I regret that Deputy O'Kennedy has left the Chamber because he never fails to amuse me. The debate relates to a budget that was introduced almost six weeks ago but nonetheless I am glad of the opportunity to make a contribution on it. In doing so I want to reflect on the achievements of the Government since they took office in 1982. We are all aware that at that time we had a rampant upward spiral of inflation well in excess of 20 per cent. In fact, in May 1982 it was between 23 per cent and 24 per cent and had been growing at an average rate of 5 per cent per annum. Unemployment was growing at a rate of 40,000 per annum. We inherited a taxation system that was the most punitive in the European Community. By far the greater share of that taxation was being borne by the PAYE sector, a group that was growing smaller annually. The value-added tax system was acting as a disincentive to industrialists who were slow to explore markets. The tax system was a disincentive to workers. That may not have changed dramatically but there has been an improvement.
The Government were faced with the daunting task of carrying out an onslaught on public expenditure which had reached the highest rate in the history of the State, reducing direct and indirect taxation and halting the upward spiral of unemployment. That seemed almost beyond the ability of any Government to redress. I should like to remind Deputy O'Kennedy, and his party, that we are still suffering gravely from the consequences of the extravagant borrowing policies pursued by the Fianna Fáil Government paricularly from 1977 to 1981. I always try to be positive in my condemnation of the policies of any Government and, if I felt it necessary to criticise this side of the House, I would not refrain from doing so. As I understand it, because of the position in which we found ourselves in 1982, it is becoming more difficult to redress the problem. Unless there is a miracle in the next ten years the position will get worse instead of better.
In 1981 Fine Gael, in their Programme for Government, preached a policy of endeavouring to tackle the high borrowing requirement, the cutting of inflation and the reducing of taxation. It is exceedingly difficult to achieve such major objectives but the Government have performed remarkably well in their efforts in that regard. In 1982 the public had to be convinced of the difficult times that lay ahead. That was achieved because, against the background of a very severe budget in February 1982, the people were prepared to support the Coalition in spite of the propaganda spread by the Opposition during that election campaign. Having convinced the public to accept something, it is then the responsibility and obligation of politicians to ensure that policies are carried through.
Public sector expenditure and indebtedness are still suffocating the private sector with a tax system that is destroying the incentive to work here. Progress has been made to change that ever so slightly and the budget is a further step in that direction. In spite of what the Opposition might like to see happening, it should be pointed out to them that they did precious little in that area when they were in Government. The public sector borrowing requirement, the main barometer of how an economy is moving, in 1981 represented 20.3 per cent of GNP. In spite of the many difficulties which the economy experienced in the past three years it has been reduced in the current year to 14.2 per cent. Irrespective of what economists may say, that represents an achievement. The target for public sector borrowing requirement should have been three points less if the Government were able to stick to their projections in Building on Reality. That plan represented the first real attempt to programme in a proper way. It must be remembered that many of the problems encountered by the Government were ones over which the Government had little or no control.
Progress has been slow and I hope this year's budget is not an indication that the spirit of the Government, or future Governments, to reduce the borrowing further is faltering. We should compare our position with that of the UK where the Government are concerned to keep the public sector borrowing requirement at 2 per cent of GNP but here we are happy to continue with a borrowing requirement that is six times greater. The public sector borrowing requirement is a clear indicator of how our economy is growing and progressing. Consequently, because we have to compete on all fronts with our EC neighbours, the years ahead will be exceedingly difficult. That will be the position for any Government whether the people decide to let us continue or choose another Government.
Although we raised £6.1 billion in tax revenue this year the State will have to borrow another £2.4 billion to meet its expenditure requirements. That is an enormous figure. Borrowing is a postdated form of taxation which some future generation of Irish people will have to pay. Future citizens will have to put their hands in their pocket and pay for the borrowing requirement that began in the mid-seventies and spiralled towards the end under a grossly incompetent Government who were afraid to face up to their responsibilities because they had their eye on the electorate. They were afraid to meet what they regarded as the hostility of the electorate. They will meet that hostility again unless they adopt a more positive approach in that regard. The policy they promoted in 1981 was one I could support because I believe it represented a proper way forward but Fianna Fáil have moved from that position. If one were to cost all the proposals put forward in Private Members' time in the past three years one would realise that it would require a level of borrowing far in excess of our capacity to pay.
In 1975 the Republic had no public sector external indebtedness but it now amounts to £8 billion or £7,000 for every employed person. Relative to other countries, particularly in those with whom we compete, our indebtedness has reached appalling proportions. The high level of public sector borrowing is causing banks and financial institutions to channel loans towards the public sector and away from the private sector to an increasing extent and one can easily understand this practice. The lending institutions are out to make a profit and why should they lend to the uncertain private sector when the Government are prepared to guarantee an almost gilt edged return on their lending? I do not say that lightly or to criticise the Government, but that is the way things are and any attempt to redress it would have a serious effect on other aspects of the economy. The process, therefore, of reducing the public sector borrowing requirement and current budget deficit has really only begun, although there has been progress. Of course, those who propose the policies of the Government and who would like to see them out of office will say the opposite.
Let us examine the new found Messianic group, what they promote and their recipe for success in the future. They are looking for more stringent cuts in public expenditure. If the Government were to adopt this approach what would happen? There could be no pay rise in the public service this year. Would The Workers' Party support such a measure? Would any party support such a measure? The trade unions and the workers would not support such a policy and, much as I regretted voting against my own colleagues on a pay agreement which was part and parcel of a negotiating process over a long period of time, I did so because there was no other course open to me. If that claim was met in full, as demanded, taxation would have to be increased. Industrial action is not the answer. They should try to find some formula whereby their claim could be settled.
We had a three hour debate in this House on the proposals of the Minister for Health in relation to hospitals. A further pruning in expenditure on health would mean a considerable reduction in an already diminishing service. We all demand improvements in educational facilities but there is not much prospect of them in the immediate future. The construction industry is also in a very depressed state. Could anyone envisage cuts in social welfare and giving no increases in this area? All Members meet these people every weekend and we understand and recognise the great difficulties they have in making ends meet on a small income.
There are abuses of the system but I am sure the new Minister — I wish her well — will try to tackle the problem. However, I do not believe that the abuses are as widespread as those mentioned in a recent newspaper article. I did not have an opportunity last week to put a question to the Minister but I understand that 37 or so additional civil servants have been recruited to monitor these abuses. I suggest that they should all be concentrated in one area to see if there is any reduction in the level of welfare demand in that area. I do not believe there would be a significant reduction in claims. Nobody condones abuses because they prevent the Government from giving real increases to those who badly need them.
Fianna Fáil and the Progressive Democrats demand lower taxes, a lower current budget deficit and, at the same time, higher public expenditure on a range of services. They have not publicly accepted the grim and unpleasant truth that any increase in the public service must be paid for by higher taxation, which is unthinkable. Many Opposition speakers referred to Building on Reality with obstinate and arrogant derision and went so far as to suggest that it should now be granted a decent burial. The basic structures of the plan remain reasonably close to what was conceivably possible when it was drafted. Arising from the best economic advice available to the Government at the time, the plan is a realistic document. This was the first plan which set clear targets of expenditure for each Government Department over a three year period. This means that all Departments knew three years in advance what the extent of their expenditure would be and how they could make cuts in certain areas over that period. All Departments and local authorities like to hold on to the money which has been allocated to them but that is the wrong approach and has led to our present troubles.
This Government pioneered a new approach to budgeting. The Opposition have short memories. When they were last in office they could not get their projections right for a single year. Their budget meant an increase in turnover tax from 2½ per cent to 5 per cent. No thought was put into their budgets and during their term of office from 1977 to 1981 they experienced overruns in current budget deficits of the order of 70 per cent, 50 per cent and 30 per cent and yet they say that the Government are failing to meet their responsibilities. At least that is one major achievement of this Government. They cannot be accused of overrunning their projections. They are very close to what was targeted, a pattern begun in 1983 and followed through to 1985. Despite an increase in unemployment greater than the figure projected at the beginning of 1985, the Government were able to remain remarkably close to the target set at the beginning of the year.
For some time the Opposition were shouting about the restructuring of VAT but when in Government they did not have the courage or the commitment to do anything in that area. However, in the 1985 budget the Government acted on that question and, in addition to restructuring the VAT system, some rates of VAT have been reduced substantially. There are some who will say that certain taxation cuts are self financing. I do not necessarily accept that. Our experience so far in the matter of VAT reductions has not proved that they are self financing though, perhaps, there may be some evidence to the contrary in 1986. Last year Exchequer borrowing was less than 13 per cent of GNP and, with the public sector borrowing requirement continuing to reduce the prospects for the economy are better now than they have been for some time despite what some of the pundits might say. I doubt if anyone could convince me that we might have moved faster in our determination to bring matters under control.
Inflation at about 4½ per cent is the lowest since the early sixties. It may even reduce this year to 3½ per cent. This reduction must bring about some form of economic upturn. Otherwise, what would be the point of theoretic economics? For the first time since the forties the trade account showed a surplus in 1985. That did not happen by chance.
In 1985, too, the figures for tourism were very good. The reductions in VAT levels in this budget will bring about automatically a further improvement in this area and an increase in jobs in the industry. What happened in the North on Monday will not help to convince people that Ireland is the right place for a holiday in 1986, but we had to contend with a similar difficulty a few years ago when the then Taoiseach made some remarks in relation to the Falklands conflict which were not very well received by our friends across the water. That episode had the effect of reducing considerably the level of tourist income, but we have recovered from that.
There are a considerable number of jobs in the tourist area. I am one of those people who for a long time have been advocating investment in that industry. We still enjoy the climate and the conditions in which people can enjoy their holidays in relative peace and contentment. Our roads are not congested and the air here remains reasonably free from pollution. The same applies to our beaches.
Unemployment is the single biggest difficulty facing the economy and, although the indications are that the upward trend appears to be slowing down, the problem is one of grave concern to all of us. The outlook so far as the international scene is concerned has been more favourable than has been the case for some time. The fall in the value of the dollar and in interest rates last year will have a considerable impact on the cost of borrowing to industrialists, to farmers and to the State. Who would have envisaged in 1981 when oil was almost 30 dollars a barrel that it would have fallen by now to about ten dollars a barrel? The very high price of this commodity in the early eighties put a very great strain on our finances.
The creation of jobs must remain the single and central economic and social priority of this or any future Government in the years ahead. By way of the various taxation measures and of incentive policies this Government have created a better climate for employment. I disagree with Deputy O'Kennedy who cast serious reflections on the various schemes devised by this Government to help those who are unemployed and who can foresee no escape from that position. Those of us who are in touch with the public realise the trauma and the depression that accompany unemployment especially when jobs are lost in employment that was considered reasonably secure. Many people between the ages of 40 and 50 particularly have great difficulty in coping with unemployment. These people still have to pay their mortgages and so on. At least this Government have done something worthwhile in reintroducing many of those people to the workplace and by providing the incentives to allow them to establish their own businesses. Anyone who says that is not an effective policy either does not understand or does not wish to understand the difficulties being experienced by the people involved.
The introduction of the house improvement grants should stimulate considerable activity in the much depressed building industry. The CII have alleged continually that this Government have depressed the industry, have withdrawn resources from it and have caused problems by increasing the VAT rate in that area from zero to 10 per cent and consequently have reduced considerably the level of employment in the industry. I am not sure that I would accept the veracity of such allegations. Through the sixties, the seventies and the eighties there have been major investments in the construction area. At enormous cost to the taxpayer we have provided buildings and various infrastructures that have not resulted in the kind of return to the Exchequer that was necessary to justify the investment in the first place.
Deputy Molloy speaking from the Parliamentary Democratic Party benches criticised the Government in respect of their claim that the £5,000 grant to those vacating local authority houses and buying homes of their own as well as the new housing grants would give the kind of stimulus to the economy that is needed. I would remind the Deputy that already there have been 43,000 applications for the new grants. Deputy Burke expressed concern that the Government might not have the money to meet their commitments on these grants but I think he will be disappointed on that, too. These applications continue to arrive at the Department at the rate of 3,500 per week. The scheme will have the effect of putting about £200 million into the economy this year alone. That should provide about 10,000 jobs in the construction industry. If all of these jobs are not provided this year they will have been provided within a two year period.
Another advantage of the scheme is that only recognised and registered builders may be employed to carry out the work and they will be employing workers. This scheme together with the scheme announced in the budget to help employers to increase their workforce, that is, the foregoing of PRSI payments for one year from April 1986 to 1987, will bring about a big improvement in employment. Nobody can fairly or accurately claim that this Government have not been concerned about measures to try to reduce unemployment. Having inherited an unemployment growth of 40,000 per year and with a population structure that was in no way helpful to trying to reduce growing unemployment, the Government have done remarkably well in bringing that down.
One of the most successful schemes in this area has been the enterprise allowance scheme which reduced unemployment on the live register by roughly 10,000 in the first two years of its operation. Many of these people, apart from being taken off the register, are now doing something positive. They are producing their own products and have started their own industries and are preventing imports from entering the country. The Minister yesterday announced more of these. Hopefully, next week and next month he will announce more as that is the type of policy this Government take great pleasure in pursuing. The social employment scheme, specifically targeted at the long term unemployed, had almost 5,500 people participating at the end of 1985 who a year or two ago had no hope.
Let us look at reports in the press from various interested bodies. The Construction Industry Federation expressed acute disappointment at the Government's failure to respond to their pre-budget submission calling for a range of incentives to boost the building industry, one of which was to eliminate the 10 per cent VAT on construction. They blame that VAT for the 15 per cent drop in the new housing outlet last year. I was looking recently at an analysis of house building within the Community and Ireland is second in the lead and per capita of her population is building more houses than any other country in the community apart from the Dutch.
Coalition Governments can be proud of their record in building houses. They started in the fifties when they had more houses than they had people to put into them. They pursued the same policy in the seventies and are continuing to do that now. Nothing would give us politicians a greater level of pleasure than to be able to say to our constituents: "You can have a house within six months if you are married and have one child. Even now you may not need to have any children." We may have to look at the cost now that we have reached that stage. The cost to the taxpayer is substantial. In one of the national newspapers today — I am paraphrasing the report; I do not know how accurate it is — it was stated that Dublin Corporation would be better selling all their housing stock to their tenants or giving them away for nothing. It is costing them more money to carry out repairs than they are getting from them. That represents a waste of public funds.
The Construction Industry Federation also referred to the £25 million reduction in the public capital programme but they did not draw any attention to the housing grants, a £200 million investment. That is the kind of inaccurate representation that can come sometimes from a section of the community who feel that, to soem extent they are not getting their share. Deputy O'Kennedy referred to the retention tax. The various lending institutions have been drawing attention to this in recent years. There is a change of major importance under the heading of taxing the financial institutions. The existing arrangements for taxing deposit interest are unsatisfactory and have been a source of considerable friction as institutions claim that their competitors enjoy an unfair advantage. This year's measure was designed to harmonise tax arrangements as far as reasonably possible across the board for all deposit interest.
There has been consistent pressure for an arrangement of this nature. The Commission on Taxation emphasised the need for equality of treatment. The tax yield from the financial institutions and from financial investment generally is decidedly low. The banks in particular were in unfair competition with the building societies. They were paying a 28 per cent retention tax which has gone up to 35 per cent. The insurance companies have considerable advantages vis-à-vis taxation as have their investors who invest in various types of insurance and who can get a clawback on tax. The banks had approximately 8,000,000 depositors. There are 2,000,000 adults in this country. Obviously, there is a bit of a fiddle going on some place. I state publicly that the Revenue Commissioners have thrown in the towel. They were not able to collect what they should have collected from the banks. This is the simplest way to bring it in as they are guaranteed 35 per cent on all interest earned on deposit. That anomaly is there.
I drew attention to the fact that the scheme of housing grants, which will be carried out by registered builders, will have the effect of eliminating some of the abuses that are taking place in the black economy, particularly in the construction industry. Some building contractors openly employ people knowing that they are drawing either benefit or social welfare assistance. In some cases, they drive to building estates, go back on the Tuesday and sign on. Why not put the 37 inspectors into one area and see what the effect would be?
The tourist industry will be pleased with what the budget proposes. Hopefully, it will have the effect, expressed by the President of the Irish Hotels Federation, Mr. Brian McCarthy, that the VAT reductions will boost tourism earnings and increase employment. He further suggested that the federation would immediately start planning a comprehensive programme to promote greater use of resources.
The three major areas I referred to earlier were taxation, public sector borrowing and employment. I would like to say something else on employment. Speaking in this House last week, the Minister for Agriculture referred to the number of factors totally to our disadvantage which he sees developing within the Community. There is an over-production of milk, beef and grain. These are three of the major commodities that have a direct value for the Irish economy.