This morning I was coming in in a taxi——
Financial Resolutions, 1986. - Financial Resolution No. 13: General (Resumed).
Debate resumed on the following motion:
That it is expedient to amend the law relating to customs and inland revenue (including excise) and to make further provision in connection with finance.
—(The Taoiseach.)
(Interruptions.)
A Deputy
He is a Pioneer, do not forget.
(Interruptions.)
The taximan was not from Glasnevin but from Inchicore. I did not have far to come and if I had a few more minutes to spare I would have asked him to drive me around the Green a few times because in fact he wrote my budget speech for me.
(Interruptions.)
If the Deputies do not want to listen to what he told me I would ask them to go into the taxi ranks around Dublin and take a taxi for a couple of pounds and they will get the best insight to the reaction to this budget. Deputies will get a far better reaction to it there than they will get here, because Deputies will be out in the real world.
(Interruptions.)
You said it.
Order.
I must draw the attention of the Chair to the fact that Deputy Harte came into this House last night and constantly interrupted speakers. Unless the Chair does something about it I am afraid it looks as if he proposes to do the same today.
The Deputy knows the Chair and that he will see that everybody gets a hearing.
Deputy Reynolds was enjoying it, Deputy Haughey.
Deputy Harte, please.
It is not easy to enjoy it, considering the hour at which we left here this morning. The taximan was a man from Inchicore and the moment I sat in he said, "I know who you are and where you are going and for Heaven's sake will you reflect not my view but the view of every customer I carried last night and of every pal I have in the taxi ranks around Dublin?" He said that he was a married man with five children, that the taxi business could not be in a worse position, but despite that the Government had put another 10.8p on the price of petrol and had put up car tax and that this was bad coming from a Government who three years ago told us that we would have a couple of rough years ahead but that there was a light at the end of the tunnel. I recall that phrase being used many times in the House and outside by the Taoiseach, by the Minister for Foreign Affairs, Deputy Peter Barry, and many others. As the taximan said, the tunnel is getting darker every day. He told me that it reminded him of when he was growing up in the fifties under a former Coalition Government when his four brothers had to emigrate to London to set up their homes. It was a sad reflection on the country, he said, that of his five children two had already emigrated. He had no doubt that, if things continued as they were, the other three would find themselves in the same position. History repeating itself, he added.
Was he chairman of the local Fianna Fáil Cumann?
Deputy Harte should cease interrupting.
I never saw the man before but his views were a true reflection of what ordinary people feel about the budget. The taximan told me that last night his wife tried in her own way to make up the family budget. They have two children under 18. She told her husband that she could not understand why Government speakers, the Minister for Finance in particular, were trying to convince her that she would be better off after yesterday's budget. That lady was told that children's allowances went up by £3 each for her two children or £72 per year. Her husband pays his taxes, works at night starting his shift at 1 p.m. and does a few hours extra work in the morning to supplement his income. That is the effort he is making to rear his family, but he lost the £100 tax allowance on each of his two children. He pays tax at the 35 per cent rate and has a mortgage on his house. How can one convince his wife that she was any better off as a result of the budget? I have not taken account of the fact that the cost of this man's petrol will rise, that his car tax will cost more and that he will have to pay more for ESB charges, telephone charges and his wife will have to pay extra for bread, butter, milk and so on as a result of the decision to do away with 50 per cent of the food subsidies.
The taximan asked how the Minister for Finance could go on television yesterday evening and say that the food subsidies had not been reduced. Technically the Minister was correct, but he was wrong in trying to convey the impression that there was no reduction in the food subsidies. I have just related the story of the taximan from Inchicore in his blue Granada this morning and if I did no more this morning than just relate that story the message should be loud and clear within the Chamber of the real hardship, distress and despair that is rampant in Irish society because of the serious problems we have got ourselves into. I will ignore the other adjectives he used to describe the budget and the expletives he uttered, but the message he asked me to take to the House was that he felt betrayed by the Government, betrayed by the message that was poured out to him three years ago when he was told "Tighten your belt, you will have a couple of rough years, but at the end of the day all will be well".
That family, like all families in the country, made sacrifices; but at the end of three years what have they discovered? They have found out that the cure is worse than the disease. Not alone have we not seen any improvement but we have witnessed a continuous slide deeper into debt daily. Every day the Government borrow £3.5 million to pay for the day-to-day expense involved in running the country, which is contrary to what we were told by Coalition spokespersons three years ago. They told us then that the country was on the verge of bankruptcy. If it was on the point of bankruptcy then how closer is it to that position today? If, as we were led to believe then, the international bankers were knocking on our door, I wonder where they are today. Why is there not a scare running through the Irish economy, as happened three years ago?
There are valid reasons why there should be a scare in the economy but we do not hear or read about it to the same extent that we witnessed three years ago. Yesterday was a day of lost opportunities. It was a day when the country looked to the Minister for Finance to give them some hope, some guidelines, as to where we were going in the future if we were to get out of the morass we are in. People lived through yesterday afternoon in the forlorn hope that something positive to show a way forward would emerge from the Minister for Finance. It was too much to hope for, because all we got from him was a fiction in figures. They were delivered by a Minister for Finance whom, I regret to say, has lost all credibility inside and outside the House. Time and again in interviews yesterday evening hard-pressed housewives said they would not believe a word the Minister says any more. He is the same Minister for Finance who last year introduced a budget that was sold in a flurry of excitement and hype the like of which we have seen for a long time, but the net result was that he only flattered to deceive.
Thankfully, the same hype was not attached to this year's budget. I never sat through a budget that did not provoke a spontaneous clap from Government backbenchers, but that was the position yesterday. That is a reflection of the negative attitude and thinking that has engulfed the Government. They do not seem to be able to find any way out of our difficulties. I do not underestimate the problems facing the country and Governments in the future, but the Coalition seem to have accepted that there is no way out and that they must stay as long as they can, keep the ship from sinking, in the hope that a new man on a white horse will deliver us from our problems.
It is regrettable that the Minister for Finance was not able to use some imagination to point us in the right direction, to give the right signals to those who were looking to the House for guidance. Is the Minister such a negative thinker that he could not bring himself to put out the right signals even though he does not have all the answers? I would be the last to say that we have all the answers, but we certainly have positive thinkers on our side. We realise that there are not instant solutions to the country's problems but we know that a start must be made. A start will not be made as a result of yesterday's budget.
The Government have ignored the two major problems that face our economy. There are 240,000 people unemployed but there was not anything in the budget to help some of those people get a job.
The budget does not hold out any hope for the thousands of young people who are part and parcel of that figure. In fact the signal is in the opposite direction as far as they are concerned. There is nothing in this budget to give incentives for employment creation and it is also evident from looking through the Estimates that there will be 10,000 fewer places for young people in training next year. The number of unemployed will rise from 240,000 to 270,000 next year if we are to rely on the few bits and pieces cobbled together in this budget to tackle unemployment. That is the reality which will face people looking for jobs, including the many young people who will be leaving third level education next June.
One banner headline this morning calls the budget a juggling act. The Minister for finance is a very bad juggler in a second-rate show to which the general public do not have the admission price, despite the fact that he lowered VAT on fun palaces and whatever, It is a total juggling act, ignoring the fundamental structure of problems and going for a bit here and a bit there, taking one step forward and two steps back, trying to convince the PAYE sector that the Minister has done a marvellous job for them. That is only one of the illusions which form part of the presentation yesterday, but if anybody is foolish enough to believe it I would refer him to the income tax figures.
The outturn for income tax in 1985 was £2,103.1 million. The post-budget estimate is £2,356.4 million. Anybody who does simple sum will find that £536 million extra taxation will be paid in 1986. If we take PAYE tax on its own, we substract £2,103 million from £2,356.3 million, giving a figure of £253.3 million. I welcome the abolition of the 1 per cent income levy. As I would welcome any steps in that direction, but there is no point in trying to sell such steps for what they are not. It is better to look at the reality and to do the sums in time rather than have the PAYE sector doing their sums later on, as happened last year when they did not believe people like us who tried to point out the reality immediately after the budget. When they got their pay packets and did all their sums they found they were to be the losers. The real figure for income tax this year is £213.3 million — £253.3 million less £40 million taken off by way of income levy. The £231.3 million will have to be paid by a smaller number of people because undoubtedly the budget will create more unemployment; thus fewer people will be paying a larger amount of money.
When I made this argument last year people laughed and scoffed. I said the figures were phoney, that the Minister was fiddling around with figures and using bits of funny money here and there. There is some funny money in this budget too. This is the reality of the fiction of figures given to us yesterday. There was a shortfall in revenue of £128 million. Was it any surprise when 240,000 people are unemployed, while the average projected in last year's budget was 217,000, a totally unrealistic figure? A supplementary estimate for £50 million had to be brought in and inevitably before this time next year the same will have to be done again. There will be 10,000 fewer places for training. Emigration will account for some of this number but the balance will remain here to be paid by this Government. It is not the future that young people want. They prefer to be doing something.
The sooner the better the Government realise that the policies they have continued to follow are a dismal failure. What more evidence do they need than the reality of the figures staring them in the face? For three years they have imposed high penal taxation, totally contrary to what they said when they came into office. They have failed to tackle the expenditure side.
Where would Deputy Reynolds cut?
This is the first year that some attempt has been made. Leaving aside capital expenditure, current expenditure has risen every year. This year some attempt is being made but I wonder how true the Estimates will be at the end of the day. The Government have relied on penal taxation to solve the problems of bringing down the current budget deficit, yet it has risen from £988 million when they came into office to £1,284 million and we are starting with an Estimate this year of £1,250 million. I wonder how real that figure is. What kind of illusory figures are they trying to get the people to believe? All the Minister is doing is moving the goal posts each time. He changes the rules of the games when he finds he cannot reach his targets. He will explain it away in the usual manner which has become synonymous with this Minister by saying that the increase is not as bad as it would have been if he had not done this or that. This is the sort of phraseology which runs through his speeches in an effort to convince people that he is really doing the job he is supposed to do. He is trying to con them.
As the taximan from Inchicore said this morning: "Fool me once, shame on you; fool me twice, shame on me". The con trick played on the Irish people will not be repeated, despite all the talk about percentages of GNP and current budget deficits. That is not the language that the ordinary people understand; they understand the reality of life.
The fictional figures presented by the Minister yesterday may have satisfied his own ego and his technocratic instincts. He is so concentrated on figures that the House could fall on top of him and he would hardly realise it. That budget represents no more than putting figures together and moving them here and there. An economist from Trinity College described it on television last night as like moving the deck chairs around the Titanic. Moving figures around will do nothing to create employment or help the hard-pressed housewife or the young person trying to get a job. It may satisfy the ego of some people opposite who are happy that they will be able to present in a conjured-up fashion figures which will help to defend their last stands of credibility.
What did the Deputy give the taximan?
I paid him.
(Interruptions.)
Order, please.
I would not insult the Irish people by presenting them with yesterday's budget.
Deputy Allen wants to hear us say only what he thinks we should be saying.
(Interruptions.)
Deputies will have an opportunity to speak.
Deputy Allen will not have much to say except what the Minister tells him. We all know Deputy Allen is the mouthpiece for flying kites and this has been shown time and time again.
How are the solicitors doing in Cork? Tell us about them.
I predict that Deputy Allen will have more votes than the three Fianna Fáil Deputies put together.
I want no interruptions from anybody.
If I were Minister Bruton I would concentrate on the agricultural industry. I read through the long budget speech but there was nothing in it for the farmers. The farmers in Meath will not be very happy about the way the agricultural industry is being treated by this Government. Each year since this Government came into power there has been a reduction in investment in agriculture. There is one thing you will be able to say quietly, out of the side of your mouth——
Please address the Chair.
The one thing the Minister will be able to say to the big ranchers with the plush fields in Meath is that the land tax will not be coming in. We said that last year. But, if this Government continue to adjust the acreage at the present rate, the plan will not be finished by the year 2000. This land tax was a response to a political problem. They had to take something out of the hat to calm the political waters.
The waves are on the way down.
They will engulfed by the waves if they are not careful. We said that the land tax as proposed by the Government was not workable. We also said that, whatever chance the Exchequer had of getting more money out of the farming community, this was the wrong year to introduce a land tax. Whom in the farming community does the land tax suit? It suits the intensified dairy farmers, people who for the last four or five years have been using capital allowance writeoffs, purchase of machinery and so on. The Minister, Deputy Bruton, knows how the game works. This year even on 80 acres of intensive dairying these farmers would be paying £30,000 or £40,000 tax. When these people were paying £800 they laughed all the way to the bank. Is it any wonder that we have heard a great eruption in favour of the land tax from the south of Ireland? This will be the first year this type of money will be coming into the Exchequer simply because all the ways of alleviating the tax liability under the accounts system have been used up. That is the reality of the land tax the myth which was mentioned here to try to keep the Labour Party happy in Coalition.
In yesterday's budget we had the economic requirements on the one side and the political realities on the other. The Taoiseach and many of his spokesmen say from time to time that Fine Gael always put the country first and Fine Gael second. We all know the reality. When it comes to political realities in Government, Fine Gael put Fine Gael first and the country second. That has been happening for the last four budgets. I will not make the comparison with what was said about Rome burning while another man was doing something else, but the position here is not so very different.
This budget shows no imagination, no creativity, or no understanding of the problems facing us. The Minister for Finance brought in a budget which I can only describe as anti-business, anti-saving and anti-family. This budget and the thinking behind it clearly reflects the collective wisdom of this Government who seem to believe that they should continue to penalise thrift, to despise success and to promote the politics of envy. By their actions you shall know them. That is the only way I can judge this. No matter which section in this budget one looks at one realises that it is anti-saving.
It was sold as a transfer of the burden of taxation from the PAYE sector to the financial corporate sector. That is a nice slogan to sell to the Labour Party and their members, but that is not the reality. It is not the banks who will be paying the £75 million but the depositors — 35 per cent will be deducted from the interest due and passed, by cheque, to the Exchequer. This is certainly a simplified way of collecting tax because there are no administrative overheads. I appeal to the Government not to try to fool the people into believing that the corporate banking sector will pay the £75 million.
Let us look at the make-up of depositors. There are not many companies with money on deposit for long periods. The backbone of bank depositors — about 70 per cent — are small savers and small depositors. These are the people the Minister will hit. These are the people the Government have been encouraging to put their money in financial institutions and not to leave it under their beds. What are the depositors doing this morning? They are taking the money out of the banks and putting it under their mattresses. Unfortunately, this means that many more old people will be attacked. These people are not liable to income tax, but the Government will take 35 per cent from them under the label of getting at the banking institutions. The Government are upsetting the traditional saving position. This budget is clearly anti-saving. The Minister should not try to tell me that this money will be collected from the corporate banking sector, because it is clearly the depositors who will have to pay. This applies to residential depositors.
Non-residential deposit holders are all right at the moment, but when they read the underlying message in yesterday's Budget Statement, many of them may decide that Ireland is becoming a very dangerous régime in which to lodge money. Despite what is said that money will move out of the country. Double taxation agreements exist between here and the UK and most of the non-residential banking deposits in the banking system have come from the UK. When the people concerned are asked to declare their UK address they know they are only a step away from the British authorities approaching them for their money. Many Irish people went to Britain and made their money in the building and construction industry in the good days and also in other areas of activity. They have put their money back into this country to let us benefit from those deposits. As we all know, for every £1 deposited with the banks they can lend £4. If one interferes with that system one is on a very dangerous road. There is a most uneasy silence in the financial world in Dublin this morning but behind the scenes there are doubts about what may develop.
By adopting their proposal with regard to the insurance companies and their managed funds the Government will get at some of the profits of those funds but at the end of the day it is the policy holders who will suffer. The only reason the insurance companies will pay in respect of their managed funds is that they have already guaranteed a return on those policies and also in respect of growth funds.
What the Government are proposing will kill that kind of saving. It will kill the small saver and it will affect the Post Office, the ACC and other institutions. There is one glaring exception, namely, that the Government have positively discriminated in favour of Government gilts. I do not know where the savings will be moved but I do not want to hear the foolish argument that because exchange control operates here the money will not leave the country. It is a nonsense to suggest that. We have a land border and where such a border exists there is no way one can stop the transfer of money. I accept that occasionally a person will be caught — this happened two weeks ago when a man was caught with £500,000 but that was only the tip of the iceberg — but for that one person caught thousands will get away. I hope the Government have not done long term deliberate damage to the pattern of savings here. If they have, as bad as we are at the moment for developing capital we would be much worse in the future.
As I pointed out, the Government have discriminated positively in favour of Government gilts but this system is not one used by small savers. On many occasions Deputy Bruton has said that one of the greatest requirements of Irish industry is more capital and more equity and I agree fully with that sentiment. However, there is nothing in this budget to encourage that kind of development.
There is a significant encouragement in the budget to help in that area.
On balance, there is very little. Does the Minister believe that the 12 per cent levy in respect of section 84 is a positive incentive for future investment? If he does he is only fooling himself. If he or the Government think that the levy in this case will be paid by the banking sector they are fooling themselves again. In every legal document drawn up under section 84 tax-based lending here is a condition at the end which states that if the financial institution concerned is charged any tax on the transaction it will pass it on to the person concerned. This is what will happen. There are many industries that are just hanging on: they are like somebody balancing on the top of Niagara Falls, they could tip over and be gone forever. Where will such industries find the money? I am not putting forward a poor mouth for Irish industry. I simply know how hard-pressed they are. The Minister need not accept my word only. A recent report by Stokes Kennedy Crowley on behalf of the IDA showed clearly that the return on sales for native Irish industry is down to 1 per cent. Yet, there is the sector this Government appear to think has a lot of money to hand over to them.
Stock relief has been abolished totally and capital allowances have been reduced. One question that needs clarification is whether the relief for accelerated corporation tax has been removed this year. The Minister is not saying anything, so I assume that relief is gone.
The Minister will have an opportunity to reply later.
This is an area of interest to him and he would know the sitution. I notice that he is smiling now. I must assume that relief is gone also. He and the Minister for Finance should realise what ACT has done and will continue to do to Irish industry. What is happening is positively discriminating in favour of foreign industrialists. This Government do not know what will be the repercussions of their decisions. They should discriminate in favour of Irish industry but the reverse is happening. The multinationals will not be affected in any way by proposals with regard to this tax. It is one of the reasons why Irish industrialists have joined the corporate emigration to the US, the UK and the Far East. No longer can they earn a return for their shareholders' money. The Smurfits, Roadstone, the Rohans, the McInerneys, the Durkans and many other have taken the corporate emigrant ship abroad. Yet, here we are foolish enough to think we can carry on in the same way and hope for some resurgence in the Irish economy. It is simply not on.
There are many other examples of an anti-business bias on the part of the Government. I see Deputy Allen is leaving the House. Many positive things could be done and if the Deputy remains I will list them for him.
The Deputy should give a few answers to questions. What about spending cuts?
The Government introduced the business expansion scheme. The record of this House will show that in the first year when it was mentioned by the Government I spent 20 minutes urging the Taoiseach not to make the foolish mistake of making the scheme too restrictive——
What about spending cuts?
If the Deputy is not interested in hearing positive suggestions he can leave. I will not worry whether I have his ear. Obviously the Deputy is not interested in listening.
The Deputy should not provoke interruptions.
He is driving his audience away.
That Deputy never goes down to west Cork. A sum of $45 million has been taken out of west Cork and they did not even get the interest on what that money would earn over the next four years for Bantry. He will get his answer.
The Minister could have taken some positive steps by way of this budget that would have been in favour of jobs and job creation. The business expansion scheme, as I said at the time of its inception, was a good idea but it is surrounded by far too many restrictions. Obviously, the Government took note of what was the case across the water in this area but, unfortunately, as always, we took the worst of the British scheme. Their business expansion scheme was not restrictive. It was very successful. As time passed the Treasury plugged various loopholes and added the odd restriction but the scheme continues to be very successful. By contrast, we began at the other end, that is, with the maximum restrictions thereby leaving it virtually impossible for the scheme to succeed. Consequently, only two or three funds have been established in the couple of years of the scheme's operation despite the fact that such development is badly needed by Irish industry.
I welcome the Minister's efforts to shake up the Stock Exchange. Dublin Stock Exchange is probably the second oldest in Europe and were it not for the fluctuations in oil shares and in Government gilts in recent years it would hardly be in business at all. It is one of the most conservative régimes in Dublin. I trust that the Minister's efforts will prove successful in this area because in this way we would be filling a void in the matter of attracting capital to industry. However, in terms of this budget there is no positive incentive for anyone to put money into industry.
The Deputy must not have read the statement.
I am sure the Minister would not wish me to point to what is not being said by the Government in so far as the budget is concerned. Of course we welcome any positive aspect of the budget but I challenge the Minister to deny the fact that the best return for investment is by way either of Government gilts or the Post Office, the areas that are also the safest and without risk. People cannot be expected to invest their money in high risk situations and when there is very little return. Risk capital is usually money that has been hard earned and people will not be prepared to invest their profits for a very low rate of return. There seems to be no recognition that business must make profits in order to survive. There seems to be no acceptance of the fact that the profit of today is the capital of tomorrow and that tomorrow's capital will provide the next day's jobs. If the profit motive does not exist, the capital will not be available either and consequently jobs will not be created.
The Government could have used the budget to provide incentives for people to provide jobs. Because of the taxation system industry was forced for too long into using heavy capital instead of labour and the situation is not that much better today. This is because the employer with a number of staff finds that with levies and the other contributions he will be paying an additional 20 per cent. Was it any wonder that in the past Irish industry moved towards the use of machinery as opposed to labour when the cost of labour was out of all proportion?
Another factor in this regard is the effect of social legislation introduced in the seventies. Any honest trade union official will admit that that legislation is having the opposite effect to what was intended. I refer in particular to the Unfair Dismissals Act which was introduced by Deputy O'Leary when he was Minister. It is time that that legislation was reviewed. Good trade unionists have admitted to me that that legislation is a deterrent to employers to employ people. It appears that we are not prepared to even begin to do anything to help create employment for the 240,000 people who are out of work.
The Government have followed their own roots in relation to how they believe the country's problems should be solved but it is time they asked themselves whether they were on the wrong road. I do not understand the kind of logic that is trotted out here day after day to the effect that it is good economic policy to borrow money in order to pay people for doing nothing while a significant amount of that money could be devoted to paying people for doing work that is very necessary. Some of the money would find its way back to the Exchequer anyway.
I challenge the economic theorists in the Government to deny that if we are ever to make any dent in unemployment or in the serious financial position of the nation we must change our direction. Only two weeks ago, with a county manager I calculated the differential in the income of a county council labourer and of a man with three children on average and depending on social welfare. The difference was £17 a week. What kind of logic is that? We are leaving our people on the unemployment list while, for instance, the county road infrastructure deteriorates daily. Sooner rather than later some Government will have to invest considerable amounts in restoring the county road network. Our roads are riddled with potholes that result in breaking springs or the shock absorbers of our cars. People are wandering around with no purpose in life while for an expenditure of another £17 per week a man could be put to work and even some of that £17 would be recouped by way of taxation.
What is the source of that figure?
We will not solve our problems if we do not accept that there is another way of dealing with them. We cannot continue, with a decreasing number of taxpayers, to pay the huge numbers who are out of work. The Government's economic policies will not work. After three years they should realise the foolishness of their policies. There are many schemes which could be used to absorb our labour resources. Such a policy would help towards restoring some confidence into a demoralised workforce. Our people do not wish to be out of work but the Government do not appear to understand the hardship, the frustration and the despair that goes with unemployment. If the Government continue to count the cost in terms of pounds, shillings and pence, they are following a recipe for disaster and perhaps even a challenge to the institutions of the State.
There is not much time left for the Minister to do something about the problem. This budget is anti-family, anti-business and anti-saving. I have demonstrated clearly that it is anti-saving, that it will upset the traditional savings mechanisms. I have also demonstrated that it is anti-business at a time when the manufacturing and commercial sectors are crying out for leadership, guidance, direction and positive thinking. I wonder if the Government are aware of where the industries of the future are and where investments should be made. They should recognise that there is a growing future for the financial services based in Ireland. We made an investment in the communications network some years ago which ensures that we can develop our financial international services market here but we are not doing anything about it.
Our existing industries have barely been mentioned. In the macro-economic sense any good businessman could contrast running the country with managing his own firm. I run my own business and I know what is involved. The first thing any good businessman would do is to ask himself what assets he has and what use he is making of them. We have plenty of assets here — green fields and one of the best climates for producing agricultural products — but we lower investment in agriculture year after year. Our seas are full of fish but they are not exploited to the full either. The Government have been talking for three years about the development of a food industry but nothing has been done about it despite the fact that we import millions of pounds worth of fruit and vegetables. We are pursuing an industrial policy which needs an urgent review.
The life cycle of products in the high tech area is getting shorter and shorter. It used to be three to four years but it is now down to one or less. Is it right to be putting so much of our resources into that type of industry when the market is changing so fast and the product cycle is so short? We will have to devote more of our resources to building up our native industries based on our own raw materials and if we cannot do that the future is very bleak.
I will deal with that.
It will not bring a response in jobs overnight, but the Minister will be doing a good job long term if he tackles the problem. He has been in office for three years now and it is time that there were positive results. Fundamental structural problems must be tackled and we cannot afford the luxury of one Department saying to another "That is my area, keep your nose out of it". Those barriers are no longer acceptable when there is a crisis in employment and where there is so much need to replace imports.
I wholeheartedly agree with the Deputy.
That is the long term view, but it will not give an immediate return in jobs. Somebody, sooner or later, must grasp the nettle and start on the road to setting up native Irish industries which will last. I am not casting any reflections on international investment but it is getting scarcer and more risky all the time. We should be able to excel in the areas in which we have the raw materials. I know it will take a big effort in the marketing fields, that there will have to be group marketing efforts on behalf of small industries who would not have the resources to do it themselves and that there will also have to be group distribution. There is always a place in the market for a high quality product. The price is not always the determining factor — service, continuation of delivery and excellence of the products will ensure its place on the international market.
Any businessman looking at Ireland Limited would have to approach it in the manner as I outlined today. If you are running an industry in a recession and find that your sales are dropping and your overheads increasing, what do you do?
You make one of two choices. You either cut your overheads and stay in business, or leave them as they are and go out of business. There must be a positive attempt to go for increased production and sales, to reduce unit costs and to preserve the industrial place. The same logic applies to the economy; but at present it is merely being fiddled around a bit, moving a few figures from here to there. Government policies and strategies have produced an endless list of business failures and factory closures — 932 in the first year, 687 in the second year and around the same figure for last year. That is a terrible indictment of the management of the economy. You cannot stand aloof and see the industries which should be providing jobs fall apart. If you accept that logic, there will be no base from which to rebuild. Admittedly, some industries did not move with the times but many good businesses went because they did not receive the attention they deserved when they needed it. It will take a long time to replace them. Is it any wonder that the Minister for Finance is called the national liquidator? He seems cold-hearted and unresponsive to the crisis which exists.
The construction industry was hardly mentioned although it is the one industry which can respond fast in creating jobs. It has probably got the hardest knock of all in the recession, with over 50 per cent of building workers previously employed now out of work. It uses native raw materials for the most part and keeps its money in circulation. Other small industries depend on it and they are also affected. Inner city development is not the answer to the problems of the construction industry because there will be no tenants to take up occupancy if the economy does not improve. Previous Coalition Governments also discriminated against the building and construction industry. Some people describe it as politics, but I cannot accept that every builder is a Fianna Fáil man. Some of them must support other parties.
They are not all Fianna Fáil men.
Perhaps the Minister could tell the people in the building and construction industry why they are so positively discriminated against. Do not tell me that there is no work for them to do. They believe there is something wrong in the Government's thinking in relation to the industry. The Government should do something about it. There is plenty of work to be done. I am not contending that the Government must provide all of the money. There is plenty of private money available willing to be put, in partnership with Government, into improving our infrastructure in order to improve our road network, to reduce our industrial costs, because they are a factor in our export business. Why is nobody doing anything about it? Why do the Government positively discriminate against them when they could respond very quickly to the unemployment crisis obtaining.
A so-called energy policy has been pursued for the last three years. That being said one wonders sometimes whether there is an energy policy at all. We have the natural resource of Kinsale gas. There has not been even one spur taken off that national pipeline which I started and on which the Minister carried out the weld in 1982. Nothing has happened since. The Minister was not sufficiently long in that office to ascertain whether he would have moved better than the man who replaced him. But the facts are that not a single spur has come off that line in three years. That would have provided an opportunity to create jobs, to earn more revenue for the Exchequer and reduce industrial costs. For three years the Government have remained inactive with that resource staring them in the face. They have done nothing with it. I fail to understand why.
I fail to understand also why the Government have put themselves into a corner with regard to oil exploration. Although the Minister may not admit it, I know that deep down he would agree with what I am saying. We have followed a policy here for ten years in relation to oil exploration. But we still have the ideological hang-ups of the past that have produced nothing for us to date because 50 per cent of nothing is nothing and we end up with nothing. Until we find oil, prove that it is there and have it commercially explored once, we cannot be bold in regard to what we want or expect from it. For heaven sake would the Minister rethink in the national interest and endeavour to reach a situation in which we produce oil from one well, then move the terms along on a sliding scale, quite acceptable in the international oil business but which is not acceptable in our situation obtaining, in that we want the oil companies to undertake all the risks without knowing what would be their return at the end of the day. There was a convoluted response to this situation earlier last year. We will have an opportunity to elaborate on this matter in a Bill to be introduced shortly in this regard. There is still an attitude of: do nothing, adopt a negative approach, negative thinking. We tend to think that somebody will solve the problems for us but nobody will. Therefore there are negative policies in the energy, industrial and taxation areas while we hit the places that might produce the wealth, goods and services on which we are so heavily dependent.
Another aspect of the anti-business approach of this Government — in addition to those already mentioned — is the Valuation Bill before the House. Its provisions constitute another severe imposition on the business and commercial sector. From where do people think all this money needed from the industrial and commercial sector will come to keep paying for everybody? It simply is not there. It is time we sat down and took a realistic view of ourselves.
For a start, looking at this budget we should realise that the whole of our concentration has been in the wrong direction. When one examines how expenditure will be allocated and financed in 1986 one is struck by a couple of figures. For example one sees that the economic services and infrastructure area represents 9 per cent only of total expenditure while service of the public debt represents 21 per cent. Social services, health, education, social welfare, housing and subsidies represent 55 per cent with security rising to take up 7 per cent. We are devoting 9 per cent of our total expenditure in this budget to economic services, the engine of our economy. Surely we have gone way out of balance? It is time we began to row back because we are on the road to nowhere. Therefore is it any wonder that we must borrow £3,500,000 daily to pay for our day-to-day expenses when we allocate money in that fashion? If we are not prepared to put money into areas that will produce the wealth, employ people who in turn will pay the necessary taxation to maintain all of the other services, then we are merely fooling ourselves.
We have got ourselves into a situation that is far worse than that of any of the socialist countries in Europe, in which two-thirds of our GNP is being spent by the Government. There are many socialist countries throughout Europe that do not have that level of intervention on the part of the State. I have no ideological hang-ups about who does the job best. I know there is here a role for the private sector, that given the right climate and incentives, the right return on their money, they will undertake that role. There is a role for the State also. There are many areas in which the State is involved which the private sector could do more efficiently and effectively, thereby saving taxpayers' money. A combination of both, so that our economy would operate in a mixed fashion, not relying solely on the private enterprise sector and certainly not relying solely on the public sector, but in which both can perform the task they do best and at which they have been most successful in the past. Regrettably, we have not been that successful in State management with regard to projects or commercial undertakings in the past.
I repeat: when we accept that we need the best people in the top jobs, that we must pay for them, getting away from the politics of envy that obtains, then only will we get a good job done. We must realise that we will not achieve that aim with a mediocre man on a mediocre salary. That does not obtain in the hard world of today. We must get rid of the Devlin impositions. We should not give people a job for the rest of their life. Rather give them a limited contract, they realising full well that if they do not deliver, that will be the end of their job and in the full knowledge that if they do deliver then they will share in the benefits accruing. Let us adopt an enlightened approach to the management of our public sector enterprises, giving people incentive and opportunity so that they are rewarded for their hard work. I believe it will be through a combination of incentives that this economy will be seen to work properly. We must remember that the Irish characteristic is: do not force him to do anything, dangle a carrot in front of him. Unfortunately, too few people have proved themselves in this country. Yet we see their magnificent contributions abroad to the development of other economies.
Until we realise what makes our economy tick, until we fully realise the make-up of the Irish character, then we are wasting our time. We have seen its fruits over the last three years. Let us turn the clock back, let us get back on the right road to recovery and incentive. If this Minister for Finance doggedly holds on to getting his few little figures in place, then our economy will continue to suffer. The sooner he realises that the better. If he does not realise it now he will if he goes out, as I did this morning, and takes a taxi into work, when he will get the same message I got from the taximan from Inchicore.
Yesterday's budget was designed to tilt the balance in favour of job creation. While I agree with many of the sentiments expressed by Deputy Reynolds, it would appear to me that he has not read the speech——
Three times.
——in order to see some of the important measures in the budget which will assist job creation. I propose to list ten separate measures in the budget which are designed to tilt the balance in favour of job creation.
It has been done, firstly, by selective cuts in VAT in employment intensive services which will reduce their cost to the consumer by 13 per cent. These sectors benefiting from VAT reductions of 13 per cent employ between them at the moment 70,000 people. The reduction in VAT and ultimately in the price of those services by 13 per cent will, I am confident, lead to thousands of additional jobs being created in this part of the service sector.
I hope the Minister is right.
Secondly, the Government have given a further boost to tourism by VAT reductions additional to those already conceded last year on accommodation and car and boat hire. This year the reduction from 23 per cent to 10 per cent is on meals taken in restaurants and a major VAT rebate scheme has been introduced for coach tour operators to which I will refer later in my contribution. A comprehensive package has been put in place to improve tourism. I might mention that the VAT on meals in restaurants in Ireland at 10 per cent will now be significantly below the European average, giving us a competitive edge where previously we had a competitive disadvantage in that important part of tourism.
It will help them to survive.
It will help them to grow.
They have to survive first.
The Deputy should not promulgate from his influential position the notion of surviving as being the object of business. Growth is the object of business. Thirdly, major cuts in income tax have been introduced which are equivalent in value to double what would have been justified by simple indexation of existing allowances and bands. This will reward effort at all levels. Fourthly, a substantial additional incentive has been given to people on social welfare, to whom Deputy Reynolds referred, to take up available jobs where previously that was not done. This is being achieved in two ways in the budget, first by an increase in the family income supplement payment which is available to low paid working families, giving them an advantage over those on social welfare and, secondly, by an increase in children's allowances of 25 per cent to benefit all, while at the same time freezing child allowances on social welfare payments at their 1985 level. The more generous level of the allowance for children in social welfare payments as against those available to low income families at work with the same number of children had been identified by the NESC as a disincentive to work for some families with a large number of children. The change in the budget will tilt the balance in favour of work for those families by giving them an increase regardless of whether they are on social welfare.
Fifthly, a major boost has been given in the budget to both worker or employee shareholding and individual personal shareholding in industry by two methods, first, a new income tax relief on dividends on shares in industry — I am surprised that Deputy Reynolds did not refer to this——
While there is anything positive in it, but I said it is only the tip of the iceberg.
——second, a reduced long term capital gains tax rate which will create an active market for shares sold by either individual or employee shareholders in industry.
That is only 5 per cent. There is nothing at all in many European countries.
This incentive to worker and individual shareholding in industry is in addition to incentives already created, namely, by the introduction of the business expansion scheme and the tax concessions for worker shareholding, and it is alongside restrictions on tax benefits in this budget for saving in certain types of financial institutions. The effect of the budget should be that savings will shift resources from some of these financial institutions where they were not perhaps used to the greatest benefit from the point of view of manufacturing into the direct holding by savers of shares in manufacturing companies themselves where the money will have a much greater job creation than it would in a building society of a life insurance company.
Sixtly, the budget by a combination of tougher penalties and an amnesty in regard to both tax and social welfare will get people from the black economy back into legitimate trading.
Seventhly, the budget contains a special tax scheme to promote investment in research and development. This is accompanied by an increase in the provision by the IDA for research and development grants within their internal budget and will help bring forth a stream of new products to provide extra jobs in the nineties. Research and development is crucial to the development of indigenous Irish-owned industry.
Eighthly, the budget by phasing out the excise duty on motor spare parts will help the most labour intensive and domestically beneficial segment of the motor industry, namely the repair market. By giving an incentive to people to repair their cars rather than replace them we will on the one hand reduce our import bill and on the other hand create employment for people in the motor trade in the repair area where previously those jobs would have been created in car factories in Tokyo or Osaka or some place further afield.
Fords in Cork.
Ninthly, by a restriction in capital allowances to industry combined with the employment incentive and the recent PRSI concessions for employers taking on additional employees we will shift the balance as far employers or manufacturers are concerned towards meeting any extra demand for goods by additional employment rather than by additional machinery. Over the last 15 years we have seen evolve a tax code which encouraged employers to replace people by machines by giving grants and tax concessions to the machines and placing income tax on PRSI contributions on the employer if he employed people. This budget by restricting these capital allowances on the one hand and by giving PRSI and incentive concessions for employment on the other is tilting the balance back towards encouraging more employment and less capital substitution for employment.
Tenthly, we have put a restriction on section 84 financing to industry, which was essentially an incentive to borrowing, combined at the same time with incentives to invest directly in industry, such as the income tax concession on dividends, the special partnership scheme and the business expansion scheme. By, on the one hand, restricting section 84, which encouraged borrowing, and by giving concessions like the business expansion scheme, the dividend tax relief and the special partnership scheme, we are encouraging people to take in equity and replace borrowing.
We are improving the financial profile of our industry more in favour of equity and against undue and unhealthy reliance on borrowing, on which such high and volatile interest rates must be paid. We are restructuring our industry in the specific direction signalled in the White Paper on Industrial Policy. Unfortunately, none of the Deputies opposite has heard the entire list as they have been changing the guard, but these measures are combined with the job creation provisions already provided for in the Estimates for current and capital spending. For instance, the Estimates provide for a 300 per cent increase in financial aid for holiday accommodation under the Tourism Vote. This will ensure that the extra tourists coming to Ireland, as a result of the reductions made in this and in the last budget in value-added tax on meals, accommodation and car hire and boat hire costs, will be able to stay in hotels and guesthouses that are up to the very best international standards.
Likewise, on the jobs front I am glad to say that there has been a fantastic response to the new house improvement grants introduced last October. So far 30,000 applications have been received and arrangements will have to be made to take on additional inspectors to deal with all these cases. I am happy to be able to say that arrangements were made two days ago by the Government for the recruitment of temporary inspectors to deal with the outstanding number of applications, a much greater number than was expected, clearly indicating the wisdom of the Government in introducing a scheme of this kind. This will give a major boost to employment in the building industry all over Ireland and that boost will be confined solely to those sectors of the building industry that are complying with their taxation responsibilities.
Nor, as Deputy Reynolds seems to suggest, is the natural resource sector of our economy being neglected in this budget. Since this Government came to office the amount invested in forestry had been significantly increased — I think by almost 80 per cent — and we expect a 10 per cent increase in output from the nationally owned forests in 1986 as against 1985 as a result of the investment by this Government.
The food industry is also a major priority. Here the Government's aim is to develop new products, based on our farm output, which can be sold direct to shops and restaurants here and in Europe, without the need for subsidy or intervention. The National Development Corporation will have a lead role in this and institutional arrangements are being made to co-ordinate an overall Irish food strategy between all the Departments concerned.
On that issue, our biggest problem as far as our agriculture is concerned is that we are producing far too many goods which languish in cold stores at the expense of the European taxpayer. The European taxpayer is running out of patience. There is no long term future for our farmers producing goods for intervention. The pressure on the Common Agricultural Policy is increasing year after year. If our agricultural and food industry continues to depend as it does to such an unhealthy extent, on intervention and export subsidies to third countries, irrespective of exports which could not take place without a general subsidy from the European taxpayer, then there is no future for food and agriculture in this, what should be the most agriculturally dominant country in Europe. We must change radically the direction and thrust of our food industry.
Mr. Brennan
Hear, hear.
That means producing products and organising our farmers in such a way that they are able to produce products that can be sold direct or after processing, without the intervention of any EC aid of any kind, to a retailer for sale to the consumer. I have taken a special interest in this since I became Minister and, with the aid of the Irish Goods Council, I have organised a series of meetings with the major retailing groups here to get them to help Irish food manufacturers to develop products that can be sold direct to the Irish consumer. Surely, if you cannot please the Irish consumer with your food products, you have little chance of pleasing the British or continental consumer. I am glad to say that as a result of these initiatives one of the major food retailing chains, one of the largest of our supermarkets, have been able to tell me that since I initially raised this matter with them and since they engaged in intensive consultation with the food industry at my request, they have been able to treble the number of Irish products that they are carrying under their own brand lable — in other words, reduce substantially the amount of goods that were previously being imported because they were not being produced to adequate quality here.
Furthermore, it is pointed out by many that there exists a degree of duplication and or confusion of objective between a number of State agencies and Departments in the food area with, I believe, three Government Departments being directly involved and a larger number of agencies. I am glad to say that agreement has been reached, as a result of consideration of a report prepared by a group of Ministers of State in respect of the food industry, on new arrangements to ensure that maximum value is achieved from all Government activity in the food area and that total co-ordination of effort is obtained.
These two initiatives, on the second of which details will be announced later, will, I believe, prove to give very great hope and new direction to the food industry. I would urge, as I have already done, the farming organisations to devote their attention to the economic organisation of farmers, to finding out how Irish agriculture can be re-orientated towards producing goods direct for the supermarkets here and in Britain and away from engaging in personality style politics which are typified by the current spate of resolutions reflecting on the person of Deputy Austin Deasy, Minister for Agriculture. That type of personality politics may achieve short term headlines in the local press but it does nothing for the true cause of farmers. That cause will properly be furthered if farming organisations, in a co-operative vein with politicians of all colours, seek to develop their interests to the full and put us in a position where we can compete with the rest of the world.
Small industry is more effective in creating and sustaining jobs than large industry — this is true, too, in other countries. The measures in the budget, which are synchronised with the existing business expansion scheme and the launch next month of an over-the-counter market, will provide a whole new source of equity funds to boost investment and expansion by small industry. Additionally, the IDA are putting more staff into the small industry effort all over Ireland. this is all consistent with the shift in emphasis in the White Paper of Industrial Policy from external to indigenous industry. The provision through the BES the OTC scheme and the dividend and special partnership concessions in the budget of a large new source of private funds for industry will enable State grants from the IDA to be gradually reduced. I want everyone to own a share in industry so that the savings of the Irish people, rather than the Government, will be the main investment source for new manufacturing activity.
I hope that the activities of the Government, of me and my Department, and of the Minister for Finance, during the last three years, will be seen to be part of a consistent trend in policy development. To digress from my prepared remarks, I wish to refer briefly to this. We want to see a position where no longer will any industrialist wanting to expand his business consider two things only: borrowing money from a bank or getting an IDA grant; in other words, capital on which he must pay interest whether he makes money or not. I would prefer to see a reduction in both bank borrowing and reliance on State grants. I should like to see these being replaced by private equity provided either by workers in industries or outsiders who want to invest in productive capital.
Or by the NDC.
Or the National Enterprise Agency. Equity is put in on the basis that, if there is a profit, there will be a dividend. Therefore, in a good year money will be paid out when an industry can afford to pay it out; but, if there is no profit, of course there will be no dividend. There are bad years in any business activity, like the electronics industry at the moment. In bad years there would not be a drain on a business: no dividend would be paid, the money would stay in to help the company to survive through a bad patch. Patient money that will be left there to wait for its return is much preferable to reliance on borrowing at high interest rates. Unfortunately, that has been the short term, unwise route taken by our manufacturers. All statistics indicate that overreliance on bank borrowing increased steadily during the last 17 or 18 years. This is beginning to be reversed as a result of Government measures and I will illustrate what we have done. First of all, we introduced a tax concession for worker shareholders: we permitted them to allow some of their wages to stay in the company so that they could get dividends later on. We introduced a business expansion scheme to encourage private investors with some income to spare, to put it into industry: we gave them complete freedom from paying any income tax on that money in the year in which they put it into industry. In this budget we introduced a scheme so that if people invest in industry, which is paying only 10 per cent corporation tax, the individuals who receive dividends from that company will get a substantial tax concession in regard to their personal income tax. Previously, the company paid 10 per cent but if it declared a dividend the private investor had to pay the full 60 per cent tax on it. That meant that individuals did not bother to invest in industry because of the high rate of tax on their dividends. Because of this budget, individuals will have a direct income tax incentive through the business expansion scheme: they will pay a lower rate of tax on dividends than on any other form of income. A major shift is being sought away from bank borrowing and towards investment in industry.
There are some who will claim insufficient progress has been made in reducing borrowing by the Government. It will be claimed that public expenditure is too high. I do not dismiss these criticisms, but it is worth recalling some facts. This year the current budget deficit will be 7.4 per cent of GNP as against 8.2 per cent last year. Yet, if the cost of servicing debts from previous years did not have to be met this year, we would actually have a budget surplus of about 3 per cent of GNP in 1986. Without debt servicing we would have a budget surplus. This illustrates how much present budgetary strategy is constrained by two things: past borrowing and dramatic increase in real interest rates since 1980.
Back in 1980 interest rates were lower than the rate of inflation, so those who borrowed made gains at the expense of those who saved. Interest rates were negative and borrowing was effectively subsidised. Now, as a result of international trends, and as every householder knows, interest rates are much higher than the rate of inflation.
Those who save are gaining at the expense of those who borrow. Saving is subsidised and borrowing penalised. This has hit the Exchequer in the same way it has hit thousands of ordinary householders with mortgages. The Government have had to pay a hugely increased interest bill just to remain at the same level or at a level of spending on items other than interest. Many of those who make sweeping statements about cutting spending fail to realise how much of what we send is interest and is therefore beyond any short term control. No amount of analysis can get around that reality.
The Government's options for cutting spending are also narrow in other areas. The only area, apart from interest payments, to show a significant increase in Government spending as a share of GNP since 1980 is in social welfare payments. Increased spending on social welfare is mainly due to an increased rate of entry of young people to the labour force in the last few years. This increase in the number of young people seeking jobs is not the result of Government policy but was predetermined by the increase in the birth rate in the early sixties long before most of us were Members of this House.
The real scandal in relation to unemployment is what happened in the seventies when it was entirely foreseeable, because of the numbers then in primary school and those entering secondary school being much greater than had been the case ten years previously, that we would have an employment crisis in the eighties. What did we do then? I was a Member of the House and a junior member of the Government for much of that time so I am not exculpating myself. In the seventies when we should have been running a budget surplus and setting aside a sinking fund to be available to meet the foreseeable unemployment crisis in the eighties, we ran substantial budget deficits culminating in the 1977 election manifesto, where we rapidly dissipated any money we would have had and ran up debts that would have to be met in the eighties. Instead of passing on resources to the generation of the eighties, to deal with the foreseeable unemployment problem, we passed on debts much greater than those that were passed on to the generation of the seventies to make it even more difficult than it would otherwise be to cope with an entirely foreseeable unemployment crisis.
When I hear Opposition Deputies expressing mock surprise and wringing their hands at the unemployment problem and at the difficulties the Government now face and at the large increases in social welfare payments, I would remind them that it was foreseeable ten years ago and that many of them did nothing about it and only condemned the Government of the day when they made any attempt to rein in Government spending so that money would be available for the eighties.
The Government have little room for manoeuvre in relation to the rate of increase in social welfare payments which has substantially exceeded the rate of increase in take-home pay. For instance, since 1980 the old age pension has increased by almost twice as much as the take-home pay of somebody at work yet that pension is being met out of the income of those at work. Many people will concentrate their criticism of social welfare on those who are unemployed. It is recognised in the budget that single people drawing unemployment assistance are least benefited by this budget. I have no idea how a single person living alone, can live on the present rate of unemployment assistance. While there are areas where we are probably spending more than we can afford on social welfare, certainly long term unemployment assistance is not one of them. Within the very modest resources available to the Government we have given a slightly larger increase to those who are long term unemployed than to other beneficiaries. That was a reasonable thing to do.
Many look at public sector pay as a major determinant of public spending and assume that the Government pay policy is responsible for much of the tax that must be raised. Since this Government took office they have kept public sector pay at a reasonable level by comparison with experience in the past and with outside employments. We have also achieved a reduction of 8 per cent in public service numbers, a greater reduction in public service numbers than was achieved in Britain by Mrs. Thatcher and a Conservative Government who have been campaigning against the public sector and in favour of reductions in public sector numbers and services since 1979, well before this Government took office. We achieved that reduction as a result of the embargo I introduced in July 1981.
As a result of the reduction in numbers and the successful restraint on pay, while public expenditure grew by 12 points as a proportion of GNP since 1980, pay only represented 0.7 points and interest on social welfare payments represented 5 points for each of the 12 points increase in public expenditure. When people talk about the increase in public expenditure they should recognise that the biggest single increase has been in interest payments and in social welfare payments. Yet most of the debate about cuts in public spending is concentrated on the little portion that has only represented, since 1980, a total share of national income of less than 2 points — subsidies non-pay services, and pay. Those who make sweeping and trite statements and applause-drawing calls for reductions in public spending should not only be asked to say what they have in mind but should recognise where the main increases have been and not concentrate all their attention on areas where relatively few real increases occurred.
I should like to refer to the introduction of a VAT rebate on the cost of coaches. To date foreign coach operators in Ireland have been gaining a competitive advantage over Irish based operators because a lower rate of VAT applied in their countries. Consequently, they were able to take business from Irish operators in Ireland. I am glad to say that the rebate scheme introduced in the budget will remove VAT. As a result of this concession to the tourist industry and the reduction of VAT on meals I had discussions last night with the Irish Tourist Industry Confederation with a view to ensuring that they would use these concessions to the full. I said two things to them. First, I told them that I wanted restaurant owners who will benefit from the VAT reduction this year, and the hoteliers, car and boat hire operators who benefited from a VAT reduction last year, to use some of that money to put together attractive package holidays for people coming here. We do not sell enough package holidays into Ireland. We expect people who come here to make their own arrangements. Unfortunately, many people when faced with the choice of going to Ireland where they would have to make arrangements themselves or going to another destination where everything is packaged for them and where they will get a reduction, will choose the easier option of going to the place where there is a package holiday available.
I hope, now that VAT is lower on meals in Ireland than it is on average in European countries, now that VAT is lower on hotel accommodation, car and boat hire than it is in many countries in Europe, that the operators who are benefiting from this will offer package holidays overseas. I hope they, or their representatives, will go overseas to sell the Irish tourist market. The notion that Bord Fáilte can do all the selling out there and that all the people in the business here have to do is to sit in their hotel or guest house and wait for tourists to come to the door is one that will not lead to maximum success in tourism.
One of the big points stressed in the White Paper on tourism — the first White Paper on that industry to be published by a Government in the history of the State — is that hoteliers, guesthouse owners and others engaged in the tourist industry should join together in marketing groups. If they cannot go overseas to meet foreign tour operators they at least should send a representative of their group to all the major tourist workshops overseas. They should start promoting Ireland themselves rather than relying, as they have done in the part, on Bord Fáilte to do that job for them.
The second point I made to the Irish Tourist Industry Confederation was that I would be monitoring with extreme care what happens to the price of meals in restaurants from 1 July. I want to see the entire 13 per cent reduction——
The Minister will be doing a lot of dining out.
I will be doing it through my agents who, luckily, as a result of an order I made, do not have to go into the restaurants to see the price charged. As a result of an order I made 18 months ago restaurants are now required to publish their menu at the door. One knows what one will have to pay before one goes in. That facility will be available to my inspectorate and there will be no need to give them a more generous eating out allowance to carry out the price survey that is necessary to ensure that restaurant owners pass on in full the entire benefit of the 13 per cent VAT concession to the consumer from 1 July, the peak of the holiday season. I have no doubt that that move will be of great benefit to the tourist industry.
The Irish Tourist Industry Confederation fully supported the points I made and undertook to give their 100 per cent co-operation. We are very lucky to have now, unlike some years ago, a confederation representing all the interests in the tourist industry to speak with one voice for the industry. The result of that single voice can be seen in the fact that in the last two budgets there were unprecedented concessions to that industry. Its case is much better understood than it was when it was represented by numerous groups.
Many have argued that the high rates of capital gains tax have been a disincentive to people to invest and that people who invest in manufacturing appreciate very much that the corporation has a 10 per cent corporate tax rate and that under the business expansions scheme they can put in up to £25,000 and not pay any tax on that in the year in question. I am sure they also appreciate very much that as a result of the budget they will get a tax concession on the income they receive in dividends from the investment in manufacturing when previously they had to pay at the full marginal tax rate. They may appreciate all those things but one of the things that motivates people to invest in a share in a manufacturing company is that when they need to they can sell it without having too much capital gain, the increase in the asset value, clawed back in the form of capital gains tax.
I am glad to say that the budget, in addition to the concessions I have mentioned, also contains a provision reducing the maximum capital gains tax rate on long term gains from 40 per cent to 35 per cent. That will make it attractive to people to invest in manufacturing industries and to realise their gains. Buying a share in an industry and leaving it in the same company for years is not the best way for one to use one's money or for industry to benefit from it. We must have a market in which people are prepared not only to buy but also to sell shares, to move money from less successful to more successful companies so that a process of selection ensures that those with the best possible prospects get the most money. That implies not creating an undue penalty on people at the time they sell a share. I accept that there is roll-over relief but we must encourage shares to be turned over from one use to another. I am glad to say that the reduction in capital gains tax will assist in that direction.
Much comment which was justified has centred on the difficulty as far as industry is concerned of attracting sufficiently talented personnel to work at senior level in Irish companies in view of the high level of income tax obtaining there. We have reduced the maximum rate of 65 per cent to 60 per cent and, in yesterday's budget, that was reduced further to 58 per cent. Obviously, that will be of help in attracting senior personnel to the country. That is of benefit to everybody whether they are engaged in a productive sector or not. There are limits to the benefits, as far as top tax rates are concerned, that one can give without creating a sense of inequity at lower levels. Many of the beneficiaries will be people in protected sections of the economy, perhaps in some of the professions, where it is hard to argue that they are making any net wealth contribution. They are, perhaps, assisting people to survive a little longer but it is hard to say that they are always contributing to the wealth generating sector of the economy. That suggests that perhaps something should be done to give a special concession or attraction to people directly involved at senior management positions at internationally acceptable salaries in wealth generating companies. Failure to do this has, it is argued, and I am sure it is true, contributed to a brain drain of some of the better managers of our companies. People who were working at a high level in an Irish subsidiary of a multinational have in some cases been attracted to work for that multinational somewhere else in the world thereby creating some loss as far as Ireland was concerned.
I am glad that the Government have decided — and this will be dealt with in the Finance Bill — to clarify the position in regard to stock options for such employees. In the recent past there has been a degree of uncertainty as to how the Revenue would interpret the law in regard to stock options and this uncertainty has let to a underutilisation of this instrument which is ideally suited to the encouragement and the provision of additional remuneration for people in key positions in industry because it is related to the performance of the company. The value of the stock option depends on whether the company are making a profit. If the company are simply paying a high salary but losing money the stock option is not worth anything. If, however, as a result of the expertise and work of the manager the company are making a lot of money, the stock option will be worth more. That means that there is a selective system for rewarding successful managers of successful companies. I am looking forward to the provision in the Finance Bill which will make such systems more attractive for use in this country and will address one of the problems we faced whereby people tended to leave this country when they reached very high positions of management in industry.
Deputy Reynolds criticised the operation of the business expansion scheme. I should like to point out that since this scheme was introduced in 1984 more than £4.5 million has been invested in industry in 30 companies qualifying under this scheme. That is a significant investment for a scheme which was entirely new and in respect of which tax practitioners were relatively unfamiliar. The scheme has been improved; and when people become more familiar with it much larger sums will be invested, thereby replacing grants and bank borrowing by equity in industry.
There has also been some doubt expressed about how the business expansion scheme would interact with the soon to be launched over-the-counter market for shares in the Stock Exchange, something which, as Deputy Reynolds acknowledged, I pressed the Stock Exchange to introduce in order to provide a suitable means of attracting share capital for smaller industries who could not afford the expense of a full quotation which would be suitable for a large company like Carrolls. Doubt had been expressed as to whether companies raising finance on the over-the counter market would be eligible to do so under the terms of the business expansion scheme. This is because the scheme stated that in order to qualify for business expansion schemes, companies must be unquoted companies — in other words, not companies fully on the Stock Exchange. People were uncertain as to whether unquoted as a qualification would exclude companies quoted on the over-the-counter market. I am pleased, therefore, to inform the House, and through it the industrial community, that the Revenue Commissioners have assured me that their interpretation of the meaning of the term "unquoted" in the legislation does not exclude companies raising finance under the Stock Exchange's new over-the-counter market. That should mean that the business expansion scheme will now take off because it will be linked to a global market, namely, the over-the-counter market, whereas previously people had to invest in individual schemes or companies without any overall body promoting the entire concept of equity investment under the scheme.
Well done.
Last October the OECD published a special study carried out, at my request, into innovation policy in Ireland today. They suggested that there should be a more selective industrial incentive, that State resources should be shifted from fixed asset investment to the acquisition of technology and marketing development. Generally speaking, they endorsed what was already in the White Paper. I have been further examining this report — I set up a small group chaired by the Secretary of my Department to examine it — who came up with a number of recommendations arising from the OECD innovation study. One of these recommendations was the introduction of a special partnership scheme for investment in research and development in companies. That was announced in the budget yesterday and is a direct result of the suggestion of the group which I established to study the innovation report prepared by the OECD.
I also expect to be able to announce certain other initiatives during the year arising from the OECD study, initiatives which can be achieved within the existing budget of my Department. One initiative on which I expect to be giving more details in the near future is a major review, independently carried out, of the way the Government assist research and development in industry at present. The Industrial Development Authority give a quite substantial amount of money each year for research and development. I should like to find out whether this and other money devoted to research and development in industry is achieving a sufficient level of autonomous self-regenerating research and product development in Irish industry; or are these grants simply being used to top up a package of financial assistance to make it acceptable to a promoter? Are research and development grants merely residual, or are they the driving force behind product development? It should be a driving force rather than a residual force. I hope that the independent study of the IDA's research and development grant scheme and other State aid to research and development which I have just announced will lead to a significant improvement in the level of research and development activity in Irish industry. I am convinced that it is through research and development in Ireland by Irish companies that we can get into a situation where we will not have to reply, as in the past, to an undue extent on foreign companies who have done their research and development elsewhere and then established plants here which have no autonomous life of their own and which, as soon as the product they produce goes off the market, are liable to close. If, on the other hand, we have Irish companies based in Ireland conducting their own research and development and developing new products all the time — and this is true of multinationals here — then we will have the basis for continuous self-regenerating growth in industry. That must and will be one of the major aims of the independent study of our research and development activity in industry to which I have just referred.
I find myself very often agreeing with sentiments expressed by the Minister, Deputy Bruton, and I agree with many of the specific suggestions and initiatives which he mentioned this morning. I wish him success with them. I often wonder why a lot more is not coming through and if he is getting the assistance and support he deserves in some of these schemes. I have no hesitation in welcoming the over-the-counter market and business expansion scheme which he has just announced. This is exactly the kind of thinking we need but there will be difficulties with it because the legislation says the investment has to be for five years. The Minister said it is important to be able to turnover investment to get a lively market, but the legislation says the investment has to be locked in for five years and, without amending the Finance Bill, the Minister will find it very hard to get over that difficulty.
The Minister mentioned a new deal in the area of research and development. I have no difficulty in welcoming that but there is a dilemma there because there are substantial grants available for technology transfer, that is basically buying in technology. We have to make up our minds: are we going to buy in the technology or R and D it at home, or is there a contradiction there?
I do not think there is. Irish companies are benefiting both ways and the technology we buy in may be the basis of further research.
The Minister mentioned stock options for successful managers. I will await the details of that scheme with some interest because obviously one of the biggest problems in getting movement in industry is how to reward senior managers. I look forward to seeing detailed proposals on that and examining this matter further.
The budget also mentioned the reduction in tax on dividends for manufacturing companies, but it did not mention how much the reduction would be. Before the Minister for Finance decides on that, it would be very important that we have the fullest details because it is only putting back something which was there before. Before the 10 per cent manufacturing tax came in, if a person got a dividend from a manufacturing company it was tax free. I grant that was unduly generous, but when the 10 per cent came in, there was full income tax on the dividend paid by the manufacturing company. What the Minister is doing here is putting things back to where they were two years ago. One of the key ways to get manufacturing industry going is to make the investors' return reasonably satisfactory. If that is done, he will give manufacturing industry a substantial boost. I wanted to make those few positive comments and suggestions on the points the Minister raised because if they can be included in the Finance Bill they will give us a bit of a lift off. I digressed in case the Minister has to leave the House but I will now deal with the budget.
I want to quote what the Taoiseach said in 1984 immediately after the publication of the national plan, Building On Reality. He said that for too long successive Governments tended to promise what they could not deliver. He went on to say that the present Government plan did not do this. He said it was a sober, realistic and thorough statement of what is possible. On the next page he said that the aims of the national plan are to halt and reverse the upward spiral of unemployment — I do not have to remind the House what happened in that area. Unemployment has increased by 60,000; to halt the rise in the burden of taxation on the community at large — I do not have to remind the House that that figure has been increased by £270 million in this budget; to bring our public finances under control so that public debt and its remuneration no longer appropriate and increasing share of our natural resources. It is clear from these comments that the Taoiseach felt successive Governments had promised too much but had not delivered. He went on to suggest that his plan would deal with unemployment, taxation and the public finances. Under each of these headings today it is clear that none of those targets has been reached and none of those promises has been fulfilled. I do not make that point with any satisfaction because this country belongs to all of us and it is sad that we have not met those targets.
This is a vulnerable budget. It is vulnerable to oil costs, interest rates and exchange rates. It is that very vulnerability which has given the Government the breathing space to give some tax reliefs. This is welcome. I warn the Government that if this budget's vulnerability has allowed them to make a little break in that area, that vulnerability can go wrong very quickly and suddenly — interest rates can change, oil costs can change and exchange rates can change. If that happens, and if we are all standing here in January 1987, I think we will be saying that this budget, and the premise on which it was founded, will be thrown out of gear completely.
The income tax take has increased by £217 million over what was intended. This budget clearly budgets for higher unemployment — a figure of £9.2 million. I take from that that the Government are saying there will be 3,000 extra people unemployed over the figure predicted. I have to remind the Government that they did this last year also. What happened was that instead of increasing by 3,000, the unemployment figure went up by 15,000. The Government came back to this House a few months ago looking for a Supplementary Estimate of £50 million for unemployment. Therefore, I sincerely question this figure of £9 million for unemployment.
We did not come back for £50 million.
The Minister came back in December 1985 for £48 million.
Of that £21 million was for the double bonus at Christmas. We came back for about £14 million.
I will go into figures another time but the figure I have is for a total of £48 million in the Supplementary Estimate. The budget spoke about an extra 3,000 to 4,000 unemployed, but the figure increased by 15,000 more than was budgeted for. Last year the Government budgeted for an average of 215,000 unemployed. The figure is getting close to 250,000; that is a long way from 215,000. Clearly provision had to be made for these higher figures and there must have been a Supplementary Estimate for a substantial figure.
This budget signified the final abandonment of the targets in the national plan. I do not have to stitch that in because it has been said many times from all sides of the House. This budget shows a total borrowing of £22 billion, which will be approximately £24 billion by the end of 1987, £26 billion by the end of 1988 and increasing at the rate of almost £2 billion a year. A sum of £800 million additional borrowing has come from abroad.
The budget also shows that current expenditure is continuing to rise to nearly £8 billion this year. Despite all the planning, analysis and commitment, which I accept is genuine, current public spending is heading inextricably towards £8 billion. It is clear that, as a nation, we have not made any progress in that area and we will have to try to do something about that. I would be extremely critical of this budget in the area of capital spending. It is proposed that capital spending this year will be £987 million. In 1982 the figure was £700 million. At this stage of our development it does not make sense to cut capital expenditure. It is bad economics and is depressing activity.
People accuse Opposition Members of being reckless when they call for additional spending but independent authorities support this proposal. For example, the 1985 annual report of the EC Commission on the Irish economy made the following comment with regard to capital spending. They recommended that the Irish budget be restructured so as to increase public investment particularly in infrastructure, in environmental control and in urban renewal. The report also said that a considerable backlog of needs have been built up in recent years that could be met with spare capacity in the building industry. That independent and respected source advocated to the Government not to cut capital expenditure but to find projects that had a payback element. Studies have shown that in the three areas mentioned by the EC the projects pay for themselves, that there is a reward for investment and that they are not a drain on the taxpayer. Many independent sources have reiterated this view. Therefore, I am not taking the easy Opposition line of advocating additional expenditure. I am taking the practical line of agreeing with the EC that we made a major policy error in cutting capital expenditure. Today's cut in capital expenditure will be tomorrow's unemployment; this year's cut in capital expenditure will be next year's dole queues. I strongly urge that the policy be reversed and that the advice of the EC be taken.
I can see why the Government acted in this way. Politically it is easier to cut capital spending because sometimes it takes generations before anyone notices what has happened. However, if one cuts current expenditure one has a mob outside the gate within hours and the telephone rings constantly with complaints. In this instance the Government took the easier course. Where is the political courage about which we have been lectured by the Minister for Finance? It is necessary that we keep a tight grip on current spending while increasing the amount of capital spending at least to the level of four years ago. I put this forward as a constructive suggestion to the Government. It is important that we make the investment now so that the Government of the day will not have to face major problems in 1988 and 1989.
A fresh approach is needed to tackle the critical economic problems facing the country. It is all the more disturbing that in the budget the Government are committed to adhering to the assumptions and targets of the economic plan which all independent commentators now agree is way off target and should be abandoned. There is a reasonably positive alternative. World economic conditions now favour a new direction in our economic policy. For example, oil prices are lower and, assuming that the Government allow Irish industry to benefit from that fall, this should be most beneficial to the economy. Lower oil prices will help to reduce inflation. Economic growth in the United States has resumed again and this should be of assistance to us. I want us to take full advantage of this favourable external environment by implementing creative and imaginative policies in the areas of employment, Government spending, debt management, industrial and energy policy, agricultural development, the promotion of service industries and taxation policy.
A major part of our economic problem is the growth in Government spending in the past ten or 15 years. That spending now exceeds 60 per cent of GNP, a degree of interventionism for which there is no mandate from the taxpayers. In turn, this has necessitated even larger increases in taxation but even they have not been sufficient to prevent recourse to borrowing which is without parallel in any other western industrial country. We owe £22 billion, more than the entire output of the economy in a full year.
Interest payments to the rest of the world are absorbing about one-third of total PAYE tax receipts. It is futile to try to tackle all these problems in a piecemeal way. It is not possible to reduce the current budget deficit without simultaneously tackling tax reform and implementing pro-employment policies. The Government tried to do this but unemployment has risen by some 60,000 and this year the deficit is larger than ever at more than 8 per cent of GNP. If the Government had merely contained unemployment at the level obtaining when they came to power they would already have achieved a target of a deficit equivalent to 5 per cent of GNP.
We need a new economic direction and we need to re-establish confidence. I have always stood for a pro-enterprise, wealth creating philosophy as the basis for implementing the social policies we must have. We need to hold back Government intervention. We cannot afford the size of Government we have built up over many years. It has led directly to a high tax level and excessive debt. It has pushed out the private sector from the productive high ground of the Irish economy, it has led to the Government monopolising the financial markets, pushing credit out of the reach of many domestic firms. Most of all, Government itself is inefficient in terms of achieving national economic and social goals. We must examine existing expenditure programmes, devolving responsibility where possible to the private sector and holding, and then reducing, the numbers employed in a smaller but in perhaps a more highly organised and motivated public sector.
The one sure way to a better balance in public finance, and consequently to a lower tax and debt ratio, is by means of high growth. We need to grow out of this crisis. It does not make any sense to try to reduce the deficit when the only effect is to push up public spending on unemployment benefits. Resources are lying idle. Our young people who are our greatest resource are emigrating in record numbers. We must use all our resources and in so doing we will help to reduce our debt. We must give priority to obtaining growth in the economy and the fruits of that growth must be used to reduce indebtedness rather than for consumption. In practice, this means increasing investment that will lay the basis for future prosperity. That is why I am so worried about this cutback in capital spending because it runs contrary to the philosophy I am outlining today.
We need specific measures to tackle our debt problem. We should emphasise to people the relationship between our excessive levels of debt and associated problems, such as high taxation. For example, I should like to see a separate fund to manage Government and semi-State external borrowing, a fund which would be charged with devising a programme to reduce external debt and in respect of which there would be a report to the Dáil every six months specifically on the progress made in regard to that debt management. Future borrowing should be limited to productive purposes and mainly to capital purposes and there should be a prohibition on increasing debt at a rate in excess of the projected growth in GNP.
It is important to point out that a number of the states in the US have made amendments to the Constitution in recent years rendering it unconstitutional for the Government of the state concerned, of whatever colour, to increase borrowing beyond a certain percentage of growth in the economy. This has been done in five or six of the states and seems to be progressing reasonably well.
I urge the Government to take note of that experiment with a view to deciding on whether it might work here also. We need a new style of industrial policy, one that will be consistent with reducing Government expenditure. We need less intervention. We need a drastic pruning of tax incentives for capital spending and tax expenditures. These would be taxes that would be foregone. Foreign industries here would much prefer it we had a better managed economy and fewer grants as opposed to an economy that is weighed down by debt. The major thrust of policy should be towards generating employment and fostering domestic entrepreneurship rather than the making available of capital grants as such. If we are to give grants they should be for people and not for machines. If we are to reward firms the reward should be for their employing more people. We need to encourage domestic industries based on developing our natural resources and using the technology developed in other countries that can afford to spend large sums on research and development. In that regard I welcome the IDA's new emphasis on technology transfer. This should be of assistance to the economy.
We need also a proper expansion of the venture capital scheme because there remain far too many firms who have been saddled with bank debt from their inception and who have no chance of survival because of that position. We need measures to encourage multinational firms to reinvest their profits here, not in Government debt but directly in Irish industry. It is worth pointing out that something of the order of £1 billion was repatriated in the past 12 months from foreign multinationals operating in Ireland. That is an enormous sum of money for the economy to lose. There must be a way of attracting these corporations to leave their money here instead of removing it to their headquarters elsewhere. But the Government scheme whereby foreign companies are urged to lend money to the Government here in return for a special deal is not the answer. I understand that, though announced about six months ago, that scheme has not been put into operation yet.
We need, too, greatly increased resources into marketing. Even a small increase in our share of world markets would result in thousands of additional jobs in this economy. We have access only to one quarter of 1 per cent of the total world market. If that were increased to even ½ of 1 per cent our economy would be transformed in a few short years. That is why we should invest much greater resources in that area. If we cannot bring down our costs we must increase our sales and we do that by putting this new emphasis that I am urging on marketing. There are plenty of new markets to be conquered. The Chinese market, for example, has not been touched yet so far as this country is concerned. That is an area of substantial opportunity.
In addition, we need new investment in the food industry. I support what the Minister for Industry, Trade, Commerce and Tourism had to say in that regard. There is no justification for continued discrimination against some types of service industries. I have in mind, for example, medical, finances, information and services of that nature. It is in this area as much as in manufacturing that lie our hopes for meeting the employment challenge. Why can we not have a similar type of tax regime for the service industry as we have for manufacturing industry? I am not saying that this should apply to every service industry but it could apply in the case of a broad range of useful service industries. I am putting that forward as a suggestion because any such change would go a long way towards paying for itself by way of increased employment.
We cannot continue to pay out £600 million or £700 million a year in unemployment benefit and assistance. Since the Government came to power almost £2 billion has been paid out under this heading. We would not have an economic crisis if we had that money working in the economy together with the PAYE revenue that would accrue from the employment that the money would generate. We cannot afford unemployment. That is why we must assist particularly service industries, those that are labour-related and labour-intensive. That is how we put people back to work and subsequently reduce our budget deficit. This, in turn, would result in lower taxation levels which would mean greater investment but we must start with the problem of unemployment. I suggest that we begin by launching an imaginative taxation regime for the service industries. I am not convinced that the long term benefit of this nation lies in manufacturing industry. Neither am I convinced that the lower cost countries will not wipe us out in the next decade or so in terms of manufacturing industry but I am convinced that what will continue will be the service industries, those industries that will service the new industries springing up throughout Europe.
It is typical of the negative thinking of recent years that discussion on farming has focused on taxation rather than on the creation of wealth within farming. Of course, the farming community must pay their fair share of taxation. That is what we all support but it must happen in an organised way. However, at the same time let us have some wealth creating, employment policies in regard to agriculture and in regard to creating jobs from our land resources. I wholeheartedly support what the Minister for Industry, Trade, Commerce and Tourism had to say in this regard. It is not good enough anymore that one of our greatest assets, our agricultural land, is used merely for the purpose of making a living for those directly involved in it. Our land is a natural resource of the nation and we must ask ourselves how we turn that resource into jobs. I say that we proceed along the lines the Minister is talking about in trying to take the food processing industry off its knees though we have not succeeded in that respect up to now. I do not understand why, with all these schemes of successive Governments down through the years, we have not had success in that area. It is an area of tremendous scope and opportunity.
Along with the other areas I have been pointing to, I include this area in my efforts to be positive in my criticism of this budget because these are the areas in which I believe there is room for movement. The Government would have the support of this side of the House for any leaps they might take in the area of services, agriculture, marketing or venture capital. I strongly advocate that the Government take those leaps and that they take note of the comments I have been making about capital spending.
I am committed to an immediate and comprehensive programme of tax reform along the lines set out by the Commission on Taxation. The present system is inequitable and inefficient and blocks the economic growth we need to break out of the vicious circle in which this economy is trapped at present. Average and marginal tax rates on both single and married people are at levels that cannot be justified on economic, let alone on social grounds. All of the parties in this House will have to work on producing properly costed policies which will finance a reduction in tyhe PAYE tax level while the transition to the Commission on Taxation reforms are under way. I do not think there are any free lunches. I do not believe in the politics of promise any more than does anybody else in the this House. I am convinced of the need for immediate tax reform as an integral element of the total package of measures I have set out here this morning and which I believe to be necessary to get the country off its knees into a wealth-creating situation.
I want to refer to the situation in regard to financial institutions which was covered substantially in the Minister's Financial Statement yesterday. We must await the Finance Bill to see quite clearly what is in mind here, but there are a number of initial comments worth making. First, the building societies now find themselves facing a tax rate of 35 per cent whereas before the budget they faced a tax rate of 29.75 per cent. Clearly that represents an increase. In addition to the bank levy, the bank will also face this new imposition, although in a slightly different way. It is quite clear also that there will be less money available for mortages in that the cash flow of the building societies will be severely disrupted. It is important to point out that this constitutes an extra tax on building societies. In the case of banks, it is not an extra tax; it is the bringing forward of tax which would be paid anyway. As it were, their compensation for that move is that they have been allowed a degree of confidentiality. But, in the case of building societies, it is a new tax and that has not been made sufficiently clear in this debate so far. This tax is increased from 29.75 per cent to 35 per cent. Therefore it constitutes a new tax on building societies, whereas in regard to the banks it is a case of as they were, except that it is bringing forward the amount that had to be paid.
I want to make another point about this, that is, that this 35 per cent taxation of interest on deposits at source is very much a double blow. If one thinks of the average person who may have some money on deposit in a bank, to date the system that obtained was that an assessment was issued. I understand that on average they paid about one year afterwards, that is, by the time the assessment had been gone through and so on. Therefore, somebody with deposit interest in 1984-85 would be paying it on assessment in 1985-86. This new decision means that they will pay it immediately, in the year in which it is credited. Therefore what will happen this year — and there should be some transitional arrangements devised for this — is that there will be two bites taken. They will pay tax on the deposit interest of last year, by assessment, which is running a year late; and now there will be this quick grab, which means that they will pay tax on the interest earned today. They will pay it this year. Therefore they will be caught for two lots of tax on approximately the same amount of deposit interest in the one year. For example, if one had earned interest of £10,000 one would be paying tax of £3,500 on that. If that was carried forward from a previous year — and the new scheme will mean that one will have to pay another £3,500 — that would mean that one's tax bill this year would be £7,000. That is unacceptable and is a kind of Robin Hood approach to taxation. There should a be a transitional arrangement devised to level out its effect on such people.
It has been said before, but should be repeated, that the elimination of the small saver's allowance is quite a critical blow at this time. There are people who for years and years have been saving with banks, placing small amounts of money on deposit, week in week out. In the case of a single person the first £50 interest earned or, in the case of a married couple, the first £100 earned was tax free. As such, one could save without having to worry about any tax on interest earned above £100, in the case of a married couple. As a result of these budgetary provisions that is gone completely. There is no longer that benefit in the banking system for small savers who formerly reaped that benefit. Indeed, that benefit has obtained for, I believe, 20 years or more. Suddenly yesterday it has gone, which must come as a disappointment to small savers. It is a very marginal change. It would not have cost very much to have left it there. The trauma it will cost many small savers today is not worth the money the Government will get out of it. It would have been a nice gesture to have left it there as an exemption limit for people with small savings, earning interest of less than £100, which is very small indeed. I am sorry the Government saw fit to attack a very small measure like that, which in any case was not a big revenue earner for them.
Still on the financial institutions, it is important to question the Minister or the Government in regard to the non-resident account business. The Minister in his Financial Statement yesterday claimed that there was no danger of an outflow of funds, that non-resident accounts are still protected in the sense that, while we want to get our hands on our own hot money, we do not necessarily want to get our hands on the hot money of other countries that might be lying in our financial system. Quite patently, under this and other Governments for many years we have quite deliberately not tackled that because it is not our problem as such. In fact, it is of major benefit to us if such money is on deposit in the nation here and can be left undisturbed for some time. In the course of his Financial Statement the Minister said:
However, in the case of banks, notices of non-residence exempting interest on existing accounts from inclusion in returns by the banks for tax purposes will, for a period of one year, satisfy the requirement for a new declaration.
In other words, there is no need for a new declaration for one year. I have to ask as strongly as I can: what will happen after one year? The clear implication in those remarks of the Minister is that after one year there will be a requirement for a new declaration. Therefore, there will have to be a new declaration after one year in regard to non-resident accounts.
I thought it was a little bit silly to include in a Financial Statement the fact that a year from now one might be looking for a declaration in regard to non-resident accounts. Why give people a year's notice if one is going to tackle that kind of money? It does not make any sense to include it in a Financial Statement, letting the whole world know that they have one year in which to get their money out, that they have one year in which to make arrangements in, say, the Isle of Man, Jersey or somewhere else. As far as I can see, that is clearly what those remarks do. The Minister is telling them: "We will take the banks' word for it this year, but next year we will be seeking a new declaration." That is very short-sighted and clearly will lead to an outflow of funds from the country within a very short time. Almost as if in an effort to pull back from that, the Minister went on to say:
The requirements will operate only in respect of deposit accounts, the balances on which at 29 January 1986 are reduced by more than 25 per cent at any time between that date and 5 April, 1987.
In other words, if one dips into one's non-resident accounts tomorrow and takes out 24 per cent of the funds, there will be no difficulty, that does not have to be reported to the Revenue Commissioners. If one dips into one's non-resident accounts tomorrow and takes out 26 per cent of one's deposits, then the Revenue Commissioners have to be told. I pose the question: in heaven's name, what would one do? Would one dip in and take out the 24 per cent at present, spending the next 12 months endeavouring to find a home for the remainder of the non-resident funds lying on deposit in Irish banks? In case anybody is under any illusion that that represents very marginal money, I should say that various figures have been produced but the general impression is that it is of the order of £500 million, approximately half a billion pounds of money, belonging to non-residents in Irish financial institutions. What did the Minister do yesterday? He told them they are all right for 12 months, but in 12 month's time he will want a declaration. Quite simply, that is the Minister saying: "You have 12 months to get your £500 million out of the country." That is a crazy, shortsighted economic policy. If one takes that side by side with the billion pounds of repatriated profits from this country — with no counter attraction to maintain them here — the raid on the financial institutions in this way will frighten away wealth and money. It is an extremely mobile international commodity which floats around and finds the most attractive home. The Minister is saying that there is no home here for it. He is implying that he would prefer such people to contact the Isle of Man, the United States or Bermuda and make other arrangements for their money because we are clean and pure and do not want their money in our banks. If that is the kind of message we are sending out, the multinationals will soon pick it up. If that kind of stink gets around the financial communities of the world, on top of the way we handled Irish Shipping, we will find it extremely hard to attract wealth to this nation. Why not send out the signals that it is welcome, that we will protect its confidentiality, that it is not money belonging to Irish people and that there is a system here which favours foreign investment? I am not talking about anything illegal but funds belonging to non-residents in Irish banks which I would assume are legally held funds. It may be money which is available internationally so why should not Ireland have it? Instead the Minister tells these people that they are not particularly wanted. The way in which financial institutions have been handled in this budget is a major mistake.
The additional 6 per cent tax on building societies has to put the mortgage rate up. One cannot put a 6 per cent tax on them today without an increase in mortgage rates following almost automatically. I predict that within two weeks there will be an increase in the mortgage rate as a result of the 6 per cent imposition. As if the building industry did not have enough difficulty with the VAT last year, it now has to cope with funds being more difficult to obtain for the building of houses. I cannot see any logic in that part of the budget.
It has been said that at the end of the day the depositor will pay, not the banking system. If depositors are getting a smaller return for their money invested they will put that money elsewhere. I will not speculate about what they will do with it but there is no limit to the ingenuity of Irish people when it comes to money. I feel reasonably certain that if deposits and small savings are attacked and investment is made less attractive, they will find some other way to realise their investment. Ours if a small open economy and people will be extremely imaginative. Unfortunately the Irish nation will lose because the Government will not think in an imaginative and creative way about hanging on to such funds.
Let us try to make everybody pay their fair share of taxation but let us stop scaring away investment, wealth and savings which are the life blood of this country. If was put to me yesterday that having attacked the PAYE people for so long and the fruits of investment, the Government are now attacking investment itself. I am worried about this crude attack on investment, especially when capital spending has been cut drastically against the advice of the EC. I see a picture of money taking flight and investment slowing down. That will build up a legacy in 1987, 1988 and afterwards for whoever is in Government.
I made a telephone call before I came into the House and discovered that there has been a 1.5 per cent drop in yield on guaranteed income bonds on the Stock Exchange, one of the biggest drops ever. It is due of course to the 15 per cent levy on the insurance companies. These are income bonds which are used by people who want some secure income for their savings. When people get a lower yield they stop investing and find something else. I heard the Minister for Industry, Trade, Commerce and Tourism saying that the something else would be Irish industry but I wonder about that. I fear that this type of investment will be lost to industry.
Do we really know what that 15 per cent is? It is a 15 per cent tax on the investment income of insurance companies. What is the investment income of insurance companies? It is not some mythical fund which can be raided and taken into the Exchequer. Those funds have been invested in Government funds — the Government are attacking their lending base — and property, but most people who have invested in property in recent years have lost very heavily because of its devaluation. About 30 per cent of the funds of insurance companies are in equities, shares in Irish companies on the Stock Exchange. The Government are making it more difficult to get a return on investment in industry generally. The Government want 15 per cent, so we are into a spiral: a smaller return of investment will lead to less investment, fewer jobs and more unemployment. It may have seemed a painless way of bringing in £38 million but it will be very painful indeed. In this budget we are going into the very heart of the financial institutions and demanding a bigger share. That means the investor gets a smaller share and will invest less rather than more.
We will not feel the results of these policies this year or between now and the election but we will feel them in 1988, 1989 and 1990 and we will be very sorry that we made this crude attack on the financial institutions and did not increase capital spending in the areas I have suggested. The EC have also put forward the view I share on capital spending.
Prior to the budget income tax was estimated to bring in £2,260 million. As a result of changes yesterday, that will rise to £2,477 million. That is an increase of £217 million or almost 10 per cent in taxation. It is clear that yesterday's budget took more out of the tax system into the Exchequer, and the sums are there.
Secondly, the share of income tax in relation to total tax has been increasing from 36 per cent in 1982 to 40 per cent yesterday. This shows that the burden of income tax has risen and continues to rise. We have a lopsided system with an excessive burden on the income tax section of the community. Let me be more specific. Exchequer returns show that out of every £100 spent in income tax in 1985 the PAYE pays £87. This compares with £85 in 1984 and proves once again, as if it needed to be proved, that the PAYE sector is supporting the tax system and that the budget in this regard is only making that matter somewhat worse.
The abolition of the 1 per cent levy is welcome. I welcomed that yesterday and have no hesitation in welcoming it again today and in complimenting the Government on taking that step. However, in the current year it will still bring in some £36 million and even with its abolition the burden of income tax on income tax payers and, more specifically, the PAYE sector will increase.
Therefore, the higher income tax burden, the rise in the petrol price, higher VAT and the abolition of the £100 child allowance must all be borne in mind when considering this budget and particularly when considering the benefit of the income tax concession given out by the Minister in the budget yesterday. An average person on, say, £10,000 with three kids would be better off, according to the Minister's figure, to the tune of £2 a week. I have shown that the petrol VAT and the abolition of the child allowance alone would more than gobble up that £2 pretty quickly. There is no great net benefit to the average householder in that. I am much more concerned, as I think the average householder will be, about the bigger question that I have been talking about: the cut of investment in capital spending and the attack on the investment sources in Ireland. Nevertheless, that £2 shows what a tinkering little system we are getting into.
On that point it is worth nothing that the State budget is now £9 billion aproximately. Yesterday we played around with about £250 million of it, so we played around with 2.5 per cent of the total spending of the country. Yesterday's budget was all about 2.5 per cent of the lot. The other 97.5 per cent trundles on, left untouched with no great changes in it. The budget is a very marginal thing on the fringe of economic planning and development.
The VAT is proposing to yield £76 million, a net £60 million. While I welcome the concessions to the tourist industry and the motor industry which have been advocated for many years, VAT as a percentage of GNP is up to over 9 per cent from 8 per cent a couple of years ago. Looking at that it is quite clear that the burden of VAT is increasing substantially as a percentage of the total wealth of the country. I suggested to the Minister last night that the new tax of 10 per cent on takeaway foods will be difficult if not impossible to enforce. I predict that there will be a net loss on that scheme. I did this a couple of years ago with the Minister in regard to residential property tax. I suggested to him that we would get £3 million from it. He argued that it would be £10 million and we ended up with £2 million. This is spending where the bother and the trouble in taxing the bag of chips is just not going to be worth it. So much will be spent on form filling and policing the system that we would be as well off to let the youngsters have their bag of chips without chasing them for 10 per cent of it. Again, that is a niggardly approach to economic planning. Leave them their couple of chips and let the civil servants and the tax commissioners and so on go and chase something more valuable. Let them deal with capital spending, investment in banks and so on.
In the VAT area particularly the major disappointment must be that the building industry did not see a reversal of last year's doubling of VAT. Do the Government know that housing starts are running at 16 per cent below previous years and 20 per cent below the previous year's in Dublin? Do they know that the decline in output in the building industry is now in its fourth year running, that employment in that industry is down 12,000 in three years, and is running at approximately 40 per cent now compared to a national unemployment rate of 17 per cent? Will they reduce VAT on the building industry in an attempt to lift the economy in some way before it gets into any more difficulty? Add that to the fact that the building societies have been raided for 6 per cent. Who in their right mind would attempt to go near the construction industry, our second biggest industry? It leaves no room for that industry to manouevre.
There is no longer the major instrument for economic policy, particularly when national economic plans and so on are falling apart and the 2.5 per cent I have talked about is extremely marginal. We should have a two or three year budget, preferably a major budget every second year with some longer term figures in it. The budget tinkers with 2.5 per cent of the total finances of the State and virtually ignores the rest of it. I appreciate the difficulty any Government have when we have £9 billion spending clocked up. Half of that goes in the three Departments of Health, Education and Social Welfare, another £2 billion goes on interest and the public sector pay bill is about £2.5 billion. You can see how little room most Governments have to manoeuvre. Having said that, let me say that the way out of our difficulties is not so much to manoeuvre within the 2.5 per cent but to break out of it, to think bigger and more broadly, stop the attack on investment and lift the country in a real way rather than fiddle around with the edges of it.
Let us adopt a fresh economic philosophy. Why not have a new venture capital scheme? Why not increase capital spending which will pay for itself in the way I have shown? Why not increase the exploration programme for oil around our shores? Why not bring in a similar tax on services to that for manufacturing? Instead of the banks levy, why not instruct our banks to give small interest loans to companies who cannot afford to pay the enormous interest rates we have today? Why not take on the Chinese market and other such markets in the exporting field in a real national sense? Why not create a business environment in agriculture so that we get jobs off the land instead of just chasing them for tax? Why not get the European Community to agree to positive discrimination towards Irish goods? Overall, why not give this country a chance to invest by stopping the attack which has been going on on the source of investment wealth in order to create jobs? Why do the Government not concentrate on creating those conditions and adopting the kind of suggestions I have been putting forward instead of fiddling around at the edges with some 2.5 per cent of our total problems? The direction I have put forward this morning is a reasonable, fresh economic philosophy and I encourage the Government to take it. If they do, they will have my support.
It is now over three years and four budgets since the Labour Party joined in Government. In 1982 the alternative which faced us was five years of a reckless and divided Fianna Fáil Government under Deputy Haughey. The prospect was for serious political instability, more Gregory-type deals, more budget borrowings, more tensions in Anglo-Irish relations and greater strife in Northern Ireland — that was one thing which appalled the Labour Party then and still does. We took the decision to join in Coalition in Government to avoid the then feared economic collapse of our country and the imposition of even greater hardship for all our people and that situation has not changed, by and large, in terms of our then decision.
Since December 1982 the Labour Party in Government have succeeded in maintaining a relatively high level of public expenditure on essential social services such as health and housing. We have more than protected social welfare beneficiaries and, in particular the long term unemployed against inflation and I shall come to that later.
For that record I do not offer any Deputy in this House any apology. To implement that record and to avoid excessive foreign borrowing we have maintained our relatively high level of taxation, defective as that system still is in many areas. We are not a party of soft options.
I have listened to Deputy Séamus Brennan for the past hour. He is quite magnificent on the upmarket clichés of economic thought and that is disastrous. I very much regret having to say that because he is a Deputy in the constituency in which I live.
The Minister can vote against me next time.
He is totally devoid of specific options. Simultaneously he wishes one had to see the State remove itself from expenditure and on the other to see the State embark on massive public expenditure on the capital side.
I propose increasing capital expenditure. That is my proposal.
Everybody goes for the capital side, the soft option.
The EC agree.
I hope that my party will not drift in that direction. We have not drifted and we have no apology to offer for this approach. Neither have we any apology to make to any of the economic commentators for the fact that the current budget deficit for this coming year is fixed at 7.4 per cent of GNP.
That is a U-turn.
We as a political party sought that and have no apology to make for it. That is a policy decision which was taken by the Government in 1983, to have a relatively high current budget deficit, not to deflate the economy as much as some economic commentators would have wished. Because of the changing circumstances of our economy and the recession lasting far longer than we thought it would, we agreed that the deficit would be phased out over a longer period. It is the function of any Government to balance out the conflicting needs of the return to financial stability and security through reducing our external indebtedness and balance of payments deficit as against the needs of a population with high unemployment and with high requirements for public expenditure on health, education and social needs. Even the very limited steps taken so far to reduce our current expenditure towards a better balance with Exchequer income have been greeted, as we know, with massive hostility by many interests, be they in education, health or in professions. We know how difficult that exercise is. With respect to the Fianna Fáil Party and even greater respect to the new right of the Fianna Fáil Party, the Progressive Democrats, when they talk about reducing public expenditure they run like scalded cats from being specific as to where the expenditure should be reduced.
Hear, hear.
When I attempt, even in minor ways, to control and eliminate waste, I am assailed from the Opposition benches as being one who is dismantling a system, when nothing is further from the truth. That is the hypocrisy of much political thought in this country.
We have the new undiluted objectives of the right wing society typified by The Way Forward. The Fianna Fáil intention when last in office was to reduce the current budget deficit to zero. 1986 was zero current budget deficit year. Could you imagine taking another £1,300 million out of the economy which would have meant that today, if we followed The Way Forward——
The present Government are going to have it by 1987.
——we would have an unemployment level of 310,000 people at least, in my estimation, not 240,000. That was the Fianna Fáil proposal. If we had decided to go along with that proposal in 1982, the level of deprivation in our society and the total neglect of both capital and current expenditure, particularly in the education and health sectors, would have been quite unbelievable.
When all the mood of public euphoria and simplistic political concepts, particularly about the new political party, the Progressive Democrats, evaporates, people will face the reality and the real policies behind that party, such as selling out our oil resources to a number of companies. Every speech made by Deputy O'Malley advocates getting oil ashore and forgetting about the question of any take for the State in this. The Government and the Minister for Energy and I know, that we could do that tomorrow morning provided that we sold out the rights of the Irish people in relation to oil exploration and our national resources.
Deputy O'Malley knows what he is doing. He has that group of business people in his pocket for their political and other support and he will milk them dry between now and the next election. He says it is £300 million a year to the Irish people but, of course, it is also £30 million a year for half a dozen people in terms of the rake-off that they will have from it. We know that and so do the Fianna Fáil Party, but they never had the courage to stand up to that. We know what it entails in terms of destroying our national resources by milking them dry prematurely at a give-away price to Irish and multinational oil interests. We will not stoop to that, having regard to the economic situation facing the country.
I challenge Deputy Séamus Brennan, the supreme word-smith of waffle in this House, and his party to specify the more stringent cuts in public expenditure which they feel should now be considered and what the reality of this would mean. For those depending on social welfare payments, I pose the question, should their present relatively low level of income be reduced further, should hospital outpatient and clinic waiting lists, with resultant delays, be permitted to become longer than at present? Is that their policy? Should the old school buildings be used for even longer despite all their inadequacies? Should incentives to employment and production be further diminished? They are the questions that must be answered. There are no soft options when you get down to public expenditure. As Minister responsible for 40 per cent of gross public expenditure, I know down to the last £100,000 what those options are, how they are fashioned and proposed and how they have to be dealt with.
Equally, many of the Fianna Fáil Párty former Ministers — and, indeed, Deputy O'Malley — know perfectly well what these options are in terms of approach. I submit that one of the great achievements of my party in Government is that social welfare payments have kept pace with inflation, and well above inflation, despite the crippling burden of additional unemployment numbers and that the unavoidable reduction in other public expenditure has been kept within reasonable bounds, with every single cut discussed and debated at great length in Government, as are improvements in efficiency and effectiveness of expenditure. We have striven for that all along.
Here I come to the reality of any budget discussion. Because the country has become a sectionalised society, a fractured one, dog eats dog and nobody cares about anybody else. If one is concerned with education, with health, with the public service, one wants one's pound of flesh. The farmer wants his pound of flesh. The manufacturer and the industrialist wants his pound of flesh. Nobody is prepared to yield: all want their thing now because with recession our society has become mean, selfish, intolerant and vicious.
Deputy O'Malley has been going around the country saying he will reduce public expenditure, that there will be no embargo in the public service. He is speaking about the Commission on Taxation favourably, but not about the VHI or mortgages or loan interests. Here we have a system of proportional representation whereby if one is all things to all men on all issues one is capable of scraping a quota. None of us knows the clear truth, which is that the public debt must be paid for ultimately by the taxpayer or it will be left for our children to repay out of their wages.
Our national plan was never intended to be something with pinpoint accuracy. Of course Deputy Haughey has said he does not believe in planning at all, that things happen anyway, that employment will be created. When we formulated the national plan, or its framework, we did not expect it to be accurate down to the last digit. Any economist would accept this. Our position is subject to fluctuating interest rates in the world and a volatile balance of trade. Industries come and go because of the explosive nature of technology. Therefore, it would be arrogant and foolish to think that in such a small open economy it is possible to give a totally accurate prediction for several years ahead.
However, in so far as we planned, our targets have been well within the framework set down. We had an overrun last year of £50 million on the current budget deficit, a very modest figure when you consider that £21 million was spent on a Christmas bonus for social welfare recipients. That money was not included in the 1985 budget.
I will deal with social welfare first, and the improved payments in 1986. We are providing a general increase of 4 per cent in social welfare benefits with an additional 1 per cent for the long term unemployed. Some Deputies have disparaged that provision. The latest post-budget estimate of the Department of Finance for mid-July 1986 to mid-July 1987 is an inflation rate of 3 per cent. If Deputies over there do not want to accept this I will introduce them to the economists in the Department of Finance and the senior officer to discuss the matter.
Our fix on inflation for 1985 was too high. We gave increases in social welfare benefits of 6½ per cent though the inflation rate worked out at only 5 per cent. In 1986 the average inflation rate for the whole year is estimated now at between 4 per cent and 4½ per cent.
When inflation goes down nobody is particularly pleased, but when it goes up all hell breaks loose. The low rate of inflation here is one of the great economic benefits this Government have managed to fashion in the past four years. I remember that social welfare increases of 25 per cent were given when inflation was running at 27 per cent, and the increases were not worth a damn to anyone. Therefore, this year, when one takes account of CPI figures, the position of social welfare recipients will continue to be well maintained. Though social welfare rates are too low, and I do not in any way suggest that they are sufficient for anybody to live on, I am the only Minister for Social Welfare in Europe in the past three years who managed to take from our national resources sufficient money to give social welfare recipients increases above inflation.
They do not think so.
I have met them all during the past three years and they have marvelled at what we have been able to do. I have always insisted on high taxation, high social welfare expenditure and sensible reductions in public expenditure when I see waste. My philosophy is that those who can afford to pay should pay, just as the financial institutions, under this budget, will pay what they should pay. Deputy Séamus Brennan comes in to cry crocodile tears all over them because at long last they are asked to make a contribution towards the running of the country. We must avoid tax evasion which was rampant in those institutions in recent years. For that we have no apology to make.
The total cost of the social welfare increases provided in the budget will amount to £69.6 million in 1986 and £122 million in a full year. These are no small sums of money and, whether we like it or not, the amount which we can provide is constrained by the overall difficulties on the public expenditure front. Anyone who is serious about tackling the enormous problems which face this country in the area of public finances must recognise that providing additional resources for any area of public expenditure, whether it is public service pay, social welfare services, the health services, or whatever, presents considerable difficulties both for the Minister for Finance, the Minister for Social Welfare and other Minister concerned, no matter what Government are in power.
If we take mid-1983 to mid-1987, present projections are that there will have been real increases of about 5.25 per cent in short term social welfare payments, a 7½ per cent real increase in persions and more than 13 per cent in payments to the long term unemployed. That is a major achievement by any standard. That is well in line with the commitment in the national plan.
In regard to disability benefits, we must be conscious of the need to ensure that social welfare benefits will reach those who really need them, and no part of the scheme can be allowed to be abused by any section. In recent years much attention has been focused on disability benefit schemes. Expenditure on this scheme, including pay-related benefit payable with disability benefit amounted to some £202 million in 1984 and £230 million in 1985, and in 1986, expenditure for disability benefit alone will amount to around £237 million. This represents a sizeable chunk of overall social welfare expenditure. There are around 77,000 payments each week and around 250,000 separate claims each year. It is a major problem facing the Government.
Obviously in such a scheme there is a clear obligation to ensure that only persons who are suffering or who would suffer a loss or interruption of earnings because they are genuinely incapable of work actually benefit from the scheme. There have been numerous complaints in recent years to the effect that the scheme is being abused and that there is an incentive for workers to go sick, particularly at certain times of the year, in order to avail of social welfare benefits and tax rebates. Much of the evidence which has been presented in support of this type of argument has been anecdotal and it is an area where hard information is difficult to come by.
The Government however have been concerned about the possible effects of the scheme on the levels of absenteeism and has been reviewing a number of options for reducing problems to which the scheme in its present form may give rise. One obvious area is in the overlap which occurs where employees are covered by sick pay arrangements in their job and complicated arrangements must be made by employers to ensure that such employees, when they fall ill, are not paid on the double.
One option to deal with this problem would be to transfer to employers part of the responsibility for payment of disability benefit to employees in respect of short term illnesses. Many European countries already have arrangements of this kind whereby employers support their workers fully for the initial period of illness and the State scheme only then steps in. Prior to taking any further action in this matter, however, the Government have consulted with the National Economic and Social Council and I am awaiting with interest the council's views.
The Government have also been looking at other aspects of the disability benefit scheme with a view to taking whatever measures are necessary to ensure that the scheme meets its essential objectives. A number of measures are already being taken to tighten up on the control of the scheme. The appointment of five additional medical referees and clerical support staff in the Department have been approved by the Government in the context of the 1986 Estimates. In addition legislation will be introduced to discontinue payment of disability benefit in respect of periods of holidays paid for while in employment. There has been an abuse whereby people go on holidays and simultaneously claim disability benefit. I cannot stand over that any longer. I must end it and I propose to end it in the Social Welfare Bill coming up. Nobody could object to this measure.
A further measure which the Government have approved is an increase in the penalty where a person fails to turn up for an appointment with the Department's medical referee. At present where this happens a person is disqualified for receiving disability benefit for six weeks. This period will be increased to nine weeks.
The Minister might get the referees to turn up as well. They do not turn up and they keep people waiting all day.
We now have 25 medical referees, a substantial increase in the number, and I suggest that the measures brought in are reasonable. We cannot have a situation where a person is asked to go before a medical referee, he does not turn up, he looses benefit for six weeks and can then claim again.
That is fair enough but would the Minister accept that when people turn up they are kept waiting for four or five hours?
I accept that and I together with the secretary of the Department of Social Welfare have taken measures to ensure the more expeditious working of the medical referee system. There is also a problem in that two out of every ten people who are asked to come before the medical referee do not come and do not notify anybody, so time scales can get into a terrible tangle and most people resume work rather than go back to the referee.
The measures proposed are reasonable ones and I will be prepared to consider any further reasonable proposals for amendments to the scheme to ensure that it is seen to be operating in a fair and reasonable way as far as insured people and the general contributing and taxpaying public are concerned.
There is one other aspect of the scheme, however, to which I would like to draw attention and that is the area of medical certification. I have referred to this on numerous occasions before but it is worth repeating, that nobody can qualify for disability benefit unless he or she is certified by a doctor to be incapable of work. This is the first point of control as far as the scheme is concerned. I would renew my appeal to the medical profession to ensure that in all cases they are fully satisfied as to the genuineness of an incapacity before they issue a medical certificate.
What about the bonesetters?
We will be dealing with that also and I certainly intend to be up front with the IMO in this matter. I will no longer stand for receptionists signing people's names on to a certificate so that fellows can simply casually drop in and pick them up and hand them in to the Department and get £80 or £90 a week for them. It is not correct. It is not what the scheme was designed for. I appreciate that there are grey areas in individual cases. I do not want to impose hardship on anyone under the disability benefit scheme but the scheme is now costing £230 million a year and we must contain the enormous impact of the scheme on our social welfare payments. To provide a scheme of this nature is why people are paying high rates of PRSI and income tax.
Unemployment expenditure is the biggest element of social welfare expenditure now accounting for some 29 per cent of the total budget of the Department of Social Welfare. In 1985 it amounted to £630 million and in 1986 we are providing £697 million in this area. This year the Government are giving an increase of 5 per cent to the long term unemployed. As Deputies know there are substantial numbers of such persons on the live register, 110,000 people, including small-holders. In keeping with our concern for this group of unemployed people additional help is being provided over and above the standard increases. Last Christmas, for the first time ever the long term unemployed were included on the Christmas bonus provision and once again in the budget, provision has been made for the additional 1 per cent. This is of considerable benefit and has generally won the approval of Members of the House.
You took 25 per cent from the old people.
We are spending more money all the time. As in the case of disability benefit, however, there is an attitude in certain quarters that a large proportion of people are receiving unemployment benefit or assistance who are not genuinely qualified. Again, much of the evidence is hearsay and uncorroborated. There is no doubt, of course, that there are people who are intent on misusing the system and who see the unemployment payment schemes as a ready source of additional personal income. The Government are determined to ensure that adequate measures are taken to combat abuse of the system and in this connection the role of the special investigation unit of the Department of Social Welfare is being strengthened. The success of the unit to date has been very evident in a number of well-publicised cases where the unit was responsible for uncovering major frauds. It takes two to commit a fraud. There must be an employer and an employee and we must always bear that in mind in that area. The unit will continue its policy of selecting and investigating particular areas where there is a suspicion that fraud may be occurring. The Government have approved the appointment of five additional officers to the special investigation unit and this will enable the unit to step up its surveillance activities.
On the general question of abuse of the social welfare system I should like to underline the offer of an amnesty which was made by the Minister for Finance in his budget speech. This will apply to persons who in the next six months come forward and make a clean breast of existing or earlier irregularities in relation to the social welfare system, whether it is an employer who has not paid his PRSI or a worker who has over-claimed. The amnesty will take the form of a freedom from prosecution and therefore from the penalties provided for defrauding the social welfare system. There will of course be no waiver on the obligation of those persons to repay in full all sums irregularly received by them. I would hope that this amnesty proposal will encourage people who may be defrauding the system to come clean and put themselves in the right.
I should like now to turn to another aspect of the budget proposals which, apart from its own merits, is an important element of the Government's policy of encouraging employment by tackling the possible disincentives associated with taking up employment as against being on the social welfare system. I refer to the child benefit scheme announced by the Minister for Finance in his budget speech.
The purpose of the schemes will be provide as much direct cash support to mothers as possible through one single payment, with the greatest benefit to families on the lowest incomes. It will not, however, be possible for administrative and technical reasons to introduce, as originally intended, a fully taxable scheme in 1986. As a first step, therefore, the Government have decided to introduce a non-taxable scheme of child benefit with effect from April 1986.
Under this scheme a child benefit of £15.05 per month will be paid for each of the first five children. This rate will be increased to £21.75 per month for each subsequent child. These payments will not be taxable. This represents an increase of £3 per month per child over the existing rates of payment under the children's allowance scheme, which will be replaced by the new scheme.
The new scheme replaces the existing children's allowance scheme and also involves the abolition of the child tax allowance of £100 per child under the income tax code. Furthermore child dependant increases for social welfare recipients will remain at their present levels. The new scheme, therefore, involves a redirection of child support. I do not mind confessing that in my case I lose £200 in child tax allowances. I am on the 60 per cent marginal rate with the result that I will lose £120 tax benefit. My wife will get an extra £3 per month or £72 per year for our two children who qualify.
If the child is over 18 what happens?
There is no change in the scheme in that regard.
The Minister will lose the tax free allowance.
There will be an overall loss in that case.
Overall I will lose £120 in tax allowances at the marginal rate.
If the children are over 18 the Minister will not get anything in return.
I get a tax allowance of £200 for the two children currently and at my 60 per cent tax rate that £200 is worth £120 to me. For a person on the 35 per cent tax rate it is worth only £70. I will lose that concession and instead my wife will get the enhanced child benefit rate of £15.05 for the two children within the framework of the scheme, or an increase of £72 per year. I will suffer a net loss and the money saved from B. Desmond, a higher income earner, will be passed down the line to social welfare recipients who will get an increase of £3 across the board. The people with no tax liability and on the low tax bands will gain from the increment saved. It could not be simpler.
Those with children over 18 at third level education and who are in the lower middle income group will not gain anything. In fact, they will lose a tax free allowance. That move is anti-family.
They will get the children's allowance.
Over 18 years of age the children's allowance does not apply.
The Deputy is aware that the child benefit scheme being brought in is eminently fair and reasonable. I have never defended a system under which a person like me earning £38,000 per year should get children's allowance.
The Minister does not have to put a gallon of petrol into his car and pay the increase of 10p per gallon.
Deputies are aware that families paying tax at the higher rate will suffer some net loss arising out of the abolition of the child tax allowance and that the intention of the scheme is to bring about a redistribution of resources in the direction of families most in need. Three-quarters of all families in the State will be at least as well off under the new scheme as under the existing scheme and many thousands of families, including families depending on social welfare payments, will in fact be better off.
Under the family income supplement scheme the new rate is being increased to 33? per cent compared to an existing rate of 25 per cent. We are spending £1 million extra in that area. It is money well spent on those who have a very low income. It will substantially improve the FIS scheme.
In the near future I expect to receive the report of the Commission on Social Welfare and following that I intend to bring proposals before the House. With regard to the self-employed I should like to point out that at the moment employees, via PRSI contributions, are contributing to the cost of their own contributory old age and retirement pensions. They are also contributing, through general taxation, the lion's share of non-contributory pensions, which are mainly of benefit to the self-employed. We will have to deal with that and it is why I established the national pensions board. I will be announcing the membership of the board in the next week or so and I look forward to the board advising me on how to deal with that matter.
With regard to the health services I should like to point out that the non-capital budget provision for 1986 is £1,095 million which represents an increase of £37 million on the 1985 provisions. Yesterday the Minister gave the gross figure, £1,200 million. By any standards that represents a very substantial outlay on the maintenance and development of our health services. Many of the comments on the budget imply that major cutbacks in health expenditure are taking place. That is not the case as the figures I have just given amply demonstrate. Naturally, as the Minister responsible for two major spending Departments, I would like to be able to announce that we could find the necessary finances to meet all demands I get daily in the House. However, we do live in the real world and the extent to which services can be provided must be consistent with the willingness of the community to provide the necessary resources. In the health services we have been making an effort to change the general framework of strategy.
Debate adjourned.