Much of the action had already occurred before we came to this budget today. In both the Public Capital Programme and the Book of Estimates we saw cuts in such areas as housing and hospital buildings. We saw these cuts take their toll in education. So what we are discussing here today is the last phase in the pruning programme indulged in by the Government over recent months to correct what is undoubtedly a very bad situation in the management of the public finances.
Whilst this budget will be analysed in the days to come, it has to be said at the outset that the budgetary exercise of the Government that has taken place in January and February, the last phase of which we have heard today, carries within it the following effects: petrol will be £2 per gallon before the end of the year; we will have an inflation rate of over 20 per cent; there will be a fall in employment and we will have to face a possible devaluation of the IR£. These are the implications of today's budget.
It may be argued that this is special pleading on my part, that it is a politically loaded analysis of what we have heard today. Let us take petrol which was described as a discretionary item. Horseback is no longer a common mode of conveyance throughout the country and with the cutback in recent years in investment in public transport a car has become a necessity for a great number of employees. There is no doubt that, having regard to further possible increases in the price of oil during the year, before the end of this year or even within a few months we will be paying £2 per gallon for petrol. That cannot be isolated. It cannot be suggested that this is a luxury item, that it penalises only the Sunday driver. It will affect employees who travel to work by car and it will affect industry generally. However the Government may plead conservation, there is no doubt they have added to inflation.
We are already facing an inflation rate of 16 per cent but there is no doubt that it will rise to over 20 per cent. One of the ways of financing improvements in the allowances for PAYE earners was to transfer the increases to the area of indirect taxation, to petrol and to the other items that were increased. There is no doubt that the increases announced by the Minister will have an impact on the cost of living and certainly will have an impact when it comes to bargainning during the summer on another national understanding. The people involved in such bargaining will not be convinced that the increases have occurred in items of discretionary spending. The increase in the rate of inflation will have an effect on the kind of wage expectations likely to be anticipated this year.
A fall in employment will occur from cuts in the public capital programme. There will be cuts in investment in education, in hospital building and in schools. The cut in school building is to be regretted particularly when it comes from a Government who recently welcomed the challenge of the number of young people in our population. The cutback in education that has been announced will lead to further overcrowding in already overcrowded classrooms. This is a poor way of meeting the challenge of the number of young people in the population. Expenditure on the public capital programme has not kept pace with last year. There have been protests from the construction industry with regard to the slow-down in that industry. If a major part of the problem facing the economy is based on a balance of payments difficulty, it is difficult to defend the cuts in building and construction when one considers how little that industry adds to balance of payments problems. It uses a high degree of native raw material and it has a large labour content. It is difficult to defend any measures that act as a disincentive to the expansion of that industry in a year that will show little growth in our own or in any economy.
There is also the matter of the devaluation of the IR£. The budget has not tackled the question of reducing our rate of inflation; it has added to it. Admittedly the difficulties that the people preparing the budget had to face probably made that choice inescapable unless they took more unpalatable measures. They have added to the burden of indirect taxation and this means that our rate of inflation will be way out of step with that of our European partners. It is clear that the present exchange rate of the IR£ cannot be maintained if our inflation rate is totally out of line with that of EEC countries. The old days when we could, in alliance with sterling, mask our balance of payments problems and ride out an impossible situation have gone forever. We are now tied into the EMS and we are subject to the scrutiny of our partners. An Irish inflation rate that is double that of other EEC countries will call into question the whole exchange position of the IR£. That is why I say that an inflation rate of nearly 20 per cent will endanger the exchange position of the IR£ and it raises more than a possibility of a devaluation of the IR£ at some stage during the year.
One could ask what the budget will do in trying to fight our high inflation rate. I have given my reaction to that. Another question might be asked with regard to the budget, namely, does it meet some of the demands of the PAYE sector? The trade unions and the other groups involved have looked for reform of the tax system. It must be said that the budget has not met those demands. In the coming months there may appear to be improvements in tax allowances but the absence of an indexation principle is a major omission. People will be entitled to normal increases. In addition, if there is another national understanding and if we assume—as we must—that the trade unions in a situation of high inflation will be looking for compensatory wage increases, in the absence of an indexation principle it means that those who may benefit from the expansion of the 35 per cent band will be subject to higher rates of taxation. The absence of a built-in indexation principle means that these allowances, like all allowances by a government in an effort to meet claims from the PAYE sector, will be eroded relatively rapidly. While the widening of the band is to be welcomed, the absence of indexation means that that forward step will be vitiated. I do not think that the budget on examination will satisfy those who have sought changes. It will not meet their demand for reform.
I welcome the farm resource tax from the point of view of its value to increased production and equity, but by altering the date of payment of farmers' tax it is adding certain difficulties in that area. I also welcome the abolition of the notional tax system because that was giving rise to a good deal of discontent.
Before anyone is tempted to congratulate this Government on some of the allowances that they have introduced in this budget it should be realised that the Government in the absence of granting any allowances here would be collecting something like £1,080 million this year. That is what the taxpayers of the country will be paying out during 1980 compared with £732 million in the previous year. Without any change here today in the tax system in a reform direction there would be an increase in income tax yields of 47.6 per cent. Whether prevailed upon for reasons of equity or necessity, the Government would have had to meet this demand. They would have been forced to meet the demand for change in the direction of equity, but for a Government who have been given such majority warning by the most extraordinary demonstrations up and down the country they have not really averted similar marches in the months ahead.
There are some improvements but they will not be lasting, and increased inflation in a year of high inflation will deprive them of any values they may have in these early months for the taxpayer. There are implications in that situation for the Government. In the benefits of the early months of the year and in the penalties of the later months there are implications of what the Government should be doing in relation to their term of office, but that debate is for another occasion.
The Government may say that they have in the alteration of the tax bands attempted to meet the demands for reform. I can see that they have, but in the absence of the indexation principle most representatives of the trade union movement on examining those proposals will not be satisfied and we will not have mended the great division which has occurred in the country in recent years as a result of the mishandling of the tax problem by this Government. They will not have mended the great division which has grown up between town and country which should be ended from a national point of view. These provisions of today will not end it.
It was agreed generally that the Government would need to cut their borrowing requirements and they were forced to do so, but the areas chosen for pruning and cutback—hospital buildings, schools and housing—were wrong from a social point of view. The cuts are real cuts, punishing cuts. When you take into account in the Book of Estimates that an increase, such as for public service pay, must be allowed in all these figures in the Book of Estimates, you will find a figure of less than 5 per cent of an increase. In a year with the inflation rate that we are expecting that is a savage cutback in the local authority housing area, school buildings and the whole education area, and anyone who has been in any Cabinet attempting to consider the problems and complications of cutbacks in public spending knows exactly the kind of difficulties that one is up against. The agencies concerned are not accustomed to cuts of this kind. Tremendous human difficulties will be caused here and we have not seen the start of these as yet. It may not be appreciated sufficiently at this point of the examination of the budget but it can be represented as a fair statement here that the taxpayer in 1980, if he or she is not getting a full instalment of justice in relation to his or her demands for tax reform, certainly will be getting very poor value indeed for his or her money in terms of tax-paid services during 1980.
My criticism of this budget is that it does not go sufficiently far in the direction of meeting the demands of the PAYE sector. Nobody expects that all of these demands will be met overnight. That would not be possible in the circumstances, but this Government have certainly hit themselves by their maladroit handling of a tax situation in years past and they have raised up an insatiable desire for tax reform. They themselves have created the extraordinary demand that is now there throughout the country and they themselves by such insensitive measures as the abolition of the wealth tax and the virtual abolition of capital gains tax are responsible for the great discontent in the country on tax issues. My fear from a national point of view is that they have not gone far enough in this budget to meet those demands which now must be met. If the demands of the PAYE sector for tax reform are not met it is not as if the demands will go away. It is not even as if it can be confined to street demonstrations. Instead the demand will find form in high wage claims and in a very unstable industrial relations situation, and none of these things is to be welcomed at a time of great economic difficulty for the country. That is why the Government will lose the first round in the matter of gaining the co-operation of trade unionists. They will be unable to convince them that in today's budget as a result of these measures they have moved appreciably and strongly in the direction of reform.
Cutbacks in investment in vital areas like housing and hospital building should not have been countenanced before this budget. The main questions asked of the budget cannot be answered satisfactorily. It assists, adds to, fuels the inflation which has taken place already in the economy and which is already as high as 16 per cent. The cutbacks which have been imposed in the Public Capital Programme in the Book of Estimates will damage the weakest people in our society. The income tax reliefs will prove unconvincing. The income tax relief for married couples on average earnings is 20 per cent. As a result of other measures in this budget already we expect to see the inflation rate this year exceed 20 per cent. Therefore, tomorrow morning when we examine this budget, when we look at the impact of such things as the increase in the price of petrol, the spiral of inflation added to by this budget, the prospect of more unemployment throughout this year, the danger in which consequently the IR£ in EMS conditions is likely to be placed as a result of these decisions of ours in recent months, we will not be able to say in fairness that this budget of 1980 tackles squarely and in serious fashion all the difficulties we face. That is why one must record disappointment that the opportunity given here of a new start has not been availed of in this budget. The budget of 1980 had at least the advantage that there was a widespread public awareness that decisive action had to be taken.
On looking at some of the facts in this budget it appears to me that we have not met in a sufficiently satisfactory fashion the demand of the PAYE sector for reform, we have added to inflation and we have endangered the present Exchequer rate of the IR£.