On the Order of Business this morning it was agreed that business would be interrupted at 5.30 p.m. to enable statements to be made on bank interest rates.
Bank Interest Rates: Statements.
The House will be aware that the four associated banks announced increases in their lending and deposit rates with effect from close of business on Monday, 3 December 1984. On the deposits side the increases were one percentage point for amounts under £25,000, 2½ percentage points for amounts from £25,000 and under £100,000 and 2½ percentage points for amounts of £100,000 and over. Lending rates went up by 1 to 2 percentage points, depending on the category of borrower and the term of the loan.
The effect of these changes is that the lending rates now being charged by the associated banks range from 14¾ per cent to 19¼ per cent.
As the Minister is reading a script I should like to know if it will be possible for him to make a copy of it available to the House.
It is on the way and should be here instantly. Since these increases in rates affect the majority of borrowers in all walks of life they have given rise inevitably to a good deal of comment. The Government, therefore, have decided it would be proper to afford the House the opportunity to consider these events. I hope Deputies will use the occasion to discuss the matter with a due appreciation of its importance and, I emphasise as regards some aspects, its sensitivity.
We have just come to the end of a long period of interest rate stability. Associated banks interest rates were unchanged between September 1983 and this month. Some commentators have referred to the fact that Irish rates are going up when the international trend of interest rate is downwards. What they have failed to point out however is the very significant fact that associated bank interest rates did not increase earlier this year in line with key international interest rates. Recent reductions in key foreign interest rates have left them significantly above their level during the first quarter of this year.
The projections which underpin Building on Reality are based on the assumption that foreign interest rates, particularly US dollar rates, while remaining high in the immediate future, will fall significantly over the period to 1987. A corresponding reduction in domestic interest rates is also assumed. With regard to Exchequer cost, changes in key foreign interest rates have about one and three-quarter times the impact on the 1985 interest bill as a corresponding change in domestic interest rates. Unlike foreign interest rate increases Exchequer payments to residents resulting from increases in domestic interest rates will generate an increase in tax revenue and so reduce the net cost to the Exchequer.
I note that another copy of the script is in the House and, as the bulk of the copies have not been circulated in the House yet, I wonder if the Minister will arrange to make at least one copy available to the Opposition?
I fully appreciate the Deputy's position. My understanding was that copies were available but apparently they have not arrived yet.
The national handlers.
The guff never fails. I apologise to the House but I will make a copy of the script available to Deputy O'Kennedy. I appreciate the Deputy's position on the matter. I was pointing out that, unlike foreign interest rate increases, Exchequer payments to residents resulting from increases in domestic interest rates will generate an increase in tax revenue and so reduce the net cost to the Exchequer. Key foreign interest rates have already fallen significantly and the overall Government economic and fiscal strategy is designed to set the scene whereby domestic interest rate developments will be able to fully reflect improvements in the trend of international interest rates within the period of the plan.
I apologise for interrupting the Minister but it appears that he is reading from a script and I should like to know if a copy of it will be made available to the House. It was always the general procedure in the long number of years I have been a Member that as soon as a Minister read from a script officials from his Department circulated copies of it. Before the Minister proceeds any further a copy should be made available to all Members in order to be fair to them.
That is a matter of courtesy and not procedure. The Chair does not have any control over it.
It is a long established practice. I understand the position of the Chair but the Chair should use his good offices in regard to this. I have no doubt the Chair will be able to arrange to have the copies circulated.
I understand the Deputy's position. I have already been through that matter and told the House that I regret that copies are not immediately available. They are on the way and will be here soon.
They are on the never-never system.
We will make allowances for the Minister this time because he is under pressure.
The Deputy will appreciate the fact that the pressure is not weighing me down in the slightest.
(Interruptions.)
I would like to take this opportunity to make it clear that the Government do not approve increases in bank interest rates. The normal protocol in these matters has been and still is that the Minister for Finance is informed of the proposed changes shortly before they are announced and of the reasons for these changes. Therefore, there is no question of Government approval being either sought or given. The Government do not interfere with the day to day administration of the Central Bank which is independent in the carrying out of its functions. This independence is possessed by almost every Central Bank throughout the world and it is very desirable that this should be the case. It is in line with this principle that the level of interest rates is a matter primarily for the Central Bank. Section 6 of the Central Bank Act, 1942, sets out the bank's general function to safeguard the integrity of the currency and to ensure that:
...in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole...
From this general mandate derives the Central Bank's responsibility for the operation of monetary policy including the regulation of credit and interest rates.
The increase in Dublin interbank interest rates over the last months is the immediate cause of the increase in associated bank interest rates which has just been agreed. The Dublin interbank market is a free market and as a result interest rates move up and down in response to changes in the supply of and demand for funds.
Given that we have a free interbank market it is not possible to control the interest rate structure of other financial institutions which are directly affected by developments in that market. For example, the key one and three month inter-bank rates were in excess of 15 per cent last Thursday and therefore customers of the associated banks, who have themselves to deal in the interbank market, could in some cases borrow money for 12¾ per cent and deposit it in the interbank market at over 15 per cent. In many cases non-associated bank customers, who account for about 45 per cent of non-Government borrowing, were already subject to the higher rates because the interest rates of the non-associated banks respond automatically to changes in interbank interest rates. Obviously, this situation could not be allowed to continue any longer.
The Government have been relatively successful in tackling the enormous balance of payments problem which faced it. The projection for the 1984 balance of payments deficit is of the order of £700 million or just about half the 1982 figure of £1.316 billion. Despite this relative success the fact remains that in 1984 we will spend about £700 million more abroad than we will earn. This foreign deficit can be traced directly to a level of Government spending which is far greater than can be financed from tax revenue. The balance has of course to be borrowed.
The main influences on Irish interest rates are the trend of international interest rates and the domestic demand for credit. Therefore, the outlook for Irish interest rates in the immediate future will depend to a considerable extent on international interest rate developments. While international interest rates have fallen somewhat recently they have mostly been reversing increases which took effect earlier this year and which did not occur here in Ireland. If the international trend of interest rates continues downwards it will help create a favourable environment for domestic interest rates in the coming year.
The root cause of the most recent increase in domestic interest rates is the size of the Exchequer borrowing requirement. Despite the relatively slack demand for credit from the private sector in recent years the size of the Exchequer borrowing requirement has produced a total credit demand well in excess of what could be financed from domestic resources without an increase in interest rates. The gap between available domestic resources and the demand for credit has been bridged by net official foreign borrowing, including foreign borrowing by State bodies and agencies, of over £1.5 billion in 1982, just over a billion in 1983 and, despite the efforts made by this Government to reduce reliance on foreign funds, the 1984 figure will be about £900 million. As well as financing the Exchequer borrowing requirement these foreign funds provided the external reserves necessary to cover the large balance of payments deficits which are also directly related to the size of the Exchequer borrowing requirement.
Therefore to say, as some commentators have, that the Government by increasing their borrowing on domestic markets pushed up the level of interest rates totally misrepresents the situation. The point is that the Government when they assumed office two years ago found themselves faced with a situation where the level of foreign borrowing itself was threatening to become a major problem. This situation could not be allowed to develop and so the Government have ensured that their foreign borrowing each year is limited to the amount which is prudent and manageable and which can be used for productive purposes. The Government are in no doubt that it is not possible to eliminate our dependence on foreign borrowing and reduce our exposure to exchange rate loss overnight. This is a medium term objective, but the amount of foreign borrowing in any one year must be kept at a manageable level. It is in many ways extraordinary that the Government are being urged to borrow more abroad when the Exchequer's foreign debt is in the region of £8 billion.
Despite the efforts we have made to restore order to the public finances the demand for credit by the Exchequer together with the credit demands of the rest of the economy are substantially in excess of what could be financed at the interest rate levels which prevailed up to end-October last. The exchange rate risk associated with foreign borrowing makes it vital that our reliance on that source of funds should be carefully weighed. In fact, the progress we have been able to make so far in reducing our reliance on foreign funds has helped us to secure improved terms on our new foreign debt.
A significant increase in official foreign borrowing would have been required this year if the liquidity needs of the domestic banking system were to be met without borrowing from the Central Bank or increasing interest rates over the levels which prevailed at end-October last. Our efforts to finance the Exchequer borrowing requirement without damaging Ireland's excellent credit rating and without incurring unnecessary exchange rate risks put pressure on bank liquidity at the interest rates which prevailed up to end-October last. However, when it comes to a choice between the level of domestic interest rates and damaging Ireland's credit rating, I would expect that most Irish people would opt for an increase in interest rates. Damaging our credit standing abroad to secure a short-term gain could lead to even higher interest rates in the medium term and therefore prove to be a very costly error. That would be a continuation of the kind of spendthrift policies in the years 1977 to 1981 that got us into the difficulties in which we find ourselves today.
1973 to 1977.
(Interruptions.)
A return to that kind of policy is no solution to our problems either in terms of the total Exchequer borrowing requirement or, even more importantly, of the level of internal taxation or of the amount of our own daily resources that have to be earmarked for interest repayments.
(Interruptions.)
I must re-emphasise therefore that the root cause of the pressure on domestic interest rates since end-October last——
This Government are borrowing still. We are still on this merry-go-round.
I find very curious indeed that Deputies on the opposite side should now be criticising borrowing, the same people who spent the last two years claiming that we should reduce the pressures on the domestic taxpayers but who failed on every occasion they were asked to say how they would do it. Talk is cheap; judgement is what we have now.
A Deputy
What did Labour say? You said what you wanted, but Labour said no.
(Interruptions.)
Perhaps I might have an extra five minutes to make up for the interruptions from the other side of the House.
The Minister brought this on himself.
The Minister made a terrible admission.
I must re-emphasise therefore that the root cause of the pressure on domestic interest rates since end-October last is the size of the Exchequer borrowing requirement and the need to minimise the risks associated with foreign borrowing. There is no question of a decision to have a higher level of interest rates; rather the higher interest rates are a product of very high levels of public expenditure and borrowing over a number of years and the effects these have had on the size of the Exchequer foreign debt. Despite our best efforts to balance our portfolio of foreign debt the addition to the national debt arising from exchange rate changes in 1983 was £858 million. This was equivalent to 52 per cent of total income tax receipts in 1983. It is very clear from those figures alone that we must try to minimise the risk of further losses of this magnitude wherever we can.
The Government readily appreciate that interest rate increases are unwelcome. They are well aware that increases in interest rates will add to the problems facing many firms and farmers and are also aware that house purchasers are concerned about their position. It is also a fact however, as I stated earlier, that many borrowers whose loans are directly related to interbank interest rates were already paying the higher rates well before the associated banks increased their interest rates. This means that the additional cost to the economy of the associated bank increases is generally less than many commentators have alleged.
The Government are also aware of the extra costs which will fall on the Exchequer itself because of the impact higher interest rates have on the cost of servicing the national debt. However much we appreciate the problems, we feel that it is necessary to face the realities of Ireland's capacity to borrow abroad and the effect of this on the market for funds in Ireland. This reality accurately mirrors the problems which flow from a high Exchequer borrowing requirement coupled with a need to preserve Ireland's excellent credit standing abroad and to minimise the risk of exchange rate loss by keeping Exchequer foreign borrowing to a prudent level.
Movements in interbank interest rates, particularly since end-October last, justified the increase of between one and two percentage points in associated bank lending rates announced with effect from the close of business last Monday, 3 December 1984. The shortage of bank liquidity which developed in the period up to end-October is reflected in the Central Bank's statistical bulletin of 7 November 1984. This shows that borrowing by licensed banks from the Central Bank at 17 October last stood at £348 million, £278 million up on the corresponding end-1983 figure of £70 million. I understand that the Central Bank were called upon to supply significantly more funds to the licensed banks before this borrowing peaked early in November.
Domestic bank interest rates charged to borrowers, while high in nominal terms, are not high when the level of domestic inflation is taken into account. Before the recent increase in associated bank interest rates the prime lending rate of the associated banks after taking account of inflation was the third lowest in the EC and well below the corresponding US rate. The most recent increases have brought our prime rate into line with rates in other EC countries. Many of these countries, however, are much better positioned than we are, particularly in that their Exchequer borrowing requirement and balance of payments deficits are, in relative terms, only a small fraction of ours.
The associated bank interest rate increases which have been agreed between the Central Bank and representatives of the Irish Banks Standing Committee are as low as it was possible to make them in the circumstances. The overdraft rates had to be increased by two percentage points but the interest rate increase for other maturities were kept to between one and one and a half percentage points. The increases in associated bank deposit rates for deposits of up to £25,000 were kept to one percentage point in order to minimise the impact of these increases on building society mortgage rates.
The existence of a competitive market for funds ensures that the interest rates offered and charged by all financial institutions, including building societies, are related. Building societies fulfil key social and economic functions by providing the funds for house purchase and it is important that they should maintain their ability to service the demand from prospective house purchasers.
The other side of the coin, as it were, is the impact an increase in mortgage rates could have on hard-pressed home owners and on the building industry. The Minister for the Environment, is very conscious of these effects and he has already expressed his deep concern to the major building societies. They will be taking the Minister's points into consideration and I am sure that, in the interests of the community and in their own interest, they will keep any adjustment in rates that may be found necessary, as low as possible.
While our exchange controls have enlarged somewhat our scope for discretionary action in regard to interest rates, they cannot confer anything approaching full freedom of action on us. No country, no matter how big, can insulate itself fully from external influences. Our exchange controls do not apply to funds held here by non-residents and in operating them we must also respect certain EC and international obligations. The timing of trade payments and receipts, while monitored by our controls, can also be influenced by interest rate differentials. Attempts, therefore, however well-motivated, to hold Irish interest rates artificially low can lead to capital outflows and losses of external reserves.
Even before these interest rates increases were announced, it was already quite clear that one of the most depressing factors in the Irish economy was the high level of interest rates.
On 28 November, when there was speculation about this matter, an eminent international economist, the chief economic adviser to the National Westminster Bank, announced in Dublin that the current level — before the 2 per cent increase — of high interest rates could not be maintained for many months without having a severe recessionary effect on the economy. He went on to argue that a reduction of 2 per cent in the interest rates would be appropriate for this country. Instead of a reduction we are now faced with a 2 per cent increase.
The associated banks, to which the Minister referred, have clearly been very reluctant to propose these increases because they know that the private sector is already so depressed, as is evident from the objective comment of an international economic adviser, that this latest increase will depress the economy into a disastrous state and will have a major effect on the banking sector.
In contrast with previous occasions when interest rates were raised by international trends, at present the trend is consistently downward internationally and we, as a consequence of direct Government policies which is implicit in what the Minister said, are creating conditions here which will mean that the whole basis of the plan to have stable interest rates internationally and, as the Minister has acknowledged, domestically, is being undermined as a consequence of the Government's action.
On 28 November the rates in Chase Manhattan, France and Italy were all down 0.5 per cent and the trend has been continuously downward. Here, contrary to international trend, the rate has been pushed up. The reason for this is the rigid approach which the Government and particularly the Minister have adopted.
What happened a few months ago?
The Deputy has only two years to make interventions like that and he had better make the most of it. Indeed he may even have a shorter time.
Tell the whole truth.
The Minister acknowledges in his statement that the root cause of the most recent increase in the domestic interest rates is the size of the Exchequer borrowing requirement despite the relatively slack demand for credit from the private sector in recent years. That underlines the fact that the rigid approach of the Government to borrowing targets has put the Minister into a straitjacket and has done the same for the economy. When we refer to the trends over 1983 to which the Minister has referred as being evidence of the growth of the servicing of the foreign debt, it must be said that the policies of the Government in determining the range of foreign borrowing, particularly in borrowing to the extent to which they did against the advice of the Opposition and many others in the dollar market by contrast with other markets, have increased the cost of servicing that debt and have also, because of the exchange rates vis-à-vis the dollar, added very considerably to our total foreign debt. It is not surprising, because of that mistaken strategy on the part of the Government where even our foreign borrowing was concentrated unduly as distinct from the mix which every previous Minister has engaged in, particularly in European currencies, that we now have a Government in a straitjacket as a consequence of which they have to soak up the credit available on the domestic market. They are the sole cause of this huge rise in interest rates which is contrary to international trends.
Because the Government have had to soak up more for their borrowing programme from the domestic banks, a very major issue has now arisen for the banking and private sectors. Already this year — and the Minister knows this — the Government have soaked up more from the Central Bank and the domestic banking sector than the private sector in toto already this year, although we all recognise that one of the major problems of the economy at present is the lack of investment and the disincentives with regard to investment in the private sector. Surely the Minister must recognise that this extra increase which has been forced upon the associated banks and has obviously been sanctioned by the Central Bank is a direct consequence of his own actions? We must also recognise that the private sector which was already depressed to the extent that they were borrowing much less than he was from the domestic banking sector, will be depressed even further to a disastrous extent. We can see the evidence all around us.
Looking at the effect this is having on the private sector and on the economy generally, we also have the highest tax rates in Europe taking direct and indirect taxes into account. If we are even to begin to look reality in the face — from a Government who claims to build on reality — we must see that a combination of these penally high tax rates, plus these new rates of interest which are operated to the banks, will mean that the economy is going to go further into depression. We will have little left but rubble and before we start to build for a renewal of the economy we will have to clear that rubble. We already had the lowest rate of investment before interest rates rose.
That is not true.
We have the lowest level of investment as a percentage of our GNP for over 15 years. Any Deputy can tell the Minister from his own experience that investment is very low and the Minister is ensuring that it will be even lower. This further 2 per cent increase is going to have a disastrous effect on the economy. Contrast it with, for instance, the rates in Britain. The preferred rates for the semi-State bodies and the biggest companies will be 14¾ per cent on overdrafts and the AA rate for businesses other than semi-State bodies and the very large companies will be 15¾ per cent. Let us compare that with the average rate in the United Kingdom of about a 10 per cent base rate plus one or two percentage points depending on the preferred position of the borrower. That is the kind of comparison that must be made to see what climate for investment there is here in comparison with competitor countries. We have to add to that the penal tax rate here where a person pays at the rate of 65 per cent when his income is in excess of £12,500 while his counterpart in Britain will not pay at the rate of 60 per cent until his income is £40,000 per annum. After making these comparisons one can begin to see why this economy is in such a depressed state. On the Order of Business practically every day, in our newspapers and on every news bulletin there is mention of closures, liquidations and redundancies. What has happened now will, unfortunately, add to that dreary chain of disasters.
Why did the ACC have to put pressure on Clover Meats? They did so because of pressure on themselves in having to face the interest rates. There are many fishermen whose boats are being repossessed and in the business sector companies are going into liquidation. The building industry is suffering closures every day and is in a state of collapse. It is quite clear that the basic economic structure of the country is falling apart. We have not the capacity left to build up the productive sector of the economy. At the beginning of this year the Government announced they would borrow from abroad a sum of £640 million and £1,000 million on the domestic front irrespective of the consequences to the economy. They have not even the judgement, much less the wit or the sense of direction, to ensure that the consequences of their rigid actions will not bring further disaster on the economy.
Wherever we turn we see the effect of the Government's actions. With the collapse of each firm go other firms also. We know in our towns and cities that when one undertaking goes it does not fall on its own but brings others with it. The Minister must be completely deaf as to what is happening in the business sector. I do not know if he has been sheltered by the civil servants but as Opposition spokesman on Finance I have never had such a range of business, financial and commercial community trooping into my office. Apparently they have done this because they have no access to the Minister because he is being protected behind civil servants——
That is absolute nonsense.
It is time the Minister woke up to reality and listened to his own Deputies who know the situation.
The Minister showed them the boot. That is no use.
As a consequence of Government action we are getting a distortion of the whole internal money market which is contrary to international trends which are favourable. The Minister has told us that taking account of inflation it is better than the international trends. Are the Government going to tell us that a high rate of inflation here is a matter of comfort for this economy generally?
Fianna Fáil have opposed everything we have done.
In the 12 months before this Government came to office the domestic inflation rate dropped by 11 per cent, from 23 per cent to 12 per cent.
Nonsense.
In the two years the Government have been in office they have boasted about the fact that inflation has dropped by 2 per cent and they tell us they are tackling inflation. Let us face reality.
We can discuss that now.
We know that unemployment is the major crisis but we cannot begin to tackle it until we create a climate for investment and activity. This decision which the banks regret is a direct consequence of a rigid Government adherence to fixed targets irrespective of the consequences. With regard to the building societies and the effect on borrowers, it is clear that because of our tax climate people are not prepared to invest. As a consequence of that people have been putting their money into safe havens and even if the building societies benefit let that be. However, people are not drawing on the building societies to the same extent and the building industry is depressed. The net inflow into the building societies in October amounted to £19.97 million which is an increase of 43.3 per cent on October last year and an increase of almost 2 per cent on September. It is obvious that when people do not invest in the productive sector or in their own businesses they will put it somewhere away from the claws of this Minister.
The Deputy should draw the rest of that conclusion.
My colleagues will develop this point further. In view of this trend in the building societies I hope they will not find it necessary to increase their mortgage interest rates because they are in an unusually buoyant position. People are putting their money into the societies to get away from the Minister, and few people are drawing on the funds of the societies.
In the final analysis the real issue is the role of Government. It is no more and no less than to create a climate in which the doers will do and the goers will go and where all together will lift the economy. However, this Government believe that their role is to control and regulate tax revenue, to adhere to rigid targets, to treat every person as if he or she were a robot who will react as the Minister thinks they should. Because of that attitude there will be further depression and there will not be a renewal of activity.
This latest increase has, quite frankly, been forced on the banks and as a consequence of this action we will have an even more depressed economy. There must be some light at the end of the tunnel and some hope must be given to people. If the Minister cannot do a U-turn in respect of all the rigid targets he has set — I plead with him to do so — then perhaps the best turn he could take is a turn out and let the people make their choice. I have not spoken like this before in the House but I am conscious of the mood throughout the country. It is time all of us took note of the fact that we are sitting on a time bomb and we cannot allow it to explode in our faces. If the Government are not capable of changing even at this late stage it is time they allowed somebody else to make the changes.
The Minister has given us an excellent lecture on banking, inter-bank rates, interest rates and so on and I am sure it will be of great academic interest to many people. However, we were listening to the Minister for Finance, the man who is supposed to control the economy and the financial operations of this State. In essence he was telling us that he has no control over the situation. It will be very depressing for the people to hear the Minister for Finance tell this House how the system works but who then states that unfortunately he has no control over it.
The most significant part of the Minister's speech was his quotation from section 6 of the Central Bank Act of 1942, which I repeat:
...and ensuring that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole.
The predominant aim of the Central Bank is not what the Minister was talking about — inter-bank rates, banking loans, Government spending, Government lending, foreign loans, domestic borrowing and so forth. Their interest is the welfare of the people as a whole. The banks have been allowed to get away with these increased in interest rates, although the Government did not want them and Deputy O'Kennedy says that the banks did not want them, that they regret them very much. It is amazing, everybody regrets but everybody has to do it.
In view of these increases in interest rates we shall see now many more firms going to the wall — many more Clover Meats. We are also going to see a substantial number of people out of work. In particular, there are the effects of this increase on the building industry. None of these things can be seen as being in the interests of the people as a whole. Already, investment in the building industry and its output have decreased and are forecast to fall by 4 per cent this year, even before this increase. Now the position will be even worse in an industry which is, after agriculture, the second biggest industry in a State where one in every four of the male unemployed is a building worker. The increase in interest rates is a further sanction by bankers against this industry which has almost half its workforce out of work. How can this be said by the Central Bank or the Minister to be for the welfare of the people as a whole?
The increase will significantly add to the problems of our semi-State companies, many of whom are trading quite profitably, but due to the huge amounts they have to pay out in interest charges, find themselves operating at a net loss.
The Bord na Móna report issued last week showed that they have to pay £9 million in interest charges to the banks. In spite of this they made a profit of about £12 million, I think. Following these increases in interest charges, will they make a profit next year? Also will those semi-State companies which are operating at a loss — some at a considerable loss — now show a further loss this year as a result of these increases? Will the Government proceed to do what they did to Irish Shipping? If there are other State companies showing very substantial losses as a result of the increase in the bank interest rates, will the Minister for Finance put in a liquidator as he did in Irish Shipping? That seems to me the headline for major loss-making semi-State companies. The banks will force them into loss, which is happening and will happen as a result of these interest charges. Will the Minister then, instead of acting against the banks, act against the companies which made the loss?
The other area where the welfare of the people is certainly not considered is the huge burden of interest charges on repayments of mortgage rates for many householders. Most of these have already seen a substantial drop in income, either through unemployment or other causes. Although we do not yet know by how much the building societies will increase their interest rates, it is quite possible that mortgage rates could increase by £30 to £40 a month as a result. That certainly cannot be seen to be for the welfare of the people as a whole.
It is extraordinary that at a time when interest charges are coming down in other countries, as other speakers have said, the Irish banks should be seeking substantial increases. It is no answer to say that when interest rates were going up earlier in the year the banks here did not increase their charges. They did not have to increase them. But why, now that the interest rates have gone down, do they suddenly increase their interest charges? The banks on existing interest rates have reached around the £200 million profit margin in a year. This increase in rates from, as the Minister said, 14¾ per cent to 19¼ per cent range, will further increase the profits of the banks. The Minister never referred in any way to this effect of the increase in interest charges — the inordinate profits of the banks. Has he any proposals in mind to take these profits from them? They regret very much having to put up the charges, we are told. They do not really want to make a profit. It is just that they have to put up the charges. Why not, then, take from them the profits that will accrue to them into the Exchequer and let the Minister use that sum to help those who are suffering as a result of these increased charges? There is no reference by the Minister as to what he is going to do in that regard.
This increase also raises the question: to whom are the banks accountable? It certainly appears that the Central Bank has neither the desire nor the ability to keep them in check. This has already been instanced by a number of decisions in the past few months by the associated banks which were meekly sanctioned by the Central Bank. They were relatively small matters, like in August the Central Bank approving the decision of a commercial bank to introduce a charge of 50p for cashing cheques for non-customers. Last year they gave the go-ahead to banks to stop sending back cancelled cheques. What is happening is that, as the profits of the banks are increasing at a rapid rate, the service that they are giving to their customers is becoming less and less. They are cutting back on it. In other words, the Central Bank is failing in its responsibility to act as a watchdog for the public. Of course, this is not surprising considering that 50 per cent of the board of the Central Bank is made up, I think, of representatives of private banking interests.
One step that the Minister could and should immediately take is to ensure that the Central Bank is revamped and a board appointed which is made up of members who will protect the interests of the public — in other words, under section 6 of the Bank Act have directors whose predominant aim would be the welfare of the people as a whole and not as at the moment the welfare of the commercial bank directors and their shareholders. In the light of the policies pursued by the banks in recent years and in view of this further usury against the public interests, the public would be well justified, following on the Minister's speech, in asking who is running the country. Is it the banks or is it the Government? It certainly looks, following the Minister's speech, as if it is "Bank rule OK".
The increase will be seen now as further evidence that a small group of wealthy individuals wield great power in this State and that there is no Government that have the guts to tackle them. The present Coalition Government have shown a particular lack of backbone in dealing with financial institutions, as we discovered earlier this year in the backdown in the period between the budget and the Finance Bill on measures to deal with section 84 — loans and bond washing. This was presumably as a result of pressure from a handful of stockbrokers or financiers.
In May, the Tánaiste, in a fairly widely reported speech made in Cork, criticised the banks for, as he said, failing in their social responsibility to society. He further said in that speech:
In the Labour Party we have always had a view about the contribution we require from profit. It is approaching time that we make it clear to everyone that we mean what we say.
It was approaching time in May and there is a time here now for him to do it. This is an opportunity for the Tánaiste and his colleagues to confront the banks and compel them to live up to their social responsibilities and adhere to section 6 of the Central Bank Act in protecting the welfare of the people as a whole. If the Labour Party are prepared to initiate legislation to compel the banks to act in the public interest, as they are supposed to do, it will have the full support of The Workers' Party. We believe that the banks have such an inordinate influence on the economy and on developments that it is in the best interests of the people that they be taken into public ownership.
Any increase in interest rates is unwelcome at any time in the sense that the Government do not want it, the public do not want it, the banks do not want it and business does not want it. Deputy Mac Giolla laughs at the idea that the banks do not want it.
If no one wants it why did it happen?
It happens for reasons which I will explain if the Deputy lets me. The banks will place their bad debts position in jeopardy. Businesses which are on the edge will go to the wall. It is irresponsible to suggest that the banks want that or that it is good for them. One of the easiest things to do in politics today, when no one has any idea of what else to do, is to attack the banks. Bank profits are very easy to attack. They look very large. Are they really large in relation to the amount of money that goes through a bank? What would be the position if there was a run on the banks because people had a doubt about their viability?
The Central Bank, contrary to Deputy-Mac Giolla's view, has always acted in the interests of the people and has said over and over again that bank profits are barely adequate. It is popular to attack them but we must look at the other side of the coin. We saw an example of the bank system last week when there was a run on the savings bank on the basis of an unfounded rumour. I could think of nothing worse than to have a serious problem with one of the major banks. That more than any other feature would destabilise our economy.
By agreement, the remainder of the time will be shared by the Government and Opposition and will be 15 minutes for each speaker.
How much time have I?
Acting Chairman
There are 13 minutes remaining.
The stability of interest rates in Ireland has been quite remarkable over the last 15 months. There is no question but that this is a setback. However, it must be viewed in the context of unusually satisfactory interest stability particularly when compared to the previous four years. The level of real interest rates, that is the level of interest rates relative to inflation, compares favourably with other countries and very favourably with the US where interest rates are very high relative to low rates of inflation.
While it is understandable that people will be critical and upset about all this we need to look at it in perspective to see why it is happening, what can be done, how long it is likely to last and whether the overall trend in the economy is absolutely sound, which I believe it is. The Central Bank, in its negotiations about this matter, has dealt with the increases in as sensitive a way as it could in relation to the fact that great emphasis has been placed on minimising increases on mortgages. In the case of the building societies there is a possibility that by 1 February, which is the date by which they will be in a position to put up their rates, it might not be necessary to do so. However, that is speculative.
And optimistic.
No one is in a position to guarantee that but there is a reasonable prospect of it for reasons I will try to explain. The position about this interest rate increase is that it relates directly to the necessity to borrow large sums of money on the domestic market. It would be well to look for a moment at the merits or otherwise of that policy. I submit that, by and large, it is better to borrow a higher proportion of one's total borrowings on the domestic market rather than on the international market. If one borrows domestically the question of currency risk is eliminated. Deputy O'Kennedy, with good reason, has been very critical in recent months about borrowing in dollars. The currency risks in borrowing in strong currencies like that has cost the country dearly. It was a sensible, realistic and commendable decision to look to the domestic market for a larger share of our borrowing to reduce the risk inherent in borrowing in a strong currency.
When the Government borrow at home and pay out interest they take back a certain amount of it in tax. At the end of the day there is still some residual spending within the economy. All that is gone if we borrow abroad. We pay interest, take the currency risk and get nothing back in taxation or spending. The policy is fundamentally sound but there is another side to it. There is the question of balancing and against the pressure it puts on the bank system and which it inevitably puts on rates. What happened was that in the latter half of this year when our international borrowing had been taken up to the limit set by the Minister that pressure was put on. As I understand it, next year we will commence our borrowing requirement afresh on the international market and that will begin quickly enough in the early months of 1985 to take the pressure off the domestic market. That in turn should, in the normal course of things, lead to a reduction of pressure on interest rates. Whether that will happen in time to put off the mortgage interest rate increase altogether is a matter of conjecture but the trend is in the right direction. It is a reasonable conjecture to suggest that this will be the likely outcome.
As regards the national plan, Building on Reality, there are references in that to interest rates. I refute the notion that because there has been a temporary increase in rates domestically the plan has been somehow invalidated. There are two kinds of rates of interest, the international rate and the domestic rate. A 1 per cent drop in international rates is worth approximately £35 million to us in terms of our foreign borrowings reduction and savings and a similar 1 per cent drop in domestic rates would be about half that, so that international rates are more important by 2:1, a factor of two, than domestic rates. The dollar rate has dropped 2 per cent in two months and that is away ahead of anything that had been planned or anticipated in the national plan. It is much too soon for me or for the Minister to guarantee what will happen to interest rates internationally and locally over the next couple of years, but it would be erroneous to suggest that because we have had a temporary setback here in interest rates for three or four months the whole strategy of the plan in relation to interest rates has been invalidated. That is not the case. The reverse is the case because of the steep reduction in the dollar rate.
At the end of the day I want to come back to the eternal triangle, which is the balance between Government expenditure, taxation and borrowing. If I have been critical of anything in the national plan it is that we have not gone far enough, that despite the fact that this Minister and this Government have been referred to as Thatcherite, monetarist and all the other "ists" and "isms", this is a high borrowing, high public expenditure, high taxation Government, and those pressures lead primarily to an increase in interest rates. We must understand that the people cannot pay any more taxation. We cannot borrow much more because we cannot pay for it, and the only part of that triangle that we can do anything about is the question of public expenditure. Unless and until we face up to the reality that we are still with all the alleged cut backs — many of them true — spending more than we can afford by a long shot, we will continue to delay our recovery.
Because taxation levels are so crippling business cannot and will not have the incentive to invest. Therefore we cannot make up the difference in borrowing. We see what is happening this week. We are over-borrowed, therefore we must tackle public expenditure and we must be honest and courageous in that. For instance, the Southern Health Board in Cork are screaming that they will have to decimate the services there when they have failed patently to deal with the budgetary situation in 1984 and are now being forced to carry that into 1985. That is an example of what no Government in the present climate can accept. When we all cry for expenditure for one thing or another we must be prepared to set it off against something else. With regard to the great catch-cry from the south-west for the past month about money for a ferry, some of us at least faced up to the fact that we could not have that except at the expense of something else. That is the way it must be, otherwise we would be back here again and again with one Government or another crying about the kind of development which happened this week. It is all related to the fact that we are spending too much, that we are taking too much in tax, therefore we are borrowing too much and we have not faced up sufficiently to that. This Government are trying to face up to it and in the long term they will get the support of the people. We need a more competitive, lower inflation economy and if we can get that and get our Government expenditure down within acceptable limits we will not have problems with interest rates.
The interest rate increased this week——
The debate must conclude at 6.50 p.m. The Minister must come back in at 6.50 p.m.
I will do as much as I can in the time available. There is no doubt that the increase in interest rates from the close of business on Monday night will have a very serious impact on industry. One could say that the detrimental effect it will have on manufacturing and other industry is unquestionably very serious. The increase will bear particularly heavily on firms supplying the home market. Do the Minister, the Government, the Central Bank or whoever — I notice a great deal of shifting of responsibility here this evening——
There is no shifting at all.
They must realise that the survival of industry at this time is very much dependent on borrowing. The NESC report published recently indicates that borrowing in 1982 accounted for 59 per cent of the network of indigenous manufacturing companies compared with 52 per cent in 1978. Furthermore, interest payments accounted for almost 60 per cent of profits before interest on tax compared with less than a quarter in 1978. These figures indicate clearly that Irish manufacturing has become very much more vulnerable to any hike in interest rates. Industrial borrowing is divided evenly between overdrafts and term loans. Therefore, the typical company as a result of this increase will bear an average increase of 1.75 per cent. taking into account the different rates and the years applicable to the term loans. I think I am being generous in dropping it down from 2 per cent to an average 1.75 per cent.
We have all expressed the opinion that competitiveness with our trading partners is vital in Irish industry. I wonder how much notice the Government have taken of that competitiveness. A document we have heard a great deal about has been referred to here again this evening. I quote from Building on Reality:
1.18 The Government have set their objective of improving the overall competitiveness of the economy in the manner outlined in this Plan...
1.19 The fall in employment in manufacturing industry that has occurred over the past four years has been due principally to two factors: the depth of the international recession and excessive increases in costs, particularly labour costs, relative to our main trading partners..... The excessive increases in Irish wage rates over the past few years have led to a considerable shake-out in labour as industrialists tried to maintain their competitive position.
Here the Government, in their document Building on Reality, attack workers for lack of competitiveness in industry and in the market place. That is a terrible slight on the work force. I wonder how the Labour Deputies, allegedly representing the workers, marched as they did not here when we were condemning and voting on this famous document, I do not agree with the Government's assessment as a reason for our lack of competiveness.
Did the Deputy ever read The Way Forward? Let him have a look at that.
These factors within the control of the Government have added immeasurably to the uncompetitive situation in which we find ourselves now. Recently we discussed the damaging effect that the electricity crisis would have on competitiveness, still the Government blame the workers. This further increase of interest rates will be a very damaging blow to that effectiveness we are all talking about.
Consider the Government's document when it states:
1.7 When account is taken of the moderation in inflation that has taken place, interest rates worldwide are now at exceptionally high levels. This has been a major factor in inhibiting investment both in Ireland and abroad...
We read in paragraph 1.8 that:
While it is generally agreed that real interest rates cannot remain at their present levels over the medium-term, there is no consensus as to when they will start to come down or as to the extent of their decline.
So much for the honesty, the reliability and the reality of the Government plan.
The rates came down sooner than we expected.
Within a matter of weeks of the publication of that document there is this unacceptable increase in interest rates at home. Is it not true that our interest rates are much higher than those of our competitors? I am outlining the effect that this increase will have on all aspects of our struggling industry. The three month inter-bank rate is now more than 5 percentage points higher than is the rate in Britain or the US and it is 9 percentage points higher than the German rate. Consequently, Irish firms are at a major disadvantage in competitive terms. A typical Irish firm have borrowings of about £7,000 per person employed. That means an annual interest charge of about £1,000 per person employed. This week's increase will push that interest charge up to £1,100. If the same funds were being borrowed on the inter-bank market in Germany the interest rate charge would be only £500 while in Britain or the US it would be less than £800.
One of the main reasons for the increase in Irish interest rates at a time when international interest rates are decreasing is the extent of public sector borrowing. That has been established here this evening. The Government and their agencies have borrowed £10,000 million abroad. This has been increased by £650 million this year and it has happened despite the Government having made an absolute commitment to the electorate not only to reduce but to wipe out total foreign borrowing and to eliminate budget deficits. But we are all aware that these two commitments have long been abandoned and we find that Ireland has the highest level of Government spending and borrowing in the EC. What is worse, the Government are borrowing now on the home market. This increases the demand for the limited supply of money available and thereby increases interest rates.
So far this year the Government have absorbed half of the increase in domestically-financed credit and they are now trying to increase this share. Public sector borrowing is crowding out the private sector, whether corporate or individual, and in the process is forcing the contraction, and in many cases the closure, of manufacturing firms. The total cost to the manufacturing sector of the recently increased interest rates will be about £20 million in a full year. This is equivalent to the working capital required to maintain about 2,000 people in manufacturing industry.
I should like the Minister to clarify a doubtful aspect of the increase in interest rates. According to the managing director of one of the five big banks, the increase will not be short term but the Minister and other commentators, including Deputy Coveney, have indicated that there will be a change by February 1985. This is another of the uncertainties that surrounds the activities of this Government. I call on them, even at this stage, to provide the necessary action to promote enterprise, to promote innovation, dynamism, confidence, risk taking and hard work.
Another aspect of manufacturing industry relates to their problems in respect of securing insurance.
The Deputy has five minutes remaining.
I will not use those five minutes so that I may give way to my colleague. I will conclude by asking what the Minister means when he refers to a prudent level of foreign borrowing. I should like to think that, as Deputy Coveney indicated, we are talking about a temporary setback. Regarding the Minister's reference to our credibility abroad, it must be well established now that our international credit rating has been shipwrecked by the Government.
It is a lot better now than it was two and a half years ago.
The reason we are here debating this matter this evening is the abysmal failure of the Government's economic policies in the two years in which they have been in office. The stability and growth which they led the people to believe would result from their policies have not materialised and instead of a growing and buoyant economy we have a deflated economy in which there is rampant unemployment and general despair.
The Government came into office saying that there was too much foreign borrowing and promising that it would be eliminated. They promised also to reduce current budget deficiting. Not only have they failed to achieve the targets they set themselves but they exceeded those targets to a large extent. They have reduced us to a situation in which there is now a mopping up of the liquidity in the domestic money market. This puts pressures on that market which result in these unwanted increases in interest rates, increases that will have a savage effect on the economy and a very sad effect on a section of the community on behalf of whom I should like to appeal to the Minister. I am asking him to take some measures to ease the burden of those who must meet big repayments in respect of mortgages on their homes and who are already finding it very difficult to continue to provide for their families in a situation where there are to be no wage or salary increases in the public service and where wage increases in the private sector are being kept to a minimum. Despite these conditions inflation is rampant and the standard of living of everyone in the community is decreasing rapidly. The ability of mortgage holders to continue to meet their financial commitments is becoming more doubtful daily. In many cases people have had to surrender their homes and to fall back on local authorities to provide housing for them. This is at a time when the Government are not making any provision for extra local authority houses. The estimates indicate that provision of these houses is to continue at the rate of 6,000 per year.
Obviously the Government housing policy is dependent on the level of buoyancy in the private sector but the kinds of pressures that are brought about by Government action by way of excessive borrowing on the home market will create major problems for householders who have had to borrow to provide homes for themselves. The Building Societies' Association are meeting on Monday next. The Minister should indicate to the House whether the increases in interest rates are temporary or whether they are to last for some time. If their borrowing policy for next year involves taking £1.2 billion out of the domestic liquidity market, the pressures will remain, the interest rates will remain high and the building societies will be forced to increase their rates also. I hope that the Government will provide some subsidy to the borrowing members of the building societies to ease the burden.
Deputy O'Kennedy concentrated a lot of his remarks on the suggestion that the trend of international interest rates is consistently downwards and Deputies on the opposite side of the House have been speaking as if interest rates have never been as high as they are at the moment. I would remind the Deputies of a few historical facts which they might like to get under their belts, and reflect on what they were saying and doing when those things were happening. On 16 May 1978 treble A overdraft rate increased to 9½ per cent; a little over a month later it went to 10½per cent, in November 1978 to 13 per cent, in June 1979 it went to 15½ per cent and in April of 1980 it went to 18 per cent.
(Interruptions.)
It came down for the remainder of 1980.
(Interruptions.)
I have no recollection——
(Interruptions.)
——that Deputies on the other side of the House made the same kind of song and dance in that period about interest rates which were then higher than they are at the moment.
(Interruptions.)
Deputy O'Kennedy claims that the international trend in interest rates is consistently down. That is not the case. We have had stability in our interest rates since September 1983 which we maintained in spite of the fact that at the end of June this year international interest rates generally increased by a substantial margin and have only recently started to come down from that level. In spite of that, given our management and the situation here, we maintained our interest rates at that level and it is only now that these international factors plus the domestic factors to which I have referred have fed into our interest rates. We have done extremely well in the interest rate front given what was happening on those international markets.
I will diverge from the interest rate topic and talk about some of the other points raised by the Opposition. The Opposition speak as if there was an inexhaustible supply of money available from foreign lenders at lower rates than we have at the moment. This is the most absurd of expectations. We have an extremely good credit rating on international markets. We are regarded as a good borrower and as a much better borrower now than we were two-and-a-half years ago during the last Fianna Fáil administration.
That is not true.
It is a fact. Our credit rating internationally has improved according to all the authorities, the people who draw up the index.
That is not true.
The signs have been seen in terms of our access to markets and the rates at which we can borrow.
(Interruptions.)
Were we now to go in for a major expansion in the level of our foreign borrowing the first thing that would happen would be that interest rates would go against us and the second thing would be that lenders would begin to have——
Would the Minister refer to one international body when we were in Government——
Deputy O'Kennedy is not in order.
I cannot allow a slander to stay in the report. It is not true.
Will the Deputy resume his seat?
(Interruptions.)
The Deputy has been making erroneous comments about foreign borrowing and the currencies in which we borrow to the extent tha the Opposition are basing their comments on the apparent assumptions that there is an inexhaustible supply of money and that all we have to do is borrow it. They are wrong. Deputy O'Kennedy has come back again this evening with that old chestnut of his about dollar borrowing. When I heard that, I wrote down a reference to dollar borrowing and I wondered if the Deputy was suggesting that we should go out and borrow in coral beads or something like that. The Deputy knows perfectly well that there is no way in which one can run a substantial foreign borrowing programme without having a large element of dollars in it. As I explained to the Deputy before, the dollar market is now the largest source of funds. Funds from other parts of the world that would otherwise be going into other markets are now going into the dollar market because the interest rates on the dollar market have been so high that it has been the best place in which to put money.
(Interruptions.)
Nobody now can run a substantial foreign borrowing policy without having a large proportion of that programme in dollars. If the Deputy chooses to ignore that I am afraid that the comments he will make and the conclusions he will draw will be without foundation. The Deputy knows perfectly well that that is the situation on international markets.
Deputy Lyons and Deputy Molloy criticised the level of Government expenditure as being too high and they are criticising the level of borrowing as being too high.
(Interruptions.)
Those Deputies appear to be chiding me for not making enough progress in the direction that we have set out in Government policies throughout those two years and in our national plan. They are now saying that we are not progressing fast enough while during those two years they accused us of going too far.
The Minister is destroying our industrial base.
(Interruptions.)
A Deputy
The Minister has axed the Department of Labour Vote by 44 per cent, by £160 million.
(Interruptions.)
That is just another illustration of the fact that the Opposition are trying to face both ways on this as on many other issues. They would be far more comfortable and far more credible if they could make up their minds as to which side of the argument they are on and stick to it, because they would then not be in the position of making the totally contradictory statements they have been making this evening.
(Interruptions.)
Deputy O'Kennedy also raised the criticism that we are sticking rigidly to targets. On the one side the Opposition Deputies suggest that we have not gone far enough towards meeting our targets and Deputy O'Kennedy is saying we are sticking too rigidly to targets. I do not know where the accommodation between those two points of view is in the Opposition and it makes no sense for them to make that kind of criticism.
Deputy Mac Giolla wondered who was in control of the situation and joined with the Opposition in criticising the effects of Government policies. How can the Deputy raise that question if policies are having the effect he says they are having? I have made it clear during the course of this discussion that international interest rates have a substantial effect on interest rates here. The trend in international interest rates over the last couple of months has been down from a level which was higher in the middle of this year than in the earlier part of this year. We managed for a time——
(Interruptions.)
——to insulate ourselves to avoid the effects of it.
That is not true.
That part of the influence has now come over to us.
(Interruptions.)
Will the Minister read the Central Bank report?
The Deputy is not talking about facts but about the way he would like the world to be. International interest rates are now trending down from a hike in the middle of this year which we avoided. That is number 1. The second substantial influence on the level of interest rates in this country, as I have said — and I have made it very clear — is the level of the Exchequer borrowing requirement.
Deputies
Hear, hear.
Scooping the pool.
One of the factors is coming down from a hump in the middle of this year which we avoided. The other is being brought under control — the level of our Exchequer borrowing requirement, the level of our current deficit and the level of our balance of payments deficit. All of these factors that have effects on the level of our interest rates are coming down; they are coming under control. They comprise major parts of the plan that that Opposition over there, now claiming to be worried about the results of those things, opposed every step of the way. Yet they allowed themselves the luxury of voting twice in this House against the very measures designed to bring about the aim they contend they want to achieve——
The Minister and his Government scooped the pool on the rates.
——but they have not got the guts to admit that it must be achieved by the kinds of measures included in that plan.
(Interruptions.)
Deputies, order, please.
The Labour Party around the country, including the Minister's constituency, are voting against their plan. Do they know that?
I am calling item No. 22.
(Interruptions.)