born. It is that figure related to the previous year's figure of calves born which is the determining factor. Of course, in 1976, because of the slaughter of cows in 1975 following the world cattle surplus the previous year calf numbers were sharply down and the agricultural output was correspondingly affected, although apart from the birth of calves, it was a bad year for agriculture. If one discounts this technical distorting factor of calf births, the growth rate in the economy in 1976 would have been of the order of 5¼ to 5½ per cent. This is a figure above the average of the EEC and there are few countries in the world who in 1976 achieved such an overall growth rate.

The reason this performance took place was the massive recovery in industrial output. Ireland is one of the only two countries in the 21 OECD countries for which we have figures whose industrial output in the third quarter of last year, the latest for which figures are available, exceeded the 1974 peak before the crisis began. Only one country, Greece, has a better performance. Greek industrial output in the third quarter of 1976 was 8 per cent higher than the 1974 peak. Ours was 1.3 per cent higher. No other country has yet achieved its 1974 peak and for most countries the short-fall is large, ranging in most cases from 4 to 8½ per cent. So there are several European countries where the industrial output is almost 25 per cent below the 1974 peak. With the single exception of Greece, we are unique in having already recovered our industrial output to the peak level before the world crisis began. These figures are readily available and I will recite the sources in each case. They are from OECD Main Economic Indicators, December, 1976.

It is clear from the pattern of industrial output over the past three years that Ireland moved into recession in phase with most other industrial economies and is moving out of it along with these other countries, although so far as industry is concerned at a faster rate. If we take the latest 12-month period for which figures are available, that is the period ending the third quarter, 1976, in that 12 months only three OECD countries had a faster industrial growth rate than Ireland. For transportable goods industries the figure was 11½ per cent in our case. Luxembourg, France and Japan had faster rates. Of the 20 countries for which figures are available all the others had lower growth rates for industrial output in that 12 months. This pattern is in very sharp contrast to the UK where the decline in output occurred somewhat later than in Ireland and in most other countries but where recovery in output has been very weak in 1976. This improvement in Irish industrial output and productivity in 1976 reflects a diversification of our exports. It is this that has allowed us to take advantage of the recovery in world demand. Had we remained as dependent on the UK market as we were before joining the EEC, we would not have been able to achieve this kind of industrial growth in a year in which the British economy still lags far behind. The industrial recovery we have had has been primarily stimulated by the rise in industrial exports but it has also been sustained by home demand. It was an industrial export boom that was essential if a firm basis for future growth was to be established. Indeed, for the future as in 1976 the main source of growth must be exports and, above all, industrial exports.

Some Opposition speakers have tried to dismiss this export progress, suggesting that it was due to the decline in the value of sterling. Yet, the decline in sterling has not been able to stimulate the level of UK industrial production to any great degree. As far as manufacturing industry is concerned, for the 12 months ended June last when our manufacturing output was 13 per cent up, in the UK the figure was 3 per cent, with a devaluation of the pound at parity with ours. Therefore, the mere devaluation of the £ does not in itself stimulate industrial growth. It is only automatic, a matter of obtaining the benefits of devalued currency through improved exports, but there is everything automatic about obtaining through higher prices the disadvantages of a fall in the international value of sterling.

Although the industrial recovery has owed much to the rapid and accelerating growth in exports, other categories of the demand also expanded. Export growth has been phenomenal. Manufactured exports rose in value by over 45 per cent in 1976. In the month of December they were up by an almost unbelievable 78 per cent. That is a volume rise of 40 per cent for the month of December. At the same time, this industrial export boom has been accompanied by a recovery in the volume of domestic consumption which continued to increase throughout the year with a temporary lull in the third quarter. This growth in consumption in 1976 was due in part to the overhang of the 1975 wage settlements, in part to the international agreement and in part to the reduction in the abnormally high savings ratio in 1975. Some of the improvements may represent a phase in a consumer durable cycle of three or four years in length. The recovery in car sales which was quite exceptional last year would point to such a cycle.

The most gratifying feature of 1976 was the continuing high level of investment in machinery and equipment. It is, after all, this investment which will form the basis for future growth. As those who follow the international economic scene closely will know, there are fears in the industrial economies that a continued lack of investment will slow down future world growth. As far as Ireland is concerned, present evidence suggests that throughout this world crisis between 1972 and 1976 investment in machinery and equipment rose in volume terms by an average of over 6 per cent per annum, an extremely creditable performance when one considers that the period included the deepest world recession since the 1930s. The growth in 1976 itself was very high, some 12 per cent in real terms.

The other main component in investment is building and construction. Investment and activity in this sector also increased slightly in real terms in 1976 and investment in construction loans on dwellings showed a significant rise. Housing investment was maintained in real terms although the number of completions was slightly below the record number of houses completed in 1975. This disparity between completions and investment levels would point to the likelihood of a further improvement in the level of construction activity in the housing sector in the current year.

Mr. T.J. Fitzpatrick

(Dublin Central): How does the Minister explain that the capital budget is down for housing?

Dr. FitzGerald

The capital budget represents a small part of the total investments in housing.

Mr. T.J. Fitzpatrick

(Dublin Central): It is diminishing all the time.

Dr. FitzGerald

It is varied according to the needs related to what the private sector is providing. If that sector is buoyant the concentration of public investment interest is in other sectors.

Mr. T.J. Fitzpatrick

(Dublin Central): It was down last year.

Dr. FitzGerald

It was not down last year. It was up very much last year, as the Deputy well knows.

Mr. T.J. Fitzpatrick

(Dublin Central): In the budget it is 19 per cent.

Dr. FitzGerald

Growth in imports in 1976 was rapid, much of it due to the rising level of raw material imports required to fuel the export boom, due to the continuing high level in investment which involves consequent imports of machinery and equipment of which we import a high proportion. The overall balance of payments deficit of £165 million was not excessive, at 3¾ per cent of GNP.

The fact is that we are a capital importing country at a certain stage in economic development, and it would make no sense for us to produce simultaneously a policy of attracting capital imports through industrial investment by foreign firms while trying at the same time to have a zero deficit in the balance of payments. Of course, a current balance of payments deficit of a modest kind is a logical corollary of the policy of seeking capital investment. In spite of the deficit, that reserves rose by £173 after allowance was made, was again due to the appreciation of the sterling value of non-sterling holdings. The improvement in reserves would almost certainly have been greater were it not for the bank strike and the efforts by the banks to keep lending at borrowing rates below those prevailing in the UK.

There have been signs in recent weeks that much of the resources that left the country as a result of the bank strike and the interest differential which existed for a period have attracted back the fall in the UK rates from emergency levels. There has been very strong interest in Irish Government securities in recent weeks which would indicate such a flowback. One would also expect that as demand for credit improves in Ireland, the flow of resources into Ireland from abroad will accelerate. Certainly, there is no indication that the balance of payments will be a constraint in the country's economic performance in 1977.

The classical textbook pattern of recovery indicates the following sequence of events: recovery in output followed with a lagged recovery in employment, this in turn followed by a fall in measured unemployment. The lag between the recovery in output and recovery in employment is due to the fact that producers respond to increased demand initially by increasing working hours and overtime and reducing short-time working.

As the growth in demand progresses, more workers are hired. The lag between the growth in employment and the fall in unemployment is due to the fact that many of those taken on in the recovery phase are not included in the measured unemployment level—people leaving school who never entered the unemployment figures because they got employment straight away and some married women, those who quit an existing job which then remains vacant for some time and then they come back into employment again.

If the rise in employment is sustained, eventually the unemployment figures begin to fall also. This is precisely what happened in Ireland from mid-1975 onwards, from the time, it must be said, of our special June budget in 1975. It is from that moment our recovery dates. Industrial output reached a trough in the third quarter of 1975, after which it recovered, and the recovery continued throughout 1976. By the second quarter of 1976, that is to say with the nine months' time lag which has been a feature of previous recoveries, industrial employment began to recover. First, you get in the third quarter of 1975 output recovery, and nine months later in the second quarter of 1976, employment recovery. In all the cycles I have kept an eye on since the late 1940s that nine months' time lag has been a feature.

Mr. T.J. Fitzpatrick

(Dublin Central): I do not know where the Minister got the employment recovery.

Dr. FitzGerald

From the statistics with which the Deputy will be familiar and which show a recovery in employment in industry in both the second and third quarters of last year. From about July or August of last year, that is some months after the recovery in employment started, the level of unemployment seasonally corrected began to decline reasonably rapidly. Present indications suggest a rate of decline averaging about 800 a month. If that rate continues, we will see unemployment in terms of the actual live register figure below the 100,000 mark by the summer of 1977, if that secular trend continues even leaving out of account the impact of the budget on unemployment.

It is worth drawing the attention of the House to the comparison between the trend of unemployment in Ireland and in other countries. I refer to seasonally adjusted figures for unemployment in Ireland and other countries from July, 1976, to the latest date for which they are available. For those countries in respect of which data are available up to December, Ireland shows by far the biggest drop in unemployment, seasonally corrected, with a 4 per cent decline from July to December. For the Netherlands the figure is 2.8 per cent, France 2.1 per cent, Germany 1.3 per cent and the US and the UK up by 1.8 per cent and 1.7 per cent respectively.

However, there are a number of other countries in respect of which figures are not available up to October, but only to November or October. When we examine those figures, it seems likely that there are certain other countries in respect of which, for the second half of last year, the drop in unemployment may have been somewhat sharper than in Ireland— Norway, Sweden and, perhaps, but improbably, Belgium. It is probable that, when the figures are finally available, only in Norway and Sweden in the whole of the OECD will the drop in unemployment have matched the decline in unemployment seasonally adjusted in Ireland.

The impact of this has been seen in the fact that the seasonal increase in unemployment has been so small this year and, of course, the impact of it will be seen visibly in the actual figures from March onwards, with the decline in unemployment as the secular trend continues and the budgetary measures take effect, and when the underlying seasonal decline which has been going on since last July emerges through the seasonal pattern the decline from March onwards will be quite dramatic.

Most commentators were surprised by the speed at which unemployment responded to the fall in output during the recession. This response may have been due to the fact that many employers knew their workers would be protected by the improved unemployment benefits, including pay-related benefits which this Government introduced. They could lay off workers with a fair degree of confidence that, when recovery came, the workers would still be available for work in Ireland, whereas in the past under Fianna Fáil such workers would have been and were forced to emigrate in vast numbers. Similarly, many workers accepted redundancies with less opposition than in earlier years because of the improved quality of the income safety net provided by the State.

It is important to point out—because there has been a lot of propaganda on this point—that both employers and workers gain from the existence of an adequate system of unemployment benefit, especially in a country where emigration is a constant threat and has been in the past the usual outlet when there were Governments in command of the situation who were not concerned adequately with social or economic progress. Many progressive and astute employers recognised the desirability of a comprehensive system of unemployment benefit with adequate income maintenance levels. Without such a scheme, many employers, faced with a temporary fall in demand, would not have been able to let workers go, or put them on short time, without a great deal of industrial unrest which would have made their firm's position much worse and would have the danger that the workers would not be there when they were needed again.

The unusually rapid decline in employment during the recession may well be reflected, as I have said, —and, indeed, the evidence is there already that it is being reflected — in an abnormally rapid recovery in employment in the period ahead even independently of the special measures taken by the Government. It may well be the case — it is I think the case — that while plants may now have considerable excess capital capacity, they may not have the kind of excess labour which, in the past, has remained even at the end of a recession so that improvements in output may have to be reflected quite quickly in increases in employment. That is what is suggested by the unemployment figures and the sharp decline in them, the almost exception by OECD standards decline in unemployment in the past six months.

Such a recovery in employment will also be aided and, indeed, reinforced by the reasonable increases in wages and salaries negotiated in the proposed national agreement. It ought to be said that much of the credit, perhaps most of the credit, for the drop in unemployment we have had is due to the fact that employment in industry has been rising since the second quarter of last year. It goes back to the fact that the previous wage agreement was moderate, as renegotiated after the June, 1975, budget. In the 12 months from September, 1975, to September, 1976, the two increases in wages which occurred increased wage rates by about 9½ per cent which was more, perhaps, than was desirable, but not much more. This helped to keep down labour costs. I will come back to that again in comparison with the UK. This created the first conditions for recovery in employment. These conditions have now been reinforced by the second wage agreement which reflects a remarkable sense not merely of responsibility on the part of trade unions and employers but a solidarity on the part of trade unions and workers to each other.

In the past, one of the problems has been that workers and trade unions have tended to think of the interests of those in employment. Either they have not seen the connection between excessive wage increases and unemployment, or if they have seen it they have pushed it out of their minds and been concerned with the interests of those who actually have jobs. In the past year and a half, under this Government, in the negotiations which have taken place following consultations with the tripartite mechanism, trade unions, workers and employers have come to accept that there is this relationship and to show a solidarity with the unemployed which is now, for the first time, producing real results in terms of recovery in employment and a sharp drop in unemployment.

Mr. T.J. Fitzpatrick

(Dublin Central): Do not say that.

Dr. FitzGerald

This is the background to the 1977 budget: an economy exhibiting exceptionally rapid industrial growth matched only in three other OECD countries, fuelled by an extremely high and accelerating rate of growth of manufactured exports reaching absolute record levels of 40 per cent increase in volume in the month of December and showing signs of growth in virtually all components of demand.

Mr. Carter

What element of meat exports is included in that figure?

Dr. FitzGerald

None whatever. I am talking about manufactured exports excluding all processed foodstuffs including meat: purely manufactured exports, chemicals and other manufacturers, classes five to eight in the official classification.

The 1977 budget has a number of objectives which correspond to the underlying needs of the economy. The first is to ensure, in co-operation with the social partners, an incomes settlement which will allow us to go on building on what has been achieved already in moving out of the recession and getting unemployment down. Secondly, the budget is aimed at building on the base established in 1976 to ensure an expansion in employment especially in the private sector through the provision of new incentives for that sector.

Thirdly, the budget aims at maintaining the real and dramatic improvements in the social welfare schemes achieved under this Government. Fourthly, the budget is aimed at ensuring the continuation of tight control on public expenditure and the ratio of borrowing to national output. Let me say in that respect that the test of whether this is a responsible budget or an irresponsible budget, in what is seen as an election year, is this question of borrowing in the deficit. An irresponsible Government — and we have had them in the past — could be tempted and could take action to provide an easy budget at the expense of a larger current deficit and increased borrowing. Such action would be irresponsible. The Government rejected that. As is known the level of the borrowing and the level of the deficit in relation to GNP are not very much lower than was planned for 1976 but lower than the actual figures in that year, which are very much below the planned figures.

In order to assist in achieving a level of pay settlement which would ensure that unit costs in Ireland stayed in line with those in the UK and elsewhere the budget announced substantial income tax cuts which amount to £72 million in a full tax year. These income tax cuts offered in a package will reduce the tax burden of the generality of taxpayers by from 10 per cent to 12 per cent, although much more at the lower level. The reliefs were designed to give great proportionate relief to lower income taxpayers. A single person earning £30 a week would have to get an increase in personal allowances of 59 per cent—far above the rate of inflation—to be as well off as he is under the new tax structure. The reliefs are also equivalent to a 24 per cent increase in personal allowances to a married man earning £50 a week. Within the limits of giving worthwhile tax concessions to all, and taking account of the excessive level at the top class rates, the Government have been able to give proportionately more to those on the lower end of the taxpaying scale.

Some comments made by the Opposition appear to suggest that the reduction in the top tax band is undesirable. One doubts whether these views are expressed with the same vehemence when Fianna Fáil are talking to their business members and supporters. At any rate, this Government believe that a marginal tax rate of 77 per cent—it was 80 per cent under Fianna Fáil and we reduced it to that —was a severe disincentive to effort. It meant that undue effort was being devoted to tax avoidance schemes where the gain was three times the net income that might be gained from expending similar efforts in earning the extra income. The cost of such a reform was small and almost all of the cost of the tax reliefs goes towards reducing the tax burden for the average taxpayer. Only a very small proportion is top-line.

One might answer criticisms from the Opposition that the tax concessions do not do enough for the lower paid by pointing out that the Fianna Fáil proposals on the economy, issued last September, promised a 20 per cent across the board reduction in tax levels. This would have given less relief to, for example, the single man with £25 a week, the married man with £40 a week and the maried man with two children on £50 a week, than the Government proposals. So much for the apparent concern for the lower income individual shown by Fianna Fáil. The main benefits of such an across the board cut would go naturally to the larger taxpayer with a higher income.

A second criticism has been voiced from the Fianna Fáil benches and elsewhere that the tax cuts are inadequate and do not keep up with inflation. If the Fianna Fáil record when in office had been one of frequent changes in personal allowances and tax brackets in line with the cost of living the criticism might have some force. A glance at the record shows how hollow such protests are and what sham is contained in the eagerness to push the so-called principle of indexation. From 1961 to April, 1973 personal allowances increased under Fianna Fáil by 25 per cent to 29 per cent while consumer prices rose by 97.8 per cent. During that period the maximum level of earned income relief claimable remained absolutely fixed. As there was no policy of indexation in that period the tax burden rose astronomically. With an unchanged tax structure which Fianna Fáil left completely unreformed for over a decade of their term of office we find their largesse in that period was given to the surtax payers.

Mr. Carter

It did not bind the Minister so hard then as it does now.

Dr. FitzGerald

If the Deputy will follow my argument closely he will see my point. I said that from 1961 to 1973 Fianna Fáil increased the allowances by from 25 per cent to 29 per cent while consumer prices rose by 97.8 per cent. They increased them in that period by a quarter of the increase in the cost of living. We will come to the question of what we have done in our term in office. I want to make the point that with an unchanged tax structure, when Fianna Fáil actually did nothing for ten years, a married man with two children earning £70 a week would be paying £13.30 a week in tax compared with the £10.50 under the proposed new system.

Mr. Carter

That is a hypothetical example.

Dr. FitzGerald

It is. The Deputy would perhaps like a less hypothetical one. I accept the Deputy's point. Let us take the worst case, that we were as bad as Fianna Fáil were over a decade in office. Suppose, on the contrary, that we consider what would have happened if we followed the pattern established by Fianna Fáil over their whole term of office. They belatedly reformed this at the end. The level of personal allowances would have been increased by 21 per cent to 25 per cent in the face of the inflation rate of 83.3 per cent since we took office. That is the same ratio in increase in tax allowances and consumer price index as in Fianna Fáil's period in office.

Mr. Carter

Is the Minister taking the level of inflation into account in that example?

Dr. FitzGerald

I am. I am taking the same ratio, 25 per cent to 29 per cent of tax allowance increases when consumer prices rose 97.8 per cent and 21 per cent to 25 per cent in the period when the inflation rate was 83.3 per cent. That is what we would have to do to match Fianna Fáil's record in terms of their relationship between tax allowances and inflation over our period in office. What has happened is that for a single person on £70 a week the tax liability in 1977 will be the same as if the level of personal allowances prevailing in 1972 to 1973 had been increased by 122.4 per cent, when you combine the increase in tax allowances and a change in the income tax bands and other reforms introduced by the Minister earlier in our term in office. For a married perlatedl son on £70 per week the tax liability is equivalent to a rise of 122.7 per cent in personal allowances since 1973. For a married person with two children on £70 per week the 1977 tax liability is the same as an increase in personal allowances of 96.5 per cent over the 1973 level. In each case the implied increase in personal allowances deriving from the change in the whole tax structure exceeds the rise in prices over the period and is far in excess of the paltry 25 per cent to 30 per cent of the price rise which Fianna Fáil achieved in the 12 years to 1973. That is an argument which Fianna Fáil might, for their own benefit, use sparingly in the year ahead.

There is no doubt, if we had greater resources at our disposal, that the Government would have given even more extensive tax reliefs. The Government are committed to a fair and equitable tax system which does not unduly burden the average family but allows the State to meet its inescapable expenditure commitments. The commitment of the Government to the cause of tax reform, including the widening of the tax net to capture all those who can afford to pay tax, has been indicated on several occasions. Unlike their predecessors they have taken action in some areas which required political courage, such as the wealth taxation denounced by Fianna Fáil, and farm income tax, which is now being denounced by Fianna Fáil, while at the same time giving the maximum amount of relief possible in the face of unparalleled external economic difficulties.

The second aim of the budget, as I have said, was to encourage employment growth particularly in the private sector. Of course, some additional public sector posts were created in priority areas, such as education and health, but we have to face the fact that the scope for sustained expansion in public sector employment, no matter how badly the additional posts are needed, will have to await a recovery in private sector employment and private sector output. This makes sense even to those who would not normally be the greatest supporters of the private sector. To those of us who favour a thriving mixed economy with a vigorous private sector it is clear that the employment recovery must be concentrated initially in the private sector. That is where the flow of resources will come from which will enable us to increase services such as health and education.

The fall in employment in the recession was concentrated in the private sector. The public sector employment continued to expand particularly in the areas of security and education. If employment in the public sector is to be sustained at a high level in the future—it will need to be if sufficient jobs are to be available to the expanding work force and if the services the community needs are to be provided— then a high level of employment in the private sector, especially in industry and services, will be essential. Without that employment and the output and demand levels that give rise to it the resources will not be available to pay the public sector pay bill. A balanced expansion in the economy and a rapid recovery in private sector employment is an essential prerequisite to a further sustained and balanced growth in public sector employment.

This budget has created a number of incentives for employment growth in the private sector. First of all, much of the extra capital expenditure that was part of the £56 million job package that the Government offered as part of a moderate pay settlement will help to expand output and demand, both directly and indirectly. The construction industry should be a major beneficiary of much of the increased spending since many of the capital projects involve a substantial construction element.

The more important and integrated package is, perhaps, the combination of the improved premium scheme for firms increasing their labour force and the special reduced tax rate for expanding companies. Thus, a firm which expands its employment in 1977 will get £20 per week for each additional unemployed worker recruited and £10 for each school leaver. This should help with any liquidity problems such an expansion might create. The profits accruing from the expansion will in 1978 be taxed at a special low rate— half the normal rate. This combination of employment premia and tax concessions should do much to encourage growth in employment in profitable firms which can survive in competition on the domestic markets or on the export markets. It is thus better directed and more desirable in the long term than either generalised labour subsidies which would end up supporting totally unviable firms or, as some interest concerned advocated, an undiscriminating cut in social welfare contributions by employers.

It must be pointed out that the social welfare contribution being sought from employers this year is exceptionally modest and that is true also in respect of the increase on employees. For employers the increase is 42p while in 1975 it was 88p and in 1976 it was £1.17p. In fact, it is less than half the previous year's figure and half that of 1975. For employees the increase is 27p, half the figure for 1975 and less than half the figure for 1976. The reduction in the standard rates of company taxation by about one-tenth should, when taken in conjunction with the substantial lowering of marginal tax rates on managerial salaries, encourage firms to expand as rapidly as possible in 1977, without any fears that the benefit of such efforts will be eaten away by excessive taxation.

A third objective of the budget is to protect the real improvements carried out by the Government in the level of income-maintenance payments for socially disadvantaged groups. In keeping with our long-term policy, the old age pension qualifying age has been reduced by one year bringing it within one year of the qualifying age of benefit. Under Fianna Fáil it remained unalterably fixed at 70. A special allowance was introduced for old people living alone in recognition of the additional costs these people must bear. These improvements have taken place against a background of severe financial difficulties but this Government are committed to the policy of having a social security system which, having regard to the level of development of the economy, reflects the degree of justice and equity essential in any civilised society. It is too easy in a recession to seek, as some have done, to penalise the weakest sections of the community for difficulties they did not create.

It is wrong to confuse the needs of a market economy with the requirements of a theoretical wholly laissez faire economy. As I have already pointed out, the social welfare system aids employers as well as employees. Public expenditure is not uniquely directed towards social welfare recipients. A policy of cutting Government expenditure advocated by people on the right could equally, and with less inequity, include wholesale cuts in expenditures by the Government in such non-welfare areas as subsidies on inputs, construction grants, disease eradication schemes, capital grants for the expansion of industry or farming, capital expenditure on housing, advance factories and so on, all of which, it could be argued, conflict with the requirements of a totally private enterprise economy. One suspects that the groups that somewhat stridently call for action against the unemployed would be less enthusiastic about other expenditure cuts designed to establish a completely free enterprise economy.

Many of those people illogically demand more and more feather-bedding for private enterprise but the truth is, and most businessmen know and accept the proposition, that since the foundation of the State we have never had a wholly free enterprise system; we have had a mixed system. Perhaps this is not surprising since several million of our people went to their graves and millions more had to leave this country as victims of the rigorous application of doctrinaire free enterprise ideas in the mid-19th century. We have a mixed economy now where there is an extensive mutual interdependence between individual producers and the State. The essence of such an economy is that the freedom of the private enterprise system will be restrained for the generally perceived public good while the overall conditions within which private enterprise can operate will be maintained at a favourable level by the State. It is a bargain which ensures stability, as far as possible, for the individual businessman in return for social constraints.

Of course, from time to time individuals may feel that the balance has swung too far one way or the other but, in general, the soundness of the overall framework is accepted. It comes under strain, of course, during a period of recession and one gets tensions emerging between the different social groups. Suggestions that social welfare payments should be cut come from well-off people who are certain they will never have to be dependent on it. This degree of interdependence, this acceptance of the required extent of social constraints necessary to maintain a stable and civilised economy, can be overturned only at the risk of great uncertainty and instability. That is why those who call so stridently for the return to an era of 19th century laissez faire have not found acceptance among the political parties that make up this Dáil —at least at a public level in debate although the Opposition may have tried to give a contrary impression to some businessmen in private. We need to retain the features of a market economy and that includes profits for investors, incentives to increased production and so on. Such a structure would be dearly bought if it was to be at the expense of those who, because they are not organised into effective pressure groups as are farmers, trade unionists, managers and employers, are consequently the easy victims of a general decline in economic activity.

As part of a policy of aiding the less well off sections of the community the Government introduced additional food subsidies in the budget. This should also help to keep down the rise in the cost of living consequent on the devaluation of the green £ obtained by the Minister for Agriculture and Fisheries after a considerable battle in Brussels in December. The action on rates will also help to keep the rise in prices down and this should be of considerable assistance in ensuring the acceptance of the proposed national agreement. Of course, if resources were more abundant we might have been able to consider greater relief for householders. It would have been quite premature and irresponsible to promise a timetable for further action in this area in advance of a substantial increase in output and employment in the economy as a whole which will reduce the current deficit and the borrowing requirement to more normal and sustainable levels. Premature and irresponsible action comes more easy to an Opposition than to a Government.

Some critics have suggested that this was an election budget, usually while trying to complain that all the increases in expenditure were not enough. However, in spite of the fact that we are within one year of an election we have grasped a nettle that Fianna Fáil refused to grasp throughout their period in office. The House, and the electorate, will remember that in 1961 a commission on income tax, which had several years earlier recommended PAYE which Fianna Fáil speedily introduced, came to the conclusion that farmers over £100 valuation should be taxed and that, over time, the net should be lowered. Some 12 years later when this Government came into office nothing had been done to implement the recommendations of the commission, presided over, I might add, by former President Cearbhall Ó Dálaigh. Thus this Government had to bite the bullet and introduce a measure which in equity was overdue by over a decade.

Before the budget we heard from everyone associated with farming that farmers accept they should pay their fair share of income tax. The spokesmen were, however, less forthcoming about what exactly constituted a fair share. They were adamant, however, that the notional system of taxes should be maintained so as to encourage investment and that sales taxes in lieu of income tax would be resisted. The Government took note of their views on the form of taxation. The tax proposals we have introduced will affect less than 10 per cent of farmers, will raise tax equal to only 5 per cent of total family farm income and will still maintain the notional system of taxation. It would seem from some comments by some leaders of farm organisations that their understanding of a notional system is one where farmers only notionally pay tax. The truth is that in 1977 the actual value of output, after all expenses including wages paid to workers and contractors, and rates, will be about £100 or so per £ valuation on average.

Mr. Carter

Will the Government take up the proposition of the leader of the IFA on taxation for farmers?

Mr. Reynolds

What is that?

Mr. Carter

Of a fair system of taxation for farmers.

Mr. Reynolds

What would the Deputy call a fair system?

Mr. Carter

The leader of the IFA last week outlined what he deemed to be a fair system.

Dr. FitzGerald

The Government had discussions with farming organisations before the budget and got their views on taxation. They said they did not want a sales tax system, not a system of taxation on actual income but a system of taxation on notional income based on valuation. The Government's proposals are based on those recommendations.

Mr. Carter

That is being phased out now.

Dr. FitzGerald

This system is in response to the views of the farming organisations. Many people in other sectors would welcome a tax code based on 65 per cent of average earnings. They would be happy to pay tax in one instalment in September in exchange for such a system. The tax burden on farmers of 5 per cent of total farm family income is a smaller share of income than was taken from the non-farming sector at any time in the post-war period. Most farmers accept that this taxation is necessary if tensions between them and the non-farming community who now represent the vast majority of the population are to be avoided.

This Government have pressed, as the House knows, at every opportunity to obtain full green £ devaluation in Brussels even though this would raise domestic prices. Unless some of the benefits are redistributed inexorable pressure would build up to halt any further green £ devaluation and to scrap the common agricultural policy. Such a trend would not be in the national interest but ultimately Governments must bow to the wishes of the majority. Thus the long-term interests of farmers do not lie in remaining aloof from the tax net if we are to fight the best possible case in Brussels. Some taxpayers may hope that the undoubted lobbying resources of the farm community will now be devoted to the income tax system in general rather than solely to the question of the exclusion of farmers from it.

Of course the Fianna Fáil attitude in all this has been predictably ambivalent. While muttering that they do not oppose the level of taxation on farmers—this to appease their urban constituents with whom they hope to win the next election—they shout loudly that they are opposed to this taxation, so as to appear to the farmers as opposing any farm taxes. The budget measures introduced by the Minister for Finance, when taken in conjunction with the expected consequential growth in tax revenue, will lead to a current deficit of £217 million or about 4.1 per cent of GNP a significant reduction on the expected deficit for 1976 of about 7.7 per cent of GNP and is a reduction on the actual outturn of 4.6 per cent of GNP.

Given that revenues represent about one-third of GNP, we would expect that at unchanged tax rates a growth of output to a level 12½ per cent above the 1977 level would remove this deficit entirely. Indeed, given the progressivity of income tax and the progressive structuring of VAT, we might expect that even a 10 per cent to 11 per cent growth rate would restore balance. If the economy had grown in 1974 and 1975 at the normal pre-recession rate of about 4½ per cent then we would have a 1977 output level some 10 per cent above that anticipated. If we go back to 1973 and extrapolate the trend of previous years' economic growth before this world recession occurred, we could say that we are probably running about 12 or 13 per cent short now of the output level we could have anticipated. It means that the current deficit we have now is solely due to the temporary depression of the economy because of this world recession and because the economy is below its normal growth pattern. It is because of that that this deficit is justified and that this borrowing to this extent and to this amount is justified. It is clear that, as the economy recovers and we get back on the long-term growth path, the deficit can be reduced substantially if it is necessary and appropriate without further large tax increases.

Mr. Carter

This is the third year we have heard the Government saying that—saying the right thing and at the same time not doing it.

Dr. FitzGerald

But we have done it. Deputy Haughey was complaining that last year we reduced the deficit from 7.7 per cent of GNP to an actual 4.6 per cent. Within the same year we achieved that and the Deputy's party complain and say it is a bad thing to do. The Deputy's party want us to borrow twice as much money.

Mr. Carter

What did you borrow in order to do that?

Acting Chairman

The Minister, please, without interruption.

Dr. FitzGerald

We have to maintain a tight control on Exchequer expenditure. At present levels it is 47 per cent of GNP but with the economy restored to its growth path it could fall to a more reasonable level of 46 per cent. On the borrowing requirement, including the capital side as well as the deficit, the borrowing needs in 1977 are estimated at 11 per cent of GNP in 1977. This represents a decline from about 15.8 per cent of expected GNP, budgeted for in 1976, and a decline from the 11.5 per cent outturn in that year.

Now this deficit may seem very high, and certainly is so by inter-national standards, but one must remember that before the recession we had a borrowing requirement of around 5 per cent to 6 per cent of GNP. Therefore an elimination of the current deficit would virtually restore the borrowing requirement to pre-recession and more normal levels. This means that the level of our borrowing for capital purposes is not abnormal and is appropriate to this country at this stage of development. The abnormality lies in the current deficit and that arises solely from the fact that the economy, like all world economies, is currently below its long-term growth path.

We undertook our budget deficit strategy in the face of enormous pressure from Fianna Fáil and many others totally opposed to the concept of a budget deficit. For two and a half years the Government had to suffer a barrage of attacks for excessive borrowing, the need to curb the deficit and the need to cut spending. These came from Fianna Fáil, usually accompanied by criticism of taxes designed to reduce the deficit and proposals for expenditure which would have, if implemented, widened the deficit out of all proportions.

The Government position was that borrowing would help maintain the level of demand during the worst of the recession and that the price for this would unfortunately be a higher level of taxes when the recession was over and these debts had to be paid. We also argued that the deficit would fall quite rapidly when the recovery got under way. We were right in this, as the outturn for 1976 shows. Some Opposition spokesmen who denounced the deficit almost a year earlier have since been heard denouncing the reduction of the deficit.

Let us now turn to the Fianna Fáil policy, a document which I have and shall treasure until after the next general election. I whispered to the Minister for Finance earlier during the debate that I thought we should get the last page of it photocopied and blown up in large type with the figures in it and use it as the basis for an election manifesto if Fianna Fáil do not have any copyright problems about it. When the political and economic history of these times comes to be written, historians will certainly find the sudden and wholesale conversion of Fianna Fáil in September, 1976, to deficit financing both interesting and perplexing. Historians may first wonder at the yards of columns devoted in Dáil Reports to lectures on the undesirability of current deficits, even during a world recession, delivered by such leading Fianna Fáil spokesmen as Deputies Lynch, Colley, Haughey and Major De Valera. This sustained, unbroken attack lasted from 1974 until the autumn of 1976. It was never punctured by any recognition that a current deficit might be essential to maintain demand in the exceptional conditions of those years. Then suddenly in September, 1976, Fianna Fáil produced their policy. It proposed current deficits on a massive scale for the 1980s. For 1977 they proposed a figure over twice the level of the recent budget and they were prepared to borrow a credible £950 million in 1977 money terms this year, 18 per cent of GNP.

The figures are here. The heading is: "Exchequer pattern 1977-1980; £m at constant mid-1976 prices". The borrowing requirements are shown as £822 million in 1977—and adjusting to 1977 prices brings it up to about £950 million. The current deficit is shown as £400 million which adjusted upwards to 1977 prices would be about £450 million or £460 million. The actual deficit we have is £217 million.

One could speculate as to the cause of this conversion. Perhaps it is not entirely unrelated to the string of by-election reversals which followed in the wake of the party's recurrent messages of gloom and their demands for unbending fiscal rectitude even during a recession. In any case, their proposals are truly spectacular. They suggest to me that the party have lost all expectations of regaining power in the foreseeable future. It would be clear to anybody that the level of borrowing indicated is totally unsustainable not to mention other defects of logic or arithmetic.

On the arithmetic side, may I point out that while the borrowing requirement is shown as £718 million for 1976, £822 million in 1977, £792 million in 1978—all in 1976 money terms—the debt service figure is shown as rising by £35 million in 1977, £35 million in 1978 and £25 million in 1979. You are going to borrow, therefore, in these constant money terms £800 million a year and your debt remuneration goes up by only £25 million to £35 million. The Government would very much appreciate learning from Fianna Fáil where we would borrow money today at that kind of 4 per cent rate including capital repayments. I am astonished that any rational political party should put forward these proposals. I cannot understand any party having advisers who would mislead them to put forward something as absurd as this document.

Another remarkable feature of it is their forecast of the rate of inflation. They say they are planning on a 7 per cent inflation rate for 1977. If you look at the actual trend of prices in 1976 you will see that, if there were no further increases in consumer prices whatever during 1977, the increase in 1977 over 1976 would be 7 per cent. Fianna Fáil therefore were planning that the cost of living would stop rising in 1977. They did not explain how this was to be achieved given that the import price increase last December was 22 per cent over the previous year. We came into this year with import prices running 22 per cent up on the previous year because of sterling devaluation. With that as the background they proposed total price stability this year. That is the implication of the figures in this document. Whoever composed it knew not only nothing about economics but nothing about arithmetic and obviously remarkably little about politics.

Mr. Carter

That is what the Minister thinks. He talks about deficits but if we were to take over from where he left off we would have no choice but to accept that there would be a deficit created by this Government.

Dr. FitzGerald

We have a choice, now that we are moving into a period of recovery, to get the deficit down and borrowing down and, though it is election year, that is what we have chosen.

Mr. Carter

Not remunerating either——

Acting Chairman (Mr. Moore)

The Minister without interruption. He has four minutes left.

Dr. FitzGerald

I appreciate that reminder. It is useful to compare Fianna Fáil proposals with what we have suggested in the budget. They proposed £30 million for construction and £70 million current expenditure for direct employment schemes for Garda, health personnel, teachers and school leavers. We proposed £37 million on capital and £19 million on current expenditure. Fianna Fáil proposals would add a further £44 million to total borrowing and £51 million to the current deficit over and above what we propose.

They proposed a tax cut equal to 20 per cent of income taxation. This would cost £110 million in a full tax year compared to £72 million we proposed. Thus a further £38 million would be added to the current deficit. They proposed the abolition of part of the employer's stamp. This would cost about £30 million in relation to the proposed 1977 increase, although some Fianna Fáil spokesmen suggested they would not raise the stamp at all in 1977. This would add another £10 million or so to the deficit. They said they would abolish all domestic rates at an additional cost of £45 million over and above the cost of our proposals. That would add a further sum to the current deficit.

From what we have heard from Fianna Fáil speakers so far in this debate, from what is, or rather is not, in their policy document and from their record over the 1960s, we can, I assume, take it that they would not dream of taxing farmers and certainly not in an election year. That would add a further £35 million to the deficit.

Their remarks on the postal and telephone charges make it clear that they feel, bearing the cost of living in mind, that they should not be increased. This would add a further £17 million to the deficit. I must be fair to them. They have not proposed any increase in food subsidies and that would reduce the deficit by £10 million. When you add these figures up their proposals would add another £205 million to the current deficit and £198 million to the borrowing requirement. That is in line with the total figures in their document.

Fianna Fáil have complained that the Government have stolen their ideas. I have shown that the country can be grateful that we have not. It is a little ingenuous of Fianna Fáil to accuse the Government of bad faith in the wake of their monumental, and still not understood, conversion to the principle of enormous current deficit financing. I will not develop my remarks on that point further given the time constraint.

I want to comment on the trend of labour costs because it is important to see our economy in perspective. Fianna Fáil suggested that foreign investment is depressed and that we will not get foreign investment. The biggest single investor in Ireland is the United States. The American Government publishes a survey of current business, an annual article on the capital expenditure by majority owned foreign affiliates of US companies with projections for 1976 and 1977. These figures cover an enormous number of countries in great detail. They show that, between 1974 and the projected figure for 1977, the increase of American investment in manufacturing in Ireland would be 125 per cent. There are only two countries where American investments are projected to rise by more than that over these three years—Peru and Venezuela.

The Irish share of US investment in manufacture in Europe is projected to rise from 1.1 per cent in 1974 to 2.3 per cent in 1977. Any suggestion that there is no confidence in this country as regards investment is clearly absolute nonsense on the basis of these authoritative figures by the American Government. The reasons for that include the fact that we have been able to maintain our competitiveness. Our labour cost increases have not been the same as in Britain because, as I mentioned earlier, in a period of 12 months to June, 1975, we increased our manufacturing output by 13 per cent while the comparative figure in Britain was 3 per cent.

(Interruptions.)

Dr. FitzGerald

Allow me to give the figures and then the Deputy may refute them. We had a 13 per cent increase in output in 1974-75 and in Britain the figure was 3 per cent. Because the British increase was so low it was accompanied by a drop in employment of 3½ per cent which did not occur here. That gave them a productivity increase of 7 per cent, while we had an increase of 13½ per cent. That meant that, when you take into account the earnings increase in the two countries, our labour cost increase was only 5 per cent and in Britain it was 13 per cent. This was the result of the buoyancy of our economy. In the last nine months of the period from the third quarter of 1975 to the second quarter of 1976 for which we have comparative figures, there is no labour cost increase in our case because the productivity increase is similar to the increase in earnings.

We have succeeded in achieving a very marked improvement vis-à-vis Britain in our competitiveness; and of course vis-à-vis other countries we are competitive and the present wage agreement, if endorsed, will ensure the continuance of this and the rapid decline in unemployment which has been the most striking feature of the second six months of last year.

Mr. Carter

I am astonished at the time the Minister has spent basing his argument on the hypothesis that the economy is booming and cogitating on the fact that we are making some inroads on our unemployment figures, that we are competitive not merely on the British market but outside it, and at the naked fact he proclaims that this budget will be the threshold of an era of prosperity. One would hope that that would be the case. Nobody likes to see depression. Nobody likes to hear complaints about unemployment or high prices. Nobody likes the words "stagnation" or "deficit", which is another name for debt. If one were to try to follow the Minister's trend one would not know where to begin. He talked about taxation, increased employment, the reduction of taxation and reducing the cost of living. We have been listening to the Taoiseach and his Ministers speak of the desirability of all those things and yet they have failed to implement their resolutions, and, what is worse, they have run away from them.

It could be said that the Government have supported their resolutions as the rope supports the hanged man. That is not a nice thing to have to say. If we are entering an era of prosperity, how is it not apparent, never mind real? How is it that we occupy the top position in the European inflation league? If the measures suggested by the Minister are successful, when will they be successful? How is it that the Government have angered so many sections of the community by their policy?

Farmers are not a difficult section of the community to deal with but for the last two years, since the Government issued their documents on taxation, the farmers have been maintaining that what is being taken from them in taxation should be put into farming in order to increase the prosperity of the community. The farmers do not object to taxation. Last Sunday the farmers' leader made a proposition to the Government. He made a fair proposition and prefaced it by stating that the farming community do not object to paying taxes, that they want to share our taxation system, but only in a fair manner. They do not want to be penalised for production or for trying to better their status in the community.

I did not hear the Minister saying that the Government would meet the farmers' request to work out a fair share of the tax burden for the farming community. It is all right for the Minister for Foreign Affairs to read through a document issued by Fianna Fáil and to start theoretical arguments as to what the position may be in a year or two. We are interested in a reduction in the cost of living, more stability in our economy and the reduction of prices. The Government have been talking in terms of those desirable aims for three years and, at the same time, running away from their resolutions. The Government should face the fact that the value of our pound is on the floor. The housewife is only interested in what she has to pay for the range of goods she has to buy each week. I would not contradict the Minister's statement that we are competitive on the British market or on the home market. A third of the goods in any shop here and in London are produced in Hong King. We cannot be competitive if the British are not competitive. The British people are agitating about the flow of foreign goods entering Britain. If we consider the number of factory closures during the last few years, which no doubt has added to the unemployment figure, we shall soon see where our competitiveness begins and ends.

I would contest the point that we have a fair system of taxation. People are finding it difficult to manage today, even though they are handling larger amounts of money. The purchasing power of the pound has been reduced so much that people are no longer getting a proper return for it.

The Minister cannot convince me that deficit budgeting is a good plan or that deficits on our balance of payments is a good idea.

Debate adjourned.