asked the Minister for Finance if he will outline the measures the Government intend to take to end the financial speculation which has resulted in a major increase in interest rates.
36.
Written Answers. - Crisis of Financial Confidence.
33.
asked the Minister for Finance if the Government has any proposals to deal with the crisis of financial confidence and in particular to reverse the outflow of money from the economy and the recent sharp rise in interest rates.
I propose to take Questions Nos. 33 and 36 together. I reject the assertion that there is a crisis of financial confidence at present. The basic cause of the speculation outflow of funds from the economy and the consequent interest rate increases lies in the weakness of the pound sterling and, to a lesser degree, the US dollar. The Government have already acted decisively in the light of these problems.
They have made it clear that there will be no downward adjustment of the Irsh pound within the EMS. The August adjustment was a once-off change which was necessitated by the unsought and unwarranted overall appreciation of the Irish pound due to the sharp drop in the value of sterling and the US dollar. The adjustment has improved the competitive position of Irish industry, particularly in relation to the continental European countries. The Government are determined to maintain the current EMS parities of the Irish pound. This assurance should make it clear to speculators that they cannot hope to make gains by transferring or keeping funds abroad in anticipation of an adjustment of the Irish currency.
The Government are continuing to take the steps open to them to create the conditions for an early return to lower interest rates. The firm assurance on the exchange rate should lead to a reflow of funds and there are already signs that this has commenced. In adition, because of the difficulties on domestic markets last month and so as to minimise the increase in interest rates, the Government significantly increase their draw down of foreign borrowings and ensured that there were further foreign loans available for draw down, if required.
The Government have also indicated their intention to take firm action to improve the position of the public finances. They have decided that the 1987 budget will involve a current budget deficit target no higher than that set for 1986, i.e. 7.4 per cent of GNP, and that the Exchequer borrowing requirement will be lower than the 1986 target of 11.8 per cent. They have also indicated that, because of the negative effect of tax increases on economic growth, there is no scope for an increase in the overall level of taxation.
These actions have served to clarify the Government's position on these key issues and to remove any uncertainty that may have existed. I am confident that they have made a significant contribution to the recent improvement in market sentiment, that the reflow of funds from abroad will continue and that there will be a return to lower interest rates as soon as market conditions allow.