When we were discussing this previously I said how futile it was for the Minister to bring pressure to bear on the building societies in regard to the interest rates they charge to mortgage holders. In a free enterprise economy, building societies are in competition for depositors' funds with commercial and industrial banks, insurance companies, the Agricultural Credit Corporation and the Industrial Credit Corporation.
The structure of the building societies leaves much to be desired. Their costs are enormous and it is easy to see why. Their percentage management expenses on the sum of £2,000 of depositors' funds is higher than any of their competitors in the United Kingdom. If, as a result of an EC Directive, we will have to allow foreign building societies to operate here, Irish building societies will be operating at a considerable disadvantage unless they put their houses in order. It is not my business to tell them how to do that but, because of the extraordinary competition for depositors' funds, advertising campaigns must cost a fortune. They must also have very high expenses in connection with their branch network. They also pay fees to auctioneers and insurance brokers which means that their management expenses are very high. They are competing so hard for investors' funds that, unless they reduce their management expenses, they will not be able to compete. Competition by foreign building societies will not ease the position.
Why are interest rates so high? We blame everyone and everything we can think of, including the recession. However, one of the reasons for interest rates being so high is excessive Government borrowing. Successive Governments try to raise finance to fund their programmes and it is a matter of supply and demand. The total borrowing of the State at present is in the region of £23 billion. This year the current budget deficit will be about £1,450 million. The Government can only get this money at home or abroad and they are also competing for funds. This, in turn, keeps up interest rates irrespective of those in other countries. The voraciousness of Governments in seeking funds contributes to the problem of high interest rates. If the Government could get their own finances in order some semblance of normality would return to the interest market. This will not happen, irrespective of rates in the United Kingdom or elsewhere, because of our financial situation which has got increasingly worse over the past four years.
The building societies must compete with the banks for the same funds. The Government, in order to attract investors' funds, must offer higher interest rates and are mopping up any surplus supply. However, demand is exceeding supply and, unless we get our public finances in order, high interest rates will continue.
Several Deputies referred to the DIRT tax. I agree with the Minister's comment that this tax would level the pitch for all concerned including the banks and building societies. For years the banks had objected to the preferential treatment given to building societies regarding non-disclosure of accounts. The building societies had to raise their interest rates to secure the small amount of funds on the market which meant increasing the mortgage rates. The pitch may have been levelled as far as competition between the financial institutions is concerned by the introduction of the DIRT tax, but we must remember that it led to the introduction of higher mortgage rates because the banks were equally attractive in regard to depositors' funds. The building societies want to keep the little margin they had over the banks to attract funds and that is why their rates have risen. The Minister for the Environment and the Minister for Finance have very little control over interest rates. If the Government cannot put their own affairs in order, interest rates will continue to rise.
This Bill will not have much effect on building societies. There are two approaches one might take with regard to tiered interest rates — whether they are for a good or for a bad purpose.