Anyone looking for a measure of the economic performance of the Government need look no further than the publication this week of the Exchequer Returns for the first half of 1986. They make grim and appalling reading and underline the continuing pauperisation of the country by uncontrollable Government spending. They are the most forceful indictment of the Government's failure to rescue the economy from the pernicious recession which is sapping employment and the incentive to work or to invest in Ireland.
Six months after the collapse of world oil prices and long after the fall in the value of the dollar, and with the continuation of falling international interest rates, the economy still shows no sign of improvement and the imbalance of public finances appears to be worsening. As recently as May, inflation here was running at 4½ per cent annually, much higher than in most other European countries and most of the countries with which we trade. As a result, living standards here at best have been static and the retail sales index for the first quarter of the year continues the standstill of the previous nine months. Awaiting the consumer boom is now akin to listening for the first cuckoo and I expect the Minister for Finance to write to the newspapers when he finally sights it.
Meanwhile, Government finances are continuing to deteriorate as Government spending makes a mockery of budget targets. Already, more than three-quarters of the current budget estimate for this year has been spent and current dayto-day spending by the Government has risen in the first half of the year by 7 per cent in real terms, nearly twice the rate of inflation. With the excuse of rising interest rates and unfavourable exchange rates no longer available to the Government as a defence for not achieving greater progress with expenditure control, how can the Coalition explain the massive increase in spending that occurred in the first half of this year? What hopes are there of moving in the general direction of reducing the budget deficit without even more increases in the crippling level of taxation? All in all, it is a sad and a sorry mess.
The public should not imagine for a moment that a realistic alternative policy is available from the main Opposition party. Against the background of the ever worsening of public finances in the past six months, one of the most nauseating feature of events in this House in recent times has been the weekly demands by Fianna Fáil for millions and millions more to be poured into nearly every area of State activity. On top of their Ard Fheis promises of more than £800 million extra in State expenditure, we have witnessed a power lust fuelled by the irresponsible notion that, if you continue to throw borrowed millions at the nation's problems, they will somehow go away.
Let the public be warned about such a cynically irresponsible alternative. Let us all remember that since 1980 successive Irish Governments have borrowed £16 billion. Yet in the same period, unemployment has risen from 91,000 to 232,000. The policies of high public spending, high taxation, high debt and appallingly high unemployment simply have not worked and must be reversed.
All the longer established political parties have pursued these policies of high expenditure and high tax in the belief that such policies would yield additional employment for those out of work and higher living standards for those in work. In reality, the growth in public spending and taxation has been accompanied not only by rising public service debt but by rising unemployment. Keynesian type demand augmenting policies simply cannot work in small open economies because the initial impetus is lost through the balance of payments while the excess demand generated by Government overspending crowds out the productive private sector through losses in competitiveness and high interest rates. Present policies, therefore, have failed to deliver.
The Progressive Democrats are offering a wholly different approach based on releasing the creative and productive potential that has been suppressed in the Irish economy through a combination of high taxes, excessive bureaucracy and the crowding out of the private sector. The established political parties have concentrated almost exclusively on pumping up the level of domestic demand, on Keynesian type demand management policies, but the Progressive Democrats are looking to the supply side, seeking to bring dormant factors of production out of retirement to produce output and to add value. Lower income tax encourages potential workers to participate in the orthodox economy, to work overtime and to accept promotion. Lower taxes on capital invested in industry attract cash into productive employment and away from sterile speculation, reducing the size of the State's crowding out the private sector and giving the latter more room in which to flourish.
The Progressive Democrats favour improving the Irish market mechanism by eliminating barriers on the supply side, whereas the long established political parties continue to concentrate on an outmoded demand oriented approach to the economy.
The dreadful social and economic problems which result from this approach will not be solved either by the ideological irreconcilables who sit on the Coalition benches or the Santa Claus politicians in Opposition who believe that a country dangerously addicted to excessive public spending can be cured by one more lethal fix of foreign borrowing. The ability to curb excessive public spending has not been achieved because, it seems to me, the Government have been overcome by some sort of paralysis which suggests to them that, even though they recognise in a vague way that the position is very serious, there is simply nothing that can be done about it.
While short term flexibility may be limited in certain areas, for example, in debt servicing, this does not mean that spending is not discretionary for a government. Even in the case of debt servicing, lower levels of borrowing by the State to finance lower levels of public spending automatically take the pressure off domestic money markets which, in turn, lowers domestic interest rates which, in turn, reduces the cost of debt service on domestic borrowings.
The most significant breakthrough in this area would be the introduction of zero based budgeting in annual departmental Estimate consideration. At present, departmental budgets are indexed up on the level negotiated for the previous year. Departments should be made to justify their annual expenditure plans, not by reference to what happened last year, but from a zero base. Nothing should be taken for granted. Making departmental spending plans explicit in this way will provide great scope for discretionary cuts. The real problem is that public spending operates with a ratchet effect; it goes up but it cannot come down. An excellent example is provided in the present year when the downward revision of the inflation rate for the year as a whole from 4½ per cent of 2½ per cent to 3 per cent produced a response from the public service and, accordingly, from the Government that the consequent savings on £7,000 million of current public spending will be approximately £10 million.
The problems of this economy will only be solved by renewing economic growth. In order to do that, positive policy changes need to be made. The most recent performance, as reflected in the Exchequer returns, starkly underlines the fact that an improved external environment alone is not sufficient to revive economic activity here. That will require more than anything else the establishment of incentives to workers and producers and the rolling back of much of the bureaucratic red tape and regulations which have strangled the vitality of Irish enterprise. The first step in that direction must be a radical simplification of the income tax structure to remove the diabolical situation where the return from work spent on tax avoidance is greater than the return from additional productive work.
That is why the radical proposals of the Progressive Democrats to reduce income tax over four years to a standard rate of 25 per cent and to abolish PRSI, which is a pernicious surtax of nearly 20 per cent on work in an economy with record unemployment, have captured so much popular acclaim. It is interesting to notice that in the United States over the past month a set of taxation proposals, not unlike that which I enunciated some months ago, has been passed by the Senate and passed in a somewhat different form by the House of Representatives. At present, legislative work is being undertaken in the Congress to try to amend both Bills to bring them together so that they can be expressed in one Bill which would be common to and passed by both Houses.
It is interesting to find that, even in the United States, it was thought essential by an overwhelming majority of the members of both Houses of Congress to simplify the tax structure, to lower the tax rates dramatically and to do away with many of what are called the deductibles which are a traditional part of the taxation regime. The proposal which has now being agreed to by a substantial majority in the Senate is to have two rates of income tax, one at 15 per cent and the other at 27 per cent. We should all look with some interest on what is happening in the United States and what the developments will continue to be. Perhaps the most successful economy in the world feels it necessary to change in that direction. I ask this House: why should one of the least successful economies in the world, which we represent, not do something along those lines? Why should we condemn ourselves, as we do for all time, apparently, to a belief that we must retain the crippling system we have at present?
The Progressive Democrats are the only party with a realistic programme to tackle the present debilitating economic malaise and the dreadful social problems which flow from it. The barrenness of positive proposals from either the Coalition or Fianna Fáil was starkly revealed in the panicky, ill-considered and blundering response from them to our radical taxation and economic proposals as enunciated at our first national conference in May. Are we to take it that none of the political parties other than the Progressive Democrats sees that drastically reducing the burden of taxation is an essential step to rescue our society from the abyss of economic despair? In turn, this is the key to tackling the rampant black economy and getting rid of a 20 per cent surtax on employment at a time of such scandalous high unemployment.
The Progressive Democrats are offering the Irish people the only practical alternative to our present dire economic problems. It is a workable alternative, provided that the country and political parties have the political will to implement it. Let me make it clear that our alternative is no magic formula. It is not full of pleasant problem-free solutions. It will involve getting rid of many of our present tax breaks and deductibles. It will involve significant reductions in overall public expenditure and a merciless onslaught on the black economy and the tax avoidance industry which is so totally demoralising to the PAYE sector. We in the Progressive Democrats are committed to a simplified taxation system, easy to administer, easy to police and to comply with; a taxation system which is fair and not penal on the compliant; a rolling back of the State apparatus to a level consistent with the country's ability to pay for it from its own and not from borrowed resources, a drastic revision of the universality of much of our welfare services and their concentration on the needy in our society. We are committed to raising the efficiency of the public service through contracting out some appropriate activities to the private sector by establishing a competitive environment in the State enterprise sector and by undertaking only those capital projects which are productive or infrastructural.
I want to say a few brief words on the situation which exists in Údarás na Gaeltachta. I was no admirer of Údarás na Gaeltachta's predecessor. I was often very critical of them. Because of the change which has been wrought in recent years within Údarás, it is right that something should be said in their support and in an effort to assist them in their present difficulties. In view of the urgent need to create employment, it is extraordinary that the Government should choose to stifle the successful work of Údarás na Gaeltachta by deliberately withholding grant payments from projects which have already been formally approved. At a time when the IDA, through no fault of their own, are recording few successes in new industrial developments, it is heartening to see the Údarás succeed in attracting projects to the remoter areas where they have responsibility.
I understand that up to £2 million in grants due for payment in 1985 have not yet issued and that projects involving 875 permanent jobs requiring grant payment of £9 million have been approved since 1 January this year but cannot be paid because the grant money is withheld by the Government. This is a serious action on the part of the Government and will affect our credibility as a nation. What is the point of a new National Development Corporation if we already have viable projects for which the Government are refusing to pay grant aid? It is interesting that when savings have to take place because of financial constraints it is payment to companies such as this or to others in the productive sector which is withheld. I can think of vast areas of State expenditure where it would not be remotely contemplated that those due certain sums would not get them. It is always outside the public sector that such payments are traditionally withheld.
Last Monday our national newspapers carried an interesting contrast between efficiency on the one hand and ideology on the other hand. Guinness Peat Aviation announced the purchase of 181 Boeing aircraft. On the very same day a number of trade unions objected strongly to a study by a Dublin firm of economic consultants on the replacement of the Aer Lingus fleet. The trade unions sought assurances from Labour Ministers in the Government that the study of the fleet replacement programme would not lead to any private financing of the airline. This kind of pressure has been exercised in the past and if successful it would lead to the financing of the fleet replacement programme, estimated in the Green Paper on Transport to cost £700 million, being borne in its entirety by the taxpayer.
As the leader of a party committed strongly to lower expenditure and therefore to lower taxes, I support the initiative of the Minister for Communications in commissioning the study. The leasing option should certainly be considered, given its popularity with airlines worldwide. The option of financing the fleet replacement, in part at least, by counter trading should also be fully considered since it is used successfully by many countries but unhappily not used at all in this country. The private sector finance option should equally be considered because the expertise of the lending institutions would be brought to bear on the programme and its cost effectiveness would be appraised.
In this regard we should remember that the private airline Ryanair has recently halved the Dublin-London air fare with a capital employed of £2 million, or less than one-third of 1 per cent of the £700 million which the Aer Lingus fleet replacement is estimated by the Government to cost. The possibility that people who get free capital will use it less economically than those who have to pay for their capital should be part of this proposed study.
For most of the last two years I was the only Deputy in Dáil Éireann to oppose the Air Transport Bill and to make the case that market forces should, within limits, be allowed to begin to operate in aviation into and out of this country. I have been happy to make a few converts, including the Minister for Communications. The success of the Ryanair service to London and the imminence of further competition in Europe generally because of the work of the Commissioner for Competition Policy, Mr. Peter Sutherland, are further signals of the way ahead. In this new environment old attitudes and operations must go. This includes the traditional way of financing airline fleets. This aviation development coincides with a popular preference for lower taxes. In order to reduce taxes, Governments must look at functions which they will have to shed. Good aviation and good public finance in this case coincide. Ideology must not be allowed to determine the vitally important fleet replacement programme.
I was interested in the Taoiseach's reference this morning to his suggestions to the meeting of EC Heads of Government that the Commission should now introduce proposals on the subject of market access which would offer possibilities for all Community airlines to operate new services. He said this should be considered at the same time as the Commission's proposals to liberalise air fares and capacity sharing arrangements. Whether the Taoiseach realises it or not, this Aer Lingus suggestion that they have totally changed their attitude of recent years and that they are now in favour of the liberalisation of air transport — since, as I forecast, it has come upon them anyway — is rather illusory. In suggesting that there should be total market access and full fifth freedom rights throughout Europe, Aer Lingus and the Government are fairly safe because they know perfectly well that it will never be taken up and is quite unrealistic.
We should not be seeking something which is impossible and unattainable, using the opportunity to get into a sulk when it is not attained, but rather we should be encouraging access to routes over which we do have control and allowing competition to be gradually introduced there. What has happened on the Dublin-London route in only six weeks has been quite spectacular and I do not think Irish aviation will ever be the same again as a result. The tourism, industrial and commercial sectors of our economy will benefit enormously. What is now happening is the direct opposite of the policy contained in the air transport legislation which was passed some months ago and is now entirely redundant.
Of the many things that are happening in this country, the most significant one can see each day is the queue of young Irish citizens outside the American Embassy. Those people are voting with their feet just as assuredly as those of us who go through the lobbies of this Chamber. The vote that is taking place outside the American Embassy every day they are open is the most significant vote of all. Those people are voting to leave an economy that is not allowed to work and to move into an economy that is encouraged to work and that works. My final appeal to this House is for us to get down to the basics that are necessary to allow this economy to work. We must stop tying ourselves in knots. We must stop paralysing ourselves by persuading ourselves we can never get out of our difficulties.
