Dáil Éireann debate -
Wednesday, 8 Apr 1987

Vol. 371 No. 9

Financial Resolutions, 1987. - Financial Resolution No. 3: 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.

—(Minister for Finance.)

Mr. J. O'Keeffe

On the last occasion I pointed out that Fine Gael accepted the general thrust of the budget in so far as the targets were concerned. It is, however, already clear that Fianna Fáil will have major problems in implementing the budget. That relates to a number of factors. First, there was the total irresponsibility of Fianna Fáil in Opposition. For four years any proposal which involved savings to the Exchequer was stridently rejected and virtually any proposal involving extravagant expenditure was roundly applauded and fully supported. Secondly, during the course of the election campaign Fianna Fáil consistently refused to provide any detail of expenditure cuts and the consequence now is that Fianna Fáil have gone into Government without any popular mandate for such cuts. Thirdly, because Fianna Fáil in Government have made cuts and produced figures for cuts in excess of £100 million, cuts which are unspecified to the extent that there are now already major doubts as to whether they are reliable, the budget arithmetic is in doubt. Fourthly, I will refer to the introduction of some measures done in a particularly insensitive and ill-conceived fashion. I will single out two of those for special mention.

If a deliberate effort was made to make a complete botch of the termination of the housing grants a greater mess could not have been achieved than that created last week. In spite of the changes made for anomalies and so on among applicants, some of whom will now qualify while others will not as a result of the U-turn euphemistically referred to as the clarification of last Friday, I am sure the former friends of Fianna Fáil in the building industry have strong views on the decision to terminate those grants. When one is considering the termination of grant schemes, surely the only fair way to do that is to make an announcement to the effect that all applicants after the date of the announcement will be excluded and that those who have applied on the basis of existing schemes will not be excluded.

The other major area which stands out is the proposal to impose a charge of £10 per day for patients in public wards. It must be remembered that there was also a proposal to increase the health levy. While the increase in the levy will not be greeted with loud hurrahs, at least it imposes additional burdens on those who are healthy and at work. However, the proposal to impose a charge on those who are ill and, consequently, not at work does not have that merit. This must be considered in the broader context of a decision to reject a small prescription charge under the GMS which would have raised about three times the amount of money involved.

As spokesman on Agriculture, I want to focus on those sections of the budget which impact directly on the farming sector. The lowest priority for the axe must be schemes of a developmental nature where the consequence is a reduction in wealth creation. I question the advisability of reductions in the farm improvement grants and the abolition of the young farmer installation aid, as well as cuts which have been made in a number of other areas. I accept the overall needs for cuts, but in the agricultural area moneys of a capital nature which are helping in wealth creation must have the lowest priority from the point of view of expenditure cuts.

My greatest criticism is directed towards the proposal to abolish the land tax. I consider this to be a very unwise move indeed. It is neither in the interests of the farmers nor of the country as a whole. This tax was developing a broad acceptability among the farming community. Of course there were protests when it was first introduced but this was to be expected. The same would apply if one were introducing a new tax in any area. Over the centuries Governments have introduced new taxes on windows, hearths, soap, salt and even on wigs. The introduction of each of these taxes brought protests, since nobody relishes paying tax of any kind. The issue in this case is not whether farmers like land tax but whether it is more acceptable than a full accounts system. In a perfect society where all farmers have perfect book accounts, a strong case could be made for a full accounts system, but when we look at the farm structure we find a multiplicity of small holders, most of whom are not very adjusted to book-keeping. Because of that, I felt the farm tax was the answer.

It gave, in addition, an incentive to greater productivity and essentially allowed the farmer to concentrate on the plough rather than the pen. The interim accelerated valuation arrangements proposed in the January budget would have enabled all farmers up to 80 adjusted acres to pay farm tax and be exempt from income tax in 1987. When it comes to a choice between a land tax and a full accounts system, I believe more than three out of four farmers would opt for the farm tax. Of course there are some very substantial farmers in the category above 80 adjusted acres but they represent a small proportion of the total number of farmers. While one will never make people happy about paying tax, the question of broad acceptability is of some importance. On those grounds the farm tax scores over the full accounts system.

A second point is that in a time of scarce resources it must be lunacy to introduce such a measure at a cost of £9 million to the Exchequer. It is not as if the farmers will be saved this money. They will pay it and more to the accountants under the full accounts system. The most recent estimates suggest that the total revenue from farm tax could have developed up to £65 million in a few years' time, whereas farmers last year paid £37 million in income tax. The Minister for Finance expects a modest £1 million extra from the increased use of profile forms in the current year. It is not as if the additional sum that would accure to the Exchequer would be an extra imposition on the farmers.

The most recent estimates from the ICMSA suggest that the cost of accountancy services to farmers runs at about £40 million per year. If we retained the land tax most of the need for that kind of expenditure would be eliminated. Then we would have a considerably larger return to the Exchequer at virtually no net extra cost to the farmer. Essentially Fianna Fáil propose to abolish the system which suits the vast majority of farmers and they are looking a farm gift horse in the mouth. On the score of return to the Exchequer it was a mistake to abolish this tax.

To add insult to injury, Fianna Fáil now propose that the smallest farmers should contribute to the revenue shortfall resulting from abolition. This is as a result of the proposal to reduce the flat rate VAT addition to farm prices from 2.4 per cent to 1.7 per cent from 1 May. This change, according to the Budget Statement, will yield £9 million in the current year, the same sum as we are told will be lost to the Exchequer as a result of the abolition of the farm tax. It is important to note that the reduction from 2.4 per cent to 1.7 per cent comes into effect only from 1 May. If that will yield £9 million in the current year, am I right in thinking that in a full year the total imposition on the farmers as a result of that change will be 50 per cent higher? If £9 million is raised over two-thirds of the year, the yield for the total year will come to £13.5 million. This amount is effectively being taken away from the farmers by reducing their entitlement to VAT credit.

I consider this to be an outrageous proposal. If we look at the VAT credit system we find it does not apply to registered farmers. Obviously the registered farmers are entitled to obtain credit for their VAT inputs by filling up the forms and dealing with the matter in the normal way but who are the registered farmers? The registered farmers are the bigger farmers. I do not know of any small farmer who is registered. This system was developed to allow the unregistered farmer to obtain credit for the VAT inputs into his agricultural undertaking. It applies to all small farmers, virtually none of whom are registered.

It should be noted also that many of these farmers would not be liable for either farm tax or income tax. The proposed change takes no cognisance of their profit, borrowings or family commitments. Effectively it amounts to an arbitrary tax on production as it withholds the VAT credits to which they are entitled. As I understand it, the flat rate VAT addition was introduced to take cognisance of VAT payments on agricultural inputs such as sprays, machinery parts and repairs, leasing contracts, packaging materials and silage covers — areas where there are VAT payments to be made by farmers and where they would be entitled to a VAT credit. This system was introduced to cater for the smaller unregistered farmer. It was designed to give him, on a carefully calculated basis, credit to which he is entitled on VAT paid on inputs. I think this point should be made clear, it is not a question of handouts to the farmers. It merely gives back to him his entitlement under the VAT system. Here we have a confusion between a tax system and the VAT credit system whereby the Government have in an arbitrary fashion abolished the farm tax. What, they are saying is, the abolition of the farm tax will cost £9 million in the current year so for the rest of this year we will take £9 million from the smaller unregistered farmers and they will be entitled by way of VAT credits to reclaim a similar amount. That seems to me a totally unfair way to do business. Nine million pounds will be taken in the current year but this will amount to £13.5 million in a full year. I feel very strongly about this. The House will understand my outrage at what seems to be a reverse Robin Hood proposal. I think we all agree that in our approach to managing the financial affairs of the State we should lean less heavily on the smaller people rather than the big people. It seems outrageous that those in the smaller farm categories should be leaned on in order to make up what has not been collected from the more substantial farmers.

Another aspect of the proposed abolition of the farm tax needs to be highlighted. The effect of this proposal will mean the closing down of the farm classification office. This will mean that the excellent work being done by this office will be set at nought. I know it was fashionable for Fianna Fáil to deride this excellent work. The last comprehensive survey, Griffith's Valuation, is almost 150 years old. It is now totally out of date being helped along by the Supreme Court decision in relation to the whole valuation system. Apart altogether from the question of tax it is very much in our own interest that we do have a comprehensive survey of all the land holdings in Ireland. This work which was being completed as a by-product of the introduction of the farm tax will be of immense value in the years ahead. Apart from the tax system it will be of immense value in the context of agricultural planning and of deciding future priorities. This work is absolutely necessary on its own merit irrespective of the tax system.

A fair amount of progress has been made to date. I understand that all holdings over 80 adjusted acres would have been reviewed and classified by September of this year. Because of the detailed nature of the work I accept that it would require at least another couple of years to complete the job fully. In the January budget we had provided for a provisional tax assessment system. This does not deny the fact that this work stands very much on its own merits and if we were not introducing a farm tax system but had sufficient funding, priority should be given to work in this area. In a time of tight financial conditions I accept that it would not immediately attract funding, but it is a job that needs to be done. It was a very useful by-product of the introduction of farm tax.

What is to become of the work that has been done so far, the very many excellent reports that have been compiled, the maps that have been prepared and the efforts at computerisation? Will all this be just thrown aside? Will this major work be left to rot? What will become of the highly motivated, highly qualified and well trained staff? The people involved in the farm classification office were doing a very good job. Serious questions have to be raised about their future. Other opportunities may not present themselves so easily. This factor should be borne in mind in considering this decision. I do not think it can be denied that the comprehensive survey in itself would have uses of all kinds in the years to come.

We had a marvellous corps of highly qualified graduates doing an excellent job. I have not heard a single word of criticism of them. Are these people to be thrown on the scrap heap following this foolish decision? On the grounds of reason and logic, in the interests of the farmer, for the benefit of the Exchequer and the national interest generally, I am adopting what is probably a unique position for an Opposition spokesman. I am proposing that the farm tax be retained and that this proposal to turn farmers into book-keepers for the benefit of accountants and nobody else be shelved. I make that proposal in all seriousness. I believe genuinely that this is the right thing for farmers and for the country.

I accept entirely that there are Members in my party who do not totally share my enthusiasm, but everybody is entitled to a point of view. This issue should not be considered totally in the political context. I believe a strong body of opinion in the Government party strongly favours farm tax as opposed to full accounts. I accept that some farmers, particularly the bigger ones, would prefer the approach now proposed by Fianna Fáil, but I believe that the vast majority would opt for farm tax rather than full accounts. Therefore, in this, as it were, non-political way I am putting forward seriously the proposal that the Government reconsider what they are doing in this area. At the very minimum the proposal to abolish farm tax requires to be examined further, to be looked at in all its implications. I have pointed out some reasons which obviously suggest a strong case for the retention of farm tax. I am asking the Government to consider these points seriously, to look again at the decision to abolish farm tax and to institute in its place full accounts for all farmers. Essentially, if that decision is followed through the only people who will gain in the end will be the accountants and surely that is not in the interest of the farmers, the country or the Exchequer.

I want to refer to a couple of other items in the few minutes that remain to me. I am glad of the emphasis which the Government are placing on the development of the food industry and the horticultural industry. I have already congratulated my constituency colleague, Deputy Joe Walsh, on his appointment as Minister of State with responsibility for the food industry. I wish him every success in that job. While I am at it I suppose I should congratulate the Minister of State with responsibility for horticulture as well. Even though he is some distance away from me, certainly I wish him well. I suppose it is fair to say that already there are some question marks about these appointments but not, of course, from the point of view of the calibre of the people appointed. How strong is the commitment of this Government to the development of these areas? I know their importance. I was involved as chairman of the ministerial group who examined the food industry a couple of year ago and I was the person who recommended the appointment of a Minister of State for Food. That proposal was adopted by the previous Government and Deputy Paddy Hegarty was appointed as Minister of State attached to both agriculture and industry. I have strong reasons for suggesting that as the best approach because agriculture is the area where the strong interest is on the part of the producer, where many of the problems are at the processing and marketing end and where industry perhaps has a greater input. However, I will not go into that at this stage. We might go into that issue in more detail at some other time.

The point I want to make is that even when money is tight if the Government were seriously interested in developing the food and horticultural industries, surely that interest should have been evidenced by an allocation of resources, done possibly by way of reallocation from other areas. However, I have examined the documents and I have seen no resources allocated to these areas. At this stage that raises questions in my mind as to the Government's commitment to achieve the grand aims which they set out in their document A Programme for National Recovery. I will confine myself to those remarks at this stage——

An Leas-Cheann Comhairle

Le me remind you tá cúig noméid fagtha agat.

Mr. J. O'Keeffe

I will be watching carefully from this side of the House how things develop in that area and in particular whether the efforts of the two Ministers of State appointed will be supported by the Government to the extent of the allocation of resources to enable them to attain their objectives.

I have just time to touch briefly one other area, namely, forestry. At this stage, while agricultural land is for dairying or beef production, interest has to be on efficiency and quality and we must consider alternative land use because of quota restrictions. I see forestry, and to a degree tourism, as of importance in this area. Looking at the forestry scene, we find that the percentage of land under timber in this country is only about a quarter of that which obtains in continental Europe. We find also in the EC only 50 per cent self-sufficiency in timber products. Therefore, it is clear there is a market there and we must orient our minds towards bigger efforts in the forestry area. Progress was made towards that over the past few years and I would like to see that stimulated further. It should be done both at State level and the private side. I do not think there is any conflict between the two. I am in favour of an effort to continue the development of State forestry. Indeed, I see nothing wrong with the disposal of some forests if that money is reinvested in the establishment of others. In relation to private forestry, here perhaps there is even greater scope and I am delighted that some of the pension funds are now allocating a portion of their portfolios for forestry development. I hope that will continue and that we will see in the coming years a major explosion in private forestry.

I have two questions that I hope will be clarified. If the Government share my enthusiasm in the forestry area, why then was there a reduction in the sum voted for private forestry grants? If the Government feel there should be an expansion of private forestry, why the reduction of £200,000 for private forestry grants? There is a second point I would like to have clarified. In the development measures proposed in the January budget included were a number of items which involved the provision of grants, in two instances with recoupment from the EC, for forestry development. These involved grants of £550 per hectare being made available under an EC regulation for farmers outside the western package area and grants of £500 per hectare for afforestation by non-farmers outside the western package area. There is also the question of continuing headage payments on afforested land. I am inquiring as to whether those development measures proposed in the January budget will be taken on board by the new administration. I encourage them so to do.

I do not think I have time to go into any other areas. Let me say in conclusion that again, perhaps unusually for an Opposition Deputy, I wish the Government every success in coping with the financial problems of this country. At the same time, I believe it is the duty and responsibility of an Opposition spokesman to point out where there appear to be problems and to make criticisms where they are considered necessary.

The Taoiseach

The purpose of this budget is to initiate economic recovery. Our programme of economic recovery requires that we first of all secure the base of the economy by getting order and balance into the public finances. Government expenditure and the amount the Government borrow must be reduced as a condition to stimulating growth, investment and employment. Firm action in controlling Government expenditure and borrowing are vitally necessary if we are to create a general climate of initiative, enterprise and if we are to inspire confidence in our ability to overcome our economic difficulties.

Our policy, of course, will not be confined to corrective action in regard to the public finances. We will also undertake a programme of measures designed to stimulate investment, growth and employment. We have identified specific sectors of the economy as having potential for development. The development of these sectors will be actively pursued. It is our intention also to use the semiState companies as major instruments of economic development policy where this is possible. I am glad to avail of this debate to rebut a great deal of misleading comment to the effect that Fianna Fáil have engaged in a major reversal of policy by introducing this budget.

Let me remind these commentators that as far back as 1982 the basic strategy we proposed in The Way Forward was to take firm action by reductions in public expenditure to eliminate the deficit combined with developmental measures. That is still our basic philosophy. The last Government in our view relied almost exclusively on massive increases in taxation and did not succeed in tackling the budget deficit which reached unprecedented levels in the past two years.

During the general election campaign we imposed upon ourselves a firm discipline in regard to the public finances. We made no expenditure promises or commitments in the campaign which would inhibit us in Government from taking the action needed to restore the public finances. The Programme for National Recovery, which will form the basis of our economic policies in Government stated:

We see the excessive size of the current budget deficit as the primary cause of unsustainable levels of borrowing and high interest rates. The current budget deficit will therefore be progressively reduced from the all-time high in 1986 ...

At the press conference when launching that programme, I warned that we would be faced with a very difficult budget situation and stated that the estimates for every area of public expenditure would be examined rigorously and in detail "and reduced to the irreducible minimum". We have carried out that work and the level of Government expenditure, which was 56.2 per cent of GNP last year, will now be reduced to 55 per cent of GNP in 1987 as a result of the budget, the start of a process we are determined to continue.

Nobody either in this House or outside it, can with any credibility deny the absolute necessity for the kind of budget we have introduced. That is not to say there will not be aspects of the budget about which it is valid to take a different view. But the main purpose of the budget cannot be rejected. The reduction in Government borrowing which we plan to achieve is essential. It was not something that could be postponed until next year or the year after. We had to face the stark reality that the rate of Exchequer borrowing could not be sustained. We cannot ignore the fact that the national debt had doubled in the past four years. It now stands at £25.4 billion and if things were allowed to continue as they have been, by 1990 the national debt would be £35 billion and at that level it would be beyond the country's capacity to service. As it is, the present cost of servicing the national debt takes up nearly one-third of the total tax revenues of the State. It has grown by an average of 20 per cent every year since 1980.

In our election manifesto we made it clear that we intended to deal decisively with the deteriorating state of the country's finances by at least stabilising the level of Exchequer expenditure in terms of gross national product. The firm action we have taken in this budget is completely in line with that undertaking. It is also in line with the policy decisions we took when we were last in Government in 1982. In the middle of that year we were compelled by deteriorating circumstances in the public finances to take drastic action to cut back expenditure because we saw clearly the urgent need for such action.

This budget is the first decisive step towards restoring order and balance in the public finances. Because effective action was not taken during the past four years, the situation continued to deteriorate. Investment confidence evaporated and capital flowed out of the country. In 1986 alone £1.5 billion was taken out of this economy with devastating results on investment and interest rates. Unless there is investment confidence and unless we can retain the nation's savings in the economy, we cannot succeed in generating economic recovery and providing employment. It is not possible to achieve economic growth in an economy where the Exchequer finances are moving steadily into greater deficit. Nor is it possible to secure investment when excessive Exchequer borrowing drives up interest rates.

In this budget the Government have given the clearest and most determined signal possible that the deterioration in the Exchequer finances will be halted and that balance will be steadily restored. We expect that, as a result of the action taken in this budget, interest rates should fall, and fall significantly. With reasonable interest rates we will have a solid foundation for new economic growth.

A cornerstone of our national economic strategy is the maintenance of the value of the Irish pound on foreign exchanges. The benefits from successfully doing this are considerable. We give a firm basis for commercial planning to our own manufacturers. We avoid the dangers of imported inflation and the artificial inflation of our foreign debt. We provide a clear exchange rate climate for those in the financial sector in Ireland, to foreign investors and we discourage speculative outflows. We provide the basis whereby interest rates in Ireland can remain at the same level as in the countries we trade with. In order to secure all these benefits the Government are determined to maintain the stability of the Irish pound within the EMS. This budget contains a number of specific proposals which indicate our determination to tackle outstanding problems in the economy.

The situation that had been allowed to develop with regard to cross-Border and cross-channel shopping expeditions had become intolerable. They were giving rise to an estimated loss of £300 million a year to this economy and maybe more. The economic life of the counties along this side of the Border, in particular, was being devastated by this traffic and its effects were steadily spreading to the entire country. We believe that the European Community concession for travellers is intended only for genuine travellers and that we are fully justified in introducing the concept of 48 hours absence as a test of the genuine traveller. It is early days yet but the indications are that the change made is succeeding and I want to give the House an assurance that the Government are determined that this new regulation will be enforced.

For many years, the large amount of unpaid taxes has been a cause of grave inequity in the taxation system and has been resented, in particular, by PAYE taxpayers. We are determined to remedy this inequity as part of our programme of tax reform. A major effort is now being made to collect the taxes which are outstanding. The merging of the Department of the Public Service with the Department of Finance has given us the opportunity to redeploy a high quality cadre of 25 civil servants as a task force to assist the efforts of the Revenue Commissioners in collecting these taxes. We have only taken credit in the budget for an extra £10 million to be collected as a result of this initiative. I would personally be hopeful of a greater return. Certainly in future years, the work of this task force allied to the continuing efforts of the Revenue Commissioners staff should be effective in clearing up this unacceptable situation to the benefit of all taxpayers.

Fianna Fáil have always maintained that there is only one fair way to tax farmers and that is in the same manner as every other section of the community. That is, in fact, what NESC have recommended. The farm tax, or as it was more popularly called, the land tax, introduced by the previous Government, was unfair to farmers as well as to the rest of the taxpaying community. In so far as farmers were concerned, it did not take any account of their personal or family circumstances, or make any allowance for losses which might be incurred. So far as the rest of the taxpaying community were concerned, on the other hand, they had no assurance that farmers would pay their fair share having regard to their actual income. May I remind Deputy O'Keeffe who spoke about this matter that NESC which is the economic forum on which all sections of the community give expression to their views on policy, strongly recommended that taxing farmers should be on the same income basis as everybody else and that they actually condemned the land tax as inequitable?

Mr. J. O'Keeffe

I would not agree.

The Taoiseach

In practice, the farm tax proved to be very unsuccessful as a source of revenue. In 1986, the previous Government calculated a gross yield of over £5 million from this tax, but succeeded in collecting only £400,000. Despite this meagre return, a large, cumbersome, separate administrative system was being established in connection with the tax. It was clearly for some time to come going to cost more than the amount of tax actually collected.

As another part of our programme of tax reform, this Government rightly decided that from here on all farmers will pay on the same basis as everybody else. All farmers likely to have taxable incomes will be assessed for income tax as soon as possible. For this purpose, we are extending the use of profile forms for small farmers, which is an effective and efficient way of identifying farmers for income tax assessment.

We have ensured that, despite the abolition of the farm tax or land tax, there will be no loss to the Exchequer this year because the reduction of £9 million in the amount of tax which would have been received from farmers will be offset by a reduction in the VAT rate provided.

Furthermore, farm tax due for 1986 amounting to about £5 million will be collected by the local authorities.

It is our view that this issue of farmer taxation has now been settled, once and for all. I am convinced that the vast majority of Irish farmers wish to pay their fair share of taxation, that they would wish to do this on the same basis as everyone else. This issue has dragged on for far too long. It has been a constant source of irritation and confrontation. It was time to solve the problem in the only way it could be solved and that is what we have done.

This Government accept the principle enunciated by NESC that a necessary element in a strategy for economic development must be that the tax system be reformed and made more efficient and equitable. In the short time at our disposal we have made a start in introducing greater taxation equity. In addition to the measures I have mentioned, the withholding tax on professional fees paid by public bodies brings the taxation of that sector more in line with the PAYE sector.

We will continue to work towards greater equity and efficiency and, as the state of the public finances improves, to put into practice our principal aim in regard to personal taxation, which is a reduction of income tax to the standard rate for at least two-thirds of income taxpayers.

While decisive action on the Exchequer finances is essential for economic confidence and investment, corrective fiscal policies must be parallelled by development policies designed to lift the rate of economic growth. The more economic growth we have the more beneficial will be the results for the public finances.

The budget targets we have set of 6.9 per cent and 10.7 per cent respectively of GNP for the current deficit and Exchequer borrowing are based on the official Department of Finance assumptions of only 1 per cent growth in GNP in 1987. That was the prudent course to take, particularly as we had only three weeks in which to prepare and present this budget. We could not, and did not, calculate on the basis of an increase in the rate of growth even through we are determined to secure it.

Any increase over 1 per cent growth will bring down the relative size of the current budget deficit and the borrowing requirement and will generally benefit the Exchequer finances.

I am of the opinion that a higher growth rate than 1 per cent can be achieved on the basis of the economic confidence and stability this budget will generate and the implementation of our new development proposals. I would be disappointed if the fiscal measures taken in the budget and the development measures we are taking independently do not result in a growth rate of more than 1 per cent. One leading professional commentator has already estimated growth, post budget, at 1.75 per cent. Our objective, of course, is to bring growth as rapidly as possible to 2.5 per cent of GNP.

To reach the objective of a 2.5 per cent growth rate we need to secure an additional output of goods and services of £250 million net of imports in our economy. The elimination of the total £300 million that we are now losing in shopping expeditions cross-Border and cross-channel would by itself alone, after deduction of the normal leakage of imports, bring us up to our target of 2½ per cent.

Economic recovery will be pursued through a series of practical actions which generate new growth and employment in the sectors of the economy which we have identified as having the necessary potential.

We will welcome support for these development measures from all concerned. We are also open to suggestions from all quarters for other development measures to complement or supplement our proposals. In particular, we will be asking the social partners for their suggestions and for their co-operation and assistance in our endeavours and we intend to commence a programme of consultations with those involved immediately. In this connection, of course, I will gladly listen in the course of this debate to any Deputy who may wish to put forward any suggestions for development. The Finance Bill will offer us the opportunity to give effect to any suitable measures we may decide to adopt.

The international financial services industry is one of the fastest growing areas of the world economy. Already, financial transactions far exceed in value the total of world trade in goods. They are a major source of new employment. The Government have set up an International Financial Services Centre Committee with a mandate to establish as quickly as possible a new centre in the Dublin Custom House Docks site for international financial services. This committee is representative of the financial, banking, Government and semi-State interests and agencies concerned. It will advise on and, where appropriate, make arrangements for the development of an international financial services industry. We came into office, convinced that there is great potential for the development of international financial services in Ireland based on the availability of people with the necessary skills, the necessary professional structures, our geographic location and our highly advanced telecommunications system. We intend to put in place the other elements, including taxation incentives and data protection regulations, which are required for the rapid development of an active international centre. Our objective is to ensure that Ireland shares in this expanding service industry and the first class employment it provides and I am reasonably confident that this project will be a success.

I have referred to the flight of capital out of the economy. The astonishing fact about that outflow of funds is that there has been no precise information about its composition or cause. On taking up office, we instigated an investigation of the nature and cause of the leakage which is, of course, a new phenomenon in our economy. When we get the information we require later this month about the nature of the outflow, we will then consider what action can be taken to encourage these funds to return or remain in our economy. The return of these funds would bring significant benefits and would of course, have a major impact on interest rates.

The Jobsearch programme is another development measure which we have rapidly put into effect. Such programmes are a feature of the employment situation in Britain, France and the United States. They have been successful in lifting long term unemployed people out of the depressing unemployment ethos by actually finding them jobs they did not know about, by retraining them, or by offering them community and other work. This is an attempt worth making to provide a more dignified and helpful service to the unemployed, instead of leaving them neglected and unaided in the dole queues.

In this case, also, we have sought to accomplish this new project by re-deployment. In all, over 300 staff have been redeployed within the public service to undertake this new programme which is a fairly significant and commendable administrative achievement.

We propose to continue the reform of the public service. We have merged the Departments of Finance and the Public Service as proposed by our predecessors. This has already begun to yield dividends in increased efficiency and more rational use of staff. We intend to continue along this road and to ensure the rational use of staff in the Civil Service and the public service generally. We are fortunate in this country in having a highly skilled and fully dedicated Civil Service and public service. We owe it to them to ensure that their skill and dedication are used as much as possible. We must ensure there are no areas of the public service where people are engaged in tasks which are unnecessary or of marginal importance in a sensible scale of economic and social priorities or can be discharged more efficiently and with more job satisfaction than at present. Given the cost of the public service in our small relatively underdeveloped country and the heavy burden borne by our taxpayers we must ensure that every penny is profitably spent to the best advantage.

The merger of the two Departments, Public Service and Finance, does not mean that personnel function will be submerged. An active, enlightened personnel policy is an essential part of a modern administraction. A personnel management policy will, therefore, be an essential function of the merged Department. The former Secretary of the Department of the Public Service will become Secretary for Public Service Management and Development, responsible to the Secretary of the Department. His task will be to spearhead a major programme designed to ensure the maximum possible level of efficiency in the deployment of the personnel of the public service.

Given the enormous size of the national debt, its efficient management is of the greatest importance. It is generally accepted that the Department of Finance have been particularly successful in raising loans on very keen terms and in handling the management of the debt in a skilful and professional way. National debt service is a first charge on the Government's finances and the division of the Department which deals with this area of work has now been strengthened by the appointment of a specially experienced Secretary for National Debt Management who will be responsible to the Secretary of the Department.

I am concerned that in recent years there has been a tendency for Governments to look to the line Departments for advice in developing the economy and to the Department of Finance merely for cutting public expenditure and the borrowing requirement. This is an undesirable and unnecessary division of labour. In the past the Department of Finance had an important developmental function, which they exercised without impairing their control function. In their enlarged form I look to it to be a powerful instrument in achieving the Government's developmental objectives.

All who depend directly on the Exchequer for their pay and conditions must now accept the realities of the state of the public finances. Jobs can no longer be regarded as secure unless the Exchequer finances are put in order. Pay constitutes one-third of all Exchequer current expenditure. Everyone — both those who are paid from the Exchequer and those who pay the taxes which fund the Exchequer — must now accept that pay restraint must contribute to arresting the existing trend in the Exchequer finances. We are asking all those concerned to recognise that the Exchequer finances are in crisis and to co-operate with us in our efforts to avert this crisis in the interest of the nation and its future. The choice is stark and clear. Pay restraint must contribute to the solution of the Exchequer deficit. The alternative to realistic pay restraint is major layoffs of staff. These are the realities that must be faced. Attitudes and stances that were justifiable perhaps in better times are no longer relevant because the grounds on which they were based no longer exist.

Government Departments have been carefully restructured to respond better to the development potential we see in our economy. We have created a Department of the Marine in which we have now centred all Government functions which relate to the sea. This is because we consider that, as an island people, we have not yet realised a fraction of the potential of the seas around us. This potential exists in fishing, fish farming and mariculture, fish processing and marketing, shipbuilding, ship-repairing and marine servicing; and offshore mineral exploration and development.

We have also created a Department of Tourism and Transport. World tourism is growing by between 3 to 4 per cent and could be the world's largest industry by the year 2000. Ireland has virtually stood still in recent years in the midst of this growth in world tourism. Yet, we have one of the best tourist products in the world in our scenery, the warm welcome our people offer, our cultural and artistic life, our developed tourist infrastructure and our wide range of recreational facilities. The scope for development is evident in the fact that only 0.5 per cent of the Germans who take holidays abroad come here, from Britain under 4 per cent and from France only 1 per cent. In the years 1980 to 1985, inclusive, the number of cross-channel visitors travelling by air to Ireland fell by about 9 per cent while in the same period air passenger traffic from the UK to the EEC, excluding Ireland, grew by over 47 per cent.

Transatlantic visitors to Ireland in the same period rose by nearly 9 per cent as compared with an average increase of over 31 per cent to the other European countries. It has been calculated that if we had kept pace with the traffic to other countries our tourist income could have been nearly £250 million higher in 1985. Again, let me remind the House that £250 million in products and services is the difference between 1.5 per cent and 2.5 per cent growth.

The new Department of Tourism and Transport will now urgently prepare their proposals for increasing tourist revenue. Cheap, efficient and convenient access transport and ancillary services are the greatest requirement of the tourist industry. The new Department will now be responsible for ensuring that this comes about as rapidly as possible. Tourism currently generates some 80,000 jobs. The Government's aim is to increase that by 40,000 by doubling our tourist revenue. In the light of international trends, that objective is clearly realistic. We are making provision in the Finance Bill to extend the tax incentives of the business expansion scheme to investments in export tourism activities.

The development of the food industry is another area of development where the potential is obvious. The Department of Agriculture have now been made responsible for the food industry and the Department have been renamed the Department of Agriculture and Food to emphasise this new responsibility. An office for the food industry with a Minister of State in charge has been established within that Department. The growth in output of the food processing industry has been very small in recent years. We compare badly with other comparable countries like Denmark in the proportion of value added in the meat and dairy industries. We must develop our natural advantages in food production by developing our food processing. We have the advantage of being able to present to the world a brand image of food from a clean and unpolluted environment. Already, discussions have started with meat processing interests for a major expansion of our meat processing capacity and its export potential.

We intend to develop the horticulture industry where again the potential has been neglected, so much so that we import £37 million of vegetables and fruit annually which we can produce ourselves. The opportunity that import substitution presents can be guaged from the fact that the total value of the output of Irish horticulture is £125 million. We have set up an Office of Horticulture with a Minister of State in charge and his main objective will be rapidly to establish An Bord Glás to promote and develop the horticulture industry and its import substitution and employment potential.

We are taking a similar commercial approach to the potential of our forests. We have established an Office for Forestry with a Minister of State in charge to promote and develop this sector. Again, the vast natural potential we have in a Europe which is short of timber will be realised with a further significant contribution to growth and employment.

Our Irish workforce has already shown the capacity to man the new high technological and science-based industries. Progressively we are beginning to develop our own scientific industries as well as benefiting from the operations of the many overseas firms in that field. Our science policy, however, has not been clearly formulated or directed toward the development needs of industry and agriculture. Our research and development efforts have been fragmented. The Office of Science and Technology with a Minster of State in charge will have a new responsibility to spearhead the national effort to administer a realistic policy of science and research and develop a strong indigenous science-based industrial sector as well as continuing to attract technologically advanced firms from overseas.

We are probably the highest earners per capita in the developed world from exports. This has, however, been mainly due to the marketing efforts and arrangements of overseas firms established here. In fact, exports by the indigenous industrial sector have declined in recent years and there has been a very strong import penetration in domestic markets. We intend to tackle the situation with a view to turning it round. By comparison with other small European countries our export drive has lacked purpose and direction. The new Office of Trade and Marketing under a Minister of State will develop a new national programme for trade and export promotion.

Fianna Fáil have always recognised the importance of the construction industry as a major source of employment and the contribution it can make to the national economy. Our commitment to it has in no way been reduced. A detailed policy statement on the construction industry was set out in our Programme for National Recovery, which we intend to implement. The disappointment of builders and private individuals at the termination of a number of housing grant schemes is very understandable but these schemes could not be carried any longer by the Exchequer. I would like to point out, however, that even after the budget the provision in the capital programme for housing under all the different heads is £386 million compared with £382 million in 1986. This ensures that in 1987 at least State investment in housing is being broadly maintained.

In their pre-budget submission last October the Construction Industry Federation stated:

The single most important factor underlying the continuing slide in construction activity is a lack of confidence in the future prospects of the economy. The key to triggering a recovery in construction is to stimulate confidence. ... The current budget deficit which has now reached 8.5 per cent of GNP must also be singled out as a fundamental factor causing the current loss of confidence in the economy and outflow of money.

The construction industry will be the first to benefit from a restoration and confidence and a resumption of investment.

The house building sector could not be looked to for the revival of the building and construction industry. That was widely accepted. The operation of the home improvement grants scheme was leading to financial disaster. The incoming Government were faced with a huge unpaid bill of nearly £200 million and this was escalating. It was this bill that compelled us to terminate the three grant schemes. The previous Government, if they had been re-elected, I believe, fully intended to terminate the house improvement grants scheme, of which the 25 per cent cut in January was a first instalment. It is in the nature of things that budgetary decisions of any kind that for practical reasons have an immediate date of implementation can create difficult circumstances for particular individuals who have been planning on the basis that particular schemes would remain in effect. But the levels of expenditure in this area had escalated so fast, that the Government, if they wanted to get a grip on the public finances, had no option but to take the decision they have taken. If the budget succeeds in reducing interest rates, this will have a beneficial effect on mortgage interest and help support demand for houses. We have left in place the £2,000 for first-time purchasers.

We intend to recommence our decentralisation programme. The development of the Custom House Dock site will be pressed ahead with the object of creating several thousand jobs in construction. We also intend to maintain the road building programme at a high level. We plan to establish a national roads authority to co-ordinate roads policy on a national basis. The Government will be having ongoing talks with the industry to identify and bring forward projects which will help maintain employment until full economic recovery is underway.

The years since 1970 have seen a major expansion and modernisation of our health services. The scope of provision, the quality of medical care, the standard of facilities, especially the new general hospitals and the new specialist units, have improved enormously. This major investment has led to a significant escalation in the cost of health care to the community, and in recent years major financial difficulties have threatened to undo much of what has been achieved. Allowing the health agencies to run up huge overdrafts, now standing at more than £50 million, was simply piling up problems that will have to be tackled in the future. I would like to point out that in all the measures we have announced those on the general medical service scheme have been exempt. Prescription charges have not been introduced and the rural dispensing scheme has been restored.

The basic task facing this Government is to restore confidence in our economy. Without that, we can achieve none of our objectives, be they in relation to jobs, investment or interest rates. The recession in Ireland, extremely severe at the outset here as elsewhere, has been unnaturally prolonged because of the failure to take the necessary action over a number of years.

The reason we have in the limited time available to us concentrated on making a substantial reduction in the current budget deficit by over 1.5 per cent and in the borrowing level by nearly 2.5 per cent is because we have to break decisively out of the stagnation of rising debt and falling employment. We had to take control of the situation before it finally takes control of us. The cost of servicing the national debt in 1985 was 7 per cent more than the entire income tax take from PAYE. If the situation were allowed to continue with stagnant growth and with no significant policy changes, by 1990 we would have a national debt in excess of £35 billion, and a GNP debt ratio close to 180 per cent. These figures are based on the NESC study. Taking action now should encourage a reduction in interest rates, increased investment including a flow of funds into the economy, and an improved financial balance which will allow some alleviation of the tax burden.

In the time available to us it was not possible to give the full and careful consideration to every aspect of public expenditure that we would have liked. Arbitrary decisions had to be made. However, we intend to start work now on the Estimates for 1988. Every aspect of Government expenditure, its purpose, the need for it, its effectiveness, will be carefully and scrupulously assessed. This work will continue for the remainder of the year so that we will be in a position to present a Book of Estimates for 1988 that will meet the needs of our present circumstances as accurately as possible and comply with the necessity to apply public expenditure in the most efficient and economical way possible.

It has been clear for many years that it would not be possible to solve the imbalances in our economy without substantial cuts in Government expenditure. That necessity was clearly accepted by all principal groups in society with the publication of the NESC report last autumn. We have sought to make the cuts necessary without impairing the efficiency of the economy and without reneging on our basic social commitment.

It is possible, as we have shown, to adopt an approach that is both fair and tough. It is not acceptable, when sacrifices are called for, to put most of the burden on the least well off. On the contrary, for expenditure cuts to be acceptable they must, taken together, be socially equitable. In this budget we have removed the most harsh cuts proposed in the health and social welfare areas.

What we have done in this budget, taken together with our developmental proposals in the programme for national recovery, are, in effect, what every serious commentator on our economic situation has demanded for years. We have acted with courage and determination. I have pointed out that the target of 2.5 per cent annual growth is practicable and realisable. We have the measures ready to achieve that growth. We ask now that all political, economic and social interests join with us in the programme for national recovery. We will welcome any proposals or suggestions which can supplement, strengthen or support that programme. On the essential foundation of strong and stable public finances, we can build an economy of growing confidence, enterprise and innovation which can at last realise the ambition we all share in this House — to shorten the unemployment queues and end the debilitating flow of emigration. Because they are introduced for that purpose, the sacrifices that are now called for will be worthwhile.

This year's budget was severe because it had to be. We had to start getting the public finances under control or they would have got completely out of hand and in a few short years we would simply not be able to borrow what would be needed to keep going. We had to reduce the gap between the Government's income and expenditure so that Government borrowing could be reduced. This is the first essential step towards economic recovery.

Even though the budget is tough we have placed great emphasis on equity and fair play and spreading the load. We have tried to shield the poorest and weakest sections of the community to the greatest possible extent and to spread the cutbacks and the restrictions right across the board and ensure that those who could best afford to do so would carry most of the burden.

The public have accepted this kind of budget because they are genuinely concerned about the future and they want the country's finances put on a proper secure basis. Whatever their own particular preferences might have been, they recognise that the approach we have taken is the only possible way to deal with the situation.

The cutbacks and restrictions had to be made in order to make a fresh start. We have the resources and the skills to overcome the dangers and difficulties we face if we organise ourselves properly to do so. But we could not begin to get the economy growing again unless we put the public finances in order. Because we have taken these difficult decisions the investment needed for growth is now possible.

We have taken the first difficult steps toward economic recovery. I am now asking everyone concerned, trade unionists, employers, the public and private sectors, representative organisations, to rally to the aid of the country at this critical time. This budget must and will be rigidly adhered to. The decisions are final. There can be no giving in to sectional pressure or to special pleading no matter how persuasive. No one has a moral right to hold the country up to ransom in the extreme circumstances that exist today. We must all put the country first.

It is sad to see strident newspaper headlines about "War", "Opening Shots", "Threats", "Boycotts" and so on. We must ask on whom is it proposed to wage war? The answer is, of course, the Irish people. It is their future that we are determined to protect. In their interest this budget must be accepted and supported. The alternative is too disastrous for anyone even to contemplate.

Mr. D. O'Malley

I would feel very happy if I could feel confident that the Taoiseach meant everything he said. I quote from the penultimate paragraph of his speech where he said:

This budget must and will be rigidly adhered to. The decisions are final. There can be no giving in to sectional pressure or to special pleading no matter how persuasive.

When we heard the budget speech last Tuesday afternoon it struck me that there were at least three things in it which were wrong, whatever the good intentions underlying them or whatever the overall intention, and which were likely to have to be changed from the manner in which they were announced. The first was the hospital charge of £10 a day; the second was the retrospective abolition of three sets of housing grants, and the way in which it was done; and the third was the imposition of a withholding tax of 35 per cent on gross professional fees paid to certain professional firms.

In respect of the first, within 24 hours we had what has now become known as clarification of the hospital charges. I understand that last night we had further clarification. The statement made by the Minister for Finance in his budget speech is not now being adhered to. There are enormous limitations on this £10 a day charge to seek to make it more equitable, and I welcome that fact but having heard these "clarifications" we are now in a very different position from the position enunicated last Tuesday.

On the question of the housing grants, we know what transpired. We know what the "clarifications" are. If I were to say one thing on Tuesday, amend it enormously by the following Friday evening and then were to say I have not changed it at all, I might well be accused of telling lies. However, that does not arise in this instance. The advertisements in last Sunday's newspapers setting out the position in regard to housing grants and the conditions for eligibility as enunciated in last Tuesday's budget statement, were entirely inconsistent with the changes made on Friday evening. Presumably there was nothing the Department or the newspapers could do to change the advertisement, but this is described as clarification, not modification.

A change has not yet taken place in regard to the withholding tax of 35 per cent on gross fees, partly because not all the firms concerned yet realise its significance. But you can take it, Sir, that a change will have to be made there, unless the Government are determined to put many of those firms out of business. If they are determined to do that, fair enough, they will not make any change, but if they want to retain in employment many thousands who are employed by these architectural, engineering, surveying, accounting firms, then those changes will have to be made.

In the discussion which took place last Tuesday night on the Financial Resolution relating to the imposition of that tax, the Taoiseach sought to equate the payment of gross fees to such a firm with the payment of wages to somebody who was subject to PAYE. Any such equation or comparison is invalid and erroneous and the Taoiseach must know that as well as anybody else. It is a device which is used to try to give the impression that these fees are profits which go into somebody's pocket when, in fact, they are the gross earnings of a firm out of which wages and other overheads have to be paid and where the actual earnings may vary between zero per cent and 10 per cent of gross fees. It would be outrageous if any Government were to propose the imposition of a 35 per cent withholding tax on the turnover of a commercial or industrial firm. Essentially there is no difference between a commercial and industrial firm and a firm which trades in professional services of one kind or another.

The regrettable aspect of these three matters which I felt would have to be changed — and two of which have been changed up to now — is that they display a lack of confidence which undermines the credibility of the very programme which the Government are setting out to establish, the need to cut public expenditure, to reduce the public deficits and reduce the Exchequer borrowing requirements. These foolish errors which arise from incompetence give ammunition to those — and there are many both inside and outside this House — who would argue against this exercise being undertaken. Their case is strengthened by the silly errors which were made which are, in part, corrected but which are corrected with a lack of grace and a blatant attempt to deny what is absolutely plain and to suggest black is white or white is black, and think people are not sufficiently intelligent to realise that. It is regrettable that the type of programme and the type of task undertaken by the Government in this budget which in general terms I agree is a movement in the right direction, should have its credibility undermined by these stupid mistakes which display such a lack of basic competence and which should never occur in any budget even one which as the Government complain, they had only three or four weeks to prepare. Five minutes examination of some of those proposals would have indicated how foolish and unsustainable they were. The way they have been so rapidly, fundamentally and radically changed since underlines that fact.

This budget is a move in the right direction in one area at least but two areas which should be utilised in conjunction with the efforts to reduce borrowing and deficits are entirely neglected. I refer to the lack of any movement towards the reduction of taxation or towards the privatisation of State assets of any description. Without those two tasks being undertaken at the same time the budget must be defective because it accentuates rather than improves many of the difficulties that exist in the real economy as opposed to the Exchequer balance sheet.

It is very disturbing to see the position in regard to taxation. Up to now we had the highest percentage of taxpayers in the world paying tax at rates above the standard rate. In 1986, 43 per cent of our taxpayers paid above the standard rate. As a result of this budget, from Monday of this week, 6 April, 47 per cent of our taxpayers will pay tax above the standard rate. In Sweden and Denmark, which are regarded as high tax countries by those who are not aware of the position in Ireland, the corresponding percentages are 12 per cent and 4 per cent paying above the standard rate. The overall increase in income tax for 1987 is 14 per cent. We in the Progressive Democrats find it impossible to accept the validity of an approach like that, an approach that not alone makes no effort to reduce the levels of tax in a regime which is almost without parallel in the world, but goes out of its way to make it worse. The bulk of that 14 per cent increase in income tax this year will come from PAYE taxpayers, who, without exception, will pay significantly more in tax than they did last year as a result of the non-indexation of tax bands.

In October last and again in February at the time of the election the Progressive Democrats set out various proposals for cuts in public expenditure and for charges in certain cases where they were not made already. When we did that originally last year we were looked on as mad by much of the political establishment. We were told we were crazy and that no proper, sensible political party would face an election with that kind of approach. I am glad to see today, as a result of this budget, the kind of transformation that what we and we alone said 12 months ago was needed. This is coming to pass with a strange sort of consensus created in this House but the consensus has to stop short at a particular point because those cuts in public expenditure — the necessity to reduce borrowing which we identified last year, the necessity to reduce the deficits and so on — were proposed by us, and they were very severe, in the context of reduced liability for tax, of bringing back, at the beginning at least, some movement towards normal taxation rates as judged by anywhere else in the world. It is difficult for this kind of consensus to survive a situation in which all tax is increased significantly while at the same time these kinds of cuts are made. I and many other people, too, think now it would be possible to approach these problems in parallel and that it is unwise not to do so.

To drive our tax rates up further, as many commentators pointed out during the past week, is compounding and increasing the disincentive that exists and making it more difficult for the real economy to make any progress whatever. In the Sunday Tribune of 5 April 1987, Mr. Paul Tansey pointed out — and I would agree with him — that the error in this budget was not the failure to reduce expenditure but rather to seek to reduce deficits by increasing taxation and by cutting capital expenditure as opposed to current expenditure. He said:

Outside the capital budget, too little of the adjustment has taken place through actual reductions in expenditure. This may seem a harsh judgment given the limited time at the new Minister's disposal. It is important, however, that while reduced borrowing is a necessary condition for growth, it is not, of itself, a sufficient condition for economic expansion. Growth occurs when new businesses are encouraged to do new things. They will not be so encouraged at existing tax rates.

In many respects that is the kernel of the problem we face. This has been accentuated by what happened. Much hardship is created without anything positive happening. It is difficult to be enthusiastic about any such proposal.

A week has passed since the budget. It is very disturbing to find that the influence on interest rates which is supposed to be the real target has been minimum and negligible. There has been a very minor decrease in the gilt yield of about 0.1 per cent and about 0.25 per cent on the one month and three month rates in the money market which is of no real value. That is very disappointing. While one welcomes the significant decrease in the target for public sector and Exchequer borowing this year, it will not have a worthwhile influence on interest rates unless the Minister is prepared to announce now — he should do so in his reply to the budget debate — the Government's target for the Exchequer borrowing requirement and the public sector borrowing requirement for 1988 as well as for 1987. He should also express the Government's determination to stick to that figure as well as, hopefully, sticking to the figure for 1987. That would have a significant influence because, without those cuts in interest rates, very little will be achieved by the exercise which has been engaged in this year.

Dr. Brendan Walsh in his assessment of the budget in The Irish Times last week, in talking about the additional reduction of £170 million in the Exchequer borrowing requirement, said that that was made up by increases in taxation of £50 million, reductions in current spending of £40 million and of £77 million in capital spending. He said that the current spending cut was too low and that that is where the saving should have come from rather than from the two areas in which it was predominantly achieved. He feels that the ability of the Government to cut current spending is critical to achieving an interest rate reduction. This is possibly why that has not been achieved. He pointed out that tax moieties and capital cuts have been the approach of the recent Coalition Government over a period of more than four years, which were not the answer then and are not likely to be the answer now.

As far as the growth rate of 2.5 per cent is concerned, which we were told was the target which would be achieved by a Fianna Fáil Government, I remember remarking during the course of the general election campaign that they might as well have talked about a growth rate of 5 per cent or even 7 per cent because it bore no relation to reality. It is not realised that there has been no growth here since 1981; our GNP in real terms in 1987 is the same as it was in 1981.

It is interesting to see the comment of another economist, Dr. Honohan, on the budget that if its targets are achieved, a decline is as likely as growth in GNP this year. He went on to develop a point that the last budget in which there was a significant reduction in borrowing targets in 1983 led to a significant decline in GNP in real terms in that year. My recollection is that the decline in that year was 3.5 per cent. I fervently hope we will not face something like that now although it is on the cards, as Dr. Honohan pointed out, that we will have a decline in GNP this year instead of growth. These targets plucked out of the air are meaningless because nothing has been done in regard to taxation and, therefore, nothing will happen regarding employment. The movement on interest rates will be too slow and too low.

The Government made great play of their effort to cut cross-Border trade as if it were some kind of improper anomaly in our economy. They regard it as a problem and a distortion. However, we should look at the underlying reasons for this. Our indirect taxes amount to 17 per cent of GNP but in Europe as a whole indirect taxes — which are high in many countries — amount to 11 per cent of GNP. Britain is one of the average countries in Europe in this regard. That is the distortion, not just duty free shopping. Our taxes and prices are so high that people inevitably, as citizens of the European Community, are exercising their right to move around within the Community and also to move goods from one State to another. Indeed, it is the Government's objective to make this right total, without any restrictions, by 1992. The measure which they have introduced runs contrary to that as these are not duty free goods which are being brought in at a ridiculously low price. Everything bought in Northern Ireland is bought with duty paid to the British Exchequer. The trade concerned is not a distortion; it is a perfectly normal internal Community set of transactions. The tax concerned is the anomaly and the distortion and, not alone has nothing been done to relieve that anomaly or distortion, it has been increased this year.

There must be a beginning in any situation and we must accept that — I have spent some time commenting on some of the anomalous details which frequently arise due to sheer bad judgement and lack of competence — this budget may well have begun the long road, not towards fiscal rectitude because it does no do that, but at least to the first steps away from financial lunacy in which we have lived for some time. For that, at least, we should be grateful.

The Progressive Democrats have been labelled as monetarist, a party of the right, with a narrow objective and, allegedly, without a sense of social justice. However, we have never been referred to as a party whose publicly advocated policies are wrong for the economy or the people. We said at our inaugural meetings of the party in the early part of last year that we were setting out to break the vice that has paralysed the effectiveness of Government over recent years. If anyone could have foreseen a year ago what has happened in this House over the last few weeks they would have to agree that we have not now been unsuccessful. If we cast our minds back to the atmosphere of a year ago, it would have seemed impossible that the attitudes now taken by the three major parties could have been achieved because it was a very long way from what was happening in Government and in Opposition.

We set before the electorate what we diagnosed as the major causes of the national problem and illustrated in detail what should and could be done to begin the road to recovery. Well over 200,000 of the electorate supported our views. Last autumn we targeted public sector borrowing and taxation as the two fields for urgent action. At that time the Fine Gael end of what was then the Coalition camel said, "No, they are our policies; we have not been able to do anything about them for four years but they are still our policies". The Labour Party end of the Coalition camel said, "No, you cannot reduce taxation. You must not reduce the waste that causes the spending to grow and grow like weeds strangling the worth-while crop: you must let us go on and on putting more fertiliser on the weeds so that we can strangle any useful growth that may occur". The Labour Party subsequently disengaged themselves from that situation and the Fine Gael Party announced later that they would have wished to have done things differently during the past four years and perhaps if they got some opportunity in the future they might do so.

Mr. Dukes

Deputy O'Malley has some experience of that particular operation.

Mr. D. O'Malley

When the Progressive Democrats set out their policies for reduction in public sector borrowing we knew this would be an essential step in achieving a lower level of interest rates. Such a reduction, as well as saving the taxpayers' money — the State being the largest borrower — would begin to create the environment necessary for new investment with its potential for job creation. It would also help to reduce the cost of capital and borrowing for already established businesses.

We in Ireland cannot begin a realistic recovery if we do not see the contradiction in Government policies which, on the one hand, spends many hundreds of millions of pounds annually in giving incentives for the establishment of new industry while, on the other hand, those policies through waste and mismanagement financed by high taxation and borrowing create the very ingredients which affect the competitiveness and profitability of businesses already established. The policies of successive Governments have created an environment which has closed down existing industry at a faster rate measured in job terms than new industries have been able to absorb the displaced workers, should it have been found possible for such workers to be retrained.

As I have already said, I see this budget slowing down the pace towards financial lunacy. I would like to draw the Government's attention to a few other contradictions which exist in the system, the correction of which might aid competitiveness and re-establish confidence. The Taoiseach this morning called for such suggestions. I have two that I think are of some importance which I put forward in the expectation that they will be fully examined and the necessary action taken in relation to them.

I want to draw the Taoiseach's attention to the contradiction which exists in the key markets which influence rates for money which are controlled by and answerable to the Minister for Finance. The Government broker has been selling Government stocks on a reducing yield basis to a level which is now about 11 per cent. The resulting proceeds of these sales have been recirculated into the short term money market at rates that are now close to 14 per cent. The Minister for Finance should be aware that for most commercial borrowers the average of the Dublin interbank rates over a period of time is the yardstick by which commercial borrowing rates are calculated. The quicker these two rates for money on the one hand and for gilt edged stocks on the other hand are pushed more closely together the better it will be for all other borrowers. There is no point in creating conditions, as exist at present, which artificially reduce the yield on Government medium and long term debt by moppingup funds in the money market, pushing up the indicators which set the rates for a substantial amount of private sector borrowing. There is only so much money in the market at any given time, and the State with its facilities for short term external borrowing must ensure that its loan management policies assist liquidity rather than hinder it and lower current interest rates for everyone, particularly for the employment-creating borrowers.

We read and hear much about the environment for investment growth and the importance of confidence and certainty as an aid to the creation of a suitable environment. We are bound to ask what sort of image do we project abroad when we allow national and international commentators to joke about a so-called £1,500 million "black hole" that has mysteriously appeared in our statistics. It is no help to our international image to have this matter buried in a mist of conjecture and mystery. It fosters suspicion and creates discord internally. Many people in Ireland believe that some favoured and exclusive group of individuals have somehow or other pushed £1,500 million out of the country which, of course, is not the case.

There is an obligation on the Government of the day to provide an answer to this so-called mystery. There are accurate figures — I presume they are accurate — on exports and imports. We have a regime of strict exchange controls over the movement of funds out of the country. Even the stories about cases of Irish notes going over the Border must be quantifiable because any Irish currency notes are unlikely to be circulating in any other country for any length of time and must find their way, through traceable banking channels, back into the country. I urge that the necessary clarifications be made so that this blot on our national credibility is removed as quickly as possible. A significant part of this anomaly will be found to be attributable to trade-related payments, as well as to the repatriation of profits, apparently or allegedly generated by the Irish-based subsidiaries of foreign owned companies. I use the phrase "apparently or allegedly" because much of these profits tend to arise as a result of inter-company or internal group transfer pricing.

I want to draw the Minister's attention to the subject of what is called leading and lagging and its effects on the competitiveness and profitability of Irish industry and, in particular, the aspects that are bound up with banking practice in Ireland. I wonder if the Minister is aware that in addition to interest charges and facility charges, practically every section of banking activity is now being used to levy charges on borrowers. Even the legal costs incurred by the banks in formalising their own conditions for lending in many cases are passed directly on to the borrower. The security demands being made by the banks in respect of their customers' requirements for foreign exchange cover is acting as a very serious deterrent to manufacturers and traders taking advantage of the forward foreign exchange markets.

For years I have been advocating the need for our financial institutions to adapt to the needs of Ireland as a trader. One of the predominant reasons why Ireland is not a major or significant international trader is that it does not have the underlying banking facilities to enable it or its people to carry out that function. I introduced legislation in 1978 to permit bankers to provide their Irish customers with the type of guarantees that foreign exports and contractors could easily obtain which fulfil the requirements of overseas customers for tender bonds and performance bonds. I have been advocating the need for exporters to use the foreign exchange markets so as to ensure that the value of exports and the costs of imports were fixed in Irish pound terms, thus eliminating completely any risks associated with trade in foreign currencies for those who wanted to concentrate on their basic business of trade in goods which they understood and could control and who did not wish to concentrate on gambling in currencies.

The Irish exchange control authority, which is the Central Bank, has very strict requirements regarding authorisations for such forward dealings. There must be documentary evidence to support the forward exchange cover being requested. The commercial banks who are authorised to provide this facility to their customers have, however, taken it on themselves in many instances, notwithstanding these exchange control requirements and the necessity to see that they are complied with, to delcare that that is not sufficient. They choose to determine or to assume that an exchange risk applies and they quantify that as a 10 per cent charge for cover against this assumed risk in connection with transactions with EMS countries and a 20 per cent risk on transactions with countries outside the EMS. I do not think it is widely realised that both of these percentages are applied to the full value of sales or purchases.

These banking impositions are a major deterrent on the willingness or ability of enterprising traders covering exchange risks and have to be provided for the normal working capital that is required for everyday purposes at a very substantial cost to the companies concerned. The Minister for Finance should investigate this matter urgently because the amount of uncovered foreign currency exposure which exists in the ordinary trading activities of many worthwhile and enterprising businesses creates an inbuilt inclination for leading and lagging caused in some cases by potential losses and in other cases by traders taking advantage of favourable trends in foreign receivables which have arisen usually by accident rather than by design. In either event the result is an unexplained element in our national financial statistics and goes a long way towards explaining the extraordinary anomaly that our official figures are not able to take account of. If the certainty of the trade is strong enough to conform with exchange control requirements, why should the commercial banks view it as a matter of such uncertainty as to require cover of 10 per cent or 20 per cent of turnover as is the case at present? Why is it that Irish banks should require this sort of cover when banks in other countries seem to have much less expensive requirements in this regard giving enormous advantage to the competitors of many of our firms?

The ability of the banking system in any given country at any given time to respond to the needs of manufacturers and traders in that country is essential to their overall success and to the welfare of the country as a whole. Let us take, for example, the Scottish engineering industry in the 19th century. They became world famous and world leaders but they would never have done so simply as engineers. Parallel with their development at that time the banking system in Scotland developed to cover their activities in a precise way which reflected their needs. As opposed to the Scots, the English became great traders in the Far East, the West Indies and elsewhere because the city of London and the banking institutions in London, Bristol, Liverpool and elsewhere in the 18th and 19th centuries were able to adapt to the needs of those who were engaged in that trade at that time. Without the assistance of the banks at that time, that could not have happened and the growth that one saw over a long period in the British economy would not have happened and the empire building which went on would not have happened.

Let us compare that with the lack of compatibility that exists in this country today between our banking system and our manufacturers and traders or, more accurately, our would be traders because we have so few traders in an international sense. If the controls of low interest foreign currency soft loans, which have been provided from the EC through the ACC in one instance at one time and in part through the ICC at another time but now administered through the commercial banks, were channelled through some of the State banks or through the Central Bank it might avoid many of the difficulties that the commercial banks in their activities are creating for traders at present. That may seem a drastic thing to say but if we are left with no option and if many of those who are struggling very much against the odds in our economy today are left with no option, that is something which will have to be seriously considered.

If our economic recovery is to be based on our success in exporting to other markets, we must ensure that our financial institutions have the will and the flexibility to facilitate such trade. If they are unwilling or unable to do so, it should be the responsibility of the Government to see that they respond properly or the Government should provide other channels which can provide the service. This morning the Taoiseach asked for specific suggestions on how our situation can be improved rather than making facile passing political comments of the day. I have made some serious and constructive suggestions. Only the Government can implement them and only the Government can give them the necessary examination. I hope they are not going to be cast aside simply because they are different or new because the extraordinary conservatism which exists in this country will strangle us in these areas as it has in so many others if we are not prepared to shake it off and not prepared to say we do not accept that simply because something has been happening this way for 50 years or 60 years it must continue to happen and we have to live with it.

Our banks should be there and should see themselves as being there to serve those who are engaged in economic activity and not to strangle those who are engaged in such activity. This is not an area where legislation is needed. Some hard talking is all that is needed. It is necessary to recognise the realities and to talk to the banks in a no nonsense manner about how they approach them. The other matter is equally important. It is an extraordinary distortion that the liquidity of the interbank money markets should be so much higher than the yield on gilts today. It is seriously damaging economic activity within the country. The Government have a duty to increase the liquidity of those markets and to bring them down towards the gilt yield level. If they do so and show that they are determined to do so — one of the ways they can show they are determined to do it is by announcing now the proposed deficit for 1988 — they will have an impact on interest rates.

One of the great disappointments of this budget, apart from its failure to deal with the real economy as opposed to the Exchequer and apart from its failure to deal with taxation levels and with the change of unnecessary ownership from the State to other investors of many assets and companies of the State, has been its lack of influence on interest rates. That is crucial and the ideas I have put forward today can be very helpful if they are properly assessed and if the necessary steps are taken to implement them. Legislation is not required; all that is required is determination.

We have seen flashes of determination during the past week or so and we have seen flashes also of the very opposite to determination. We have got to wait and see and I hope these changes of mind which were imposed on the Government by their own misjudgments and foolish mistakes in drawing up the budget are not going to be a feature of the scene during the next year. The first faltering steps in the right direction have been taken. If they are continued they will have every encouragement from this party and this party, apart from their electoral achievements, have the satisfaction of knowing that without talking as we did a year ago we would not have heard the kind of things we have heard in this House during the past week.

We welcome the much greater realism which now exists and we want to encourage it. We want to maintain it and, where appropriate, we want to intensify it. We want to expand it and, in particular we want to see it expanded away from a concentration on the Exchequer into the kind of areas I have been talking about laterally today which will have a profound affect on the real economy, on employment and investment. In the last resort, these are the things that matter. The Government are there only to facilitate within reason those who would take those steps. Unhappily, those who would take those steps do not get encouragement from this budget. If some of the different approaches that were made were undertaken they would get such encouragement and I ask the Minister, and his Department, to give full consideration to what I have said.

Mr. Dukes

Deputy O'Malley seems to have a somewhat coloured view of the course of economic debate here over the past four years and of the influences there have been on that debate. He reminds me of nothing more than a man who was accustomed to playing gaelic football with a particular team for a period of years, has a falling out with the captain, goes to join another club but rushes back to the clubhouse after a match clutching an oval ball and saying, "look, I will change the whole nature of this game". That seems to be a part of a claim Deputy O'Malley is making today. I do not wish that to refer to the substance of what is in the ball he is carrying. That, of course, is a different matter.

We had this morning a very zealous sermon delivered by the Taoiseach with all the zeal of the newly converted but, of course, it is not the first time we have heard that doctrine expounded. There was another occasion when the Taoiseach made points very much in a similar vein and I should like to recall some of the words he used on that occasion. For example, he said:

As a community we are living away beyond our means. I do not mean that everyone in the community is living too well. Clearly many are not and have barely enough to get by. But taking us all together, we have been living at a rate which is simply not justified by the amount of goods and services we are producing.

He went on to say:

We will have to cut down on Government spending. The Government are taking far too much by way of taxes from individual members of the community. But even this amount is not enough to meet its commitments. We will just have to re-organise Government spending so that we only undertake the things which we can afford.

He said more in that vein and added:

In our present economic situation, it is madness to think that we can keep on looking for money for less work or to think that if we have sufficient economic muscle, there is no limit to what we can extract from the community. I want everyone to know and understand this simple fact and with that understanding to form his or her own personal attitude as to what he or she should be entitled to.

It was not today nor even last week that the Taoiseach made those statements. I was quoting from a little booklet which gave us the text of a broadcast by the Taoiseach, Mr. Charles J. Haughey, TD, on Radio Telefís Éireann on 9 January 1980. They were the words of a newly elected party leader, a new Taoiseach, who appeared to be determined then to seize the economy by what he has recently termed, the scruff of the neck and to rectify the excesses of the previous two and a half years. The promise was great but, the delivery, I have to say, was pitiful.

Despite what was generally regarded as a perceptive and accurate analysis of the situation facing the country, the then Fianna Fáil Government failed between January 1980 and June 1981 to address the problem properly. Their failure to do so at that time was all the more blameworthy because they had then a 20 seat majority in this House.

The Coalition Government of 1981-82 began to tackle the problem vigorously, and, in fact, initiated many of the measures which proved their effectiveness from December 1982 up to last March, and on which indeed the present Government are still relying, to stop the runaway gallop of public expenditure and give some hope of a stabilisation, if not a reduction, of the tax burden. The measures taken by the 1981-82 Coalition Government were strenuously opposed by the Fianna Fáil Party in Opposition. When they came back into Government in March 1982, the Fianna Fáil Party paid lip service to the need to redress the financial position and substituted for the coalition budget proposals of that year a device which appeared in the short term to solve the problem but which has created even greater problems in the longer term. I refer, of course, to the imposition of VAT at the point of entry. That device allowed the Fianna Fáil Government in 1982 to avoid necessary reductions in expenditure by means of a strategem, the effects of which ironically were not felt until that Government were about to go out of office in November 1982. Let us remember that it was not until the first payment day after the September-October VAT period in 1982 that employers, manufacturers and those involved in the service industry began to realise just what VAT at the point of entry meant to them. At that moment the Government who had sought to save themselves by that strategem were on their way out.

During the period of office of the Fianna Fáil Government in 1982 the financial situation, which the previous Coalition had begun to rectify, quickly got out of control again. There is no point in the Taoiseach now claiming that public expenditure was kept under control during that period of office. That claim simply ignores the fact that the revenue forecast on which the projected level of expenditure was founded quickly revealed itself to be excessively optimistic and the Government found themselves in mid-summer, just three months after the budget, having to attempt major reductions in expenditure. When we look at it in that perspective it gives a different picture from the one the Taoiseach attempted to convey during the course of his remarks this morning. That Government in relation to public finances were an abject failure and the only good thing about them was the brevity of their lifespan.

From December 1982 up to March 1987 Fianna Fáil in Opposition opposed every step the Government took to redirect and to control both current and capital expenditure. They opposed every measure designed to get better value for the expenditure of both the taxpayers' money and borrowed money. They opposed every step to redirect expenditure so that the cause of equity and justice would be better served in the deployment of public resources.

I do not intend to dwell at any length on the rhetoric of those years, littered as they were with terms like, book-keeping, monetarist, Thatcherite, uncaring, insensitive and so many more. Measures taken during that period of office now being rightly promoted by the Government, were described as mean, petty, harsh or savage, depending on the particular spokesman in question. Opposition spokesmen of the day — I remember in particular the Opposition spokesman on Finance — waxed eloquently about what they saw as the lack of signposts, indicators, signals and so on. What they were saying was that they did not like the kind of measures we were putting forward and that they opposed them.

The Government during that period did not allow themselves to be deflected from the economic and budgetary measures they believed were necessary. They certainly would not allow themselves to be deflected by empty rhetoric. That Government kept to the course they had mapped out and brought about substantial improvements not only in relation to the level of spending but also in relation to the manner in which expenditure programmes, both capital and current, are planned and carried out. Many improvements were made in the structure of administration over that period and if the present Government have the wit to do so, which I sincerely hope they have, they can benefit substantially from these improvements.

But there has been a massive waste in the years since January 1980. Over those seven years there has been a massive and unforgiveable waste of time and energy in the process of really bringing home to the people the nature and extent of our problems. There has been a scandalous waste of energy on the part of those on the opposite side of the House who, over that period, have obstructed or slowed down the emergence of the real consensus on the course we must take, both in relation to the definition of our problems and in the specification of the steps that must be taken in order to effect a remedy.

Every Government must operate in the climate of the day. To be succesful a Government must bring the people with them. From December 1982 to March 1987, the Government found there were limits to how far they could bring the people, limits which resulted in very large part from the fact that the then Opposition were, wittingly or unwittingly, peddling a sham message of false hope by pretending that there was another and magic way when such a way did not exist. I say wittingly or unwittingly because I am convinced that a great many of those on the back benches of Fianna Fáil simply did not understand the nature of the problem. They were the unwitting ones. I am equally convinced that during those years there must have been some on the front benchers of Fianna Fáil who at least had the beginnings of an understanding of the problem but who nevertheless persisted in playing the short-term political game of opposition.

The tragic result of all this has been that the adjustment of our economy has been unnecessarily and unjustifiably delayed. As a result, many people who had jobs are now unemployed. Many people who sought jobs have been unable to get them. In a very real sense the prevarication led by the Opposition over that period has given rise to unemployment, social degradation and unnecessary suffering.

In the first paragraph of the financial statement last week the Minister for Finance said:

There have been too many failures, too many missed opportunities and a prevailing lack of confidence in our ability to achieve progress.

In a later part of this speech the Minister said:

There is an air of despondency that is unwarranted. We have problems but it is well within our ability to correct them.

Were it not for the fact that so many people have suffered from the delay in economic adjustment occasioned by the ambivalent attitude of Fianna Fáil in Opposition, we might perhaps savour the fine irony of a Fianna Fáil Minister making statements of that kind. Which, of all the parties in this House, have spent the past four and a half years emphasising the black side of the picture? Which, of all the parties in this House, have spent the last four years not just resisting the action needed to correct our problems but also attempting to peddle illusory formulae which did nothing more than divert attention from the real solutions? Which party used up lengthy hours of debate in this House proposing self-financing tax cuts and characterising any attempt to get value for public money as parsimony or lack of imagination? Which party now are clinging properly but desperately to those very concepts they rejected over four years in order to be able to steer a course along the path on which there is an emerging consensus?

It now appears that just over seven years after the present Taoiseach's first exposition of the problem as Taoiseach and just over five and a half years after the first Coalition measures of July 1981, the parties constituting almost 90 per cent of the membership of this House have reached a broad consensus on what the main thrust of economic and budgetary policy should be. Looking at the record of those years there can be no doubt in anybody's mind as to who has been to the forefront in bringing about that consensus. It has been brought about by determined application by the Fine Gael Party both in Government and in Opposition. We should look at that consensus and ask what it really means. It is a matter of immense importance to us at this stage to examine that consensus, to examine its content and its limits, if there are limits to it, in terms of the fundamental principles stated by the Minister for Finance in his financial statement as follows:

Public finance targets must be consistent with good management of the economy,

there must be a special focus on productive economic activity and employment, and ...

borrowing and the cost of servicing the national debt must be progressively reduced.

This year the Government aim to keep the current deficit to 6.9 per cent of GNP and the Exchequer borrowing requirement to 10.7 per cent of GNP. On the basis of those principles and those targets, Fine Gael do not oppose this budget. Public finance targets must be consistent with good management of the economy. We can all agree on that. Between 1977 and 1981 we saw very clearly how laxity in relation to public finance targets gives rise to extremely bad management of the economy. In particular, a cavalier approach to financial targets leads inexorably to a situation in which the income of future years is progressively mortgaged more and more heavily. It is because of this mortgaging of income we find today that the resources we produce, while sufficient in themselves to support levels of activity and service that we would find acceptable, are not all available for these purposes. Interest and repayments take a huge bite out of our current resources and seriously curtail our ability to deal constructively with today's problems and to plan for the future. It is only by reducing that lien on our current resources that we can regain the ability to use those resources to maximise employment and welfare and to use our credit standing constructively to provide for the future.

Fine Gael's concern, and I hope it is shared in the House, about the current deficit and borrowing levels springs directly from our desire to see more investment, more job creation and more freedom for the citizen to use his or her income in the way that best matches his or her requirement. The refusal by the Fianna Fáil Party over many years to take these concerns seriously comes directly from the arrogant and patronising belief that they know better than the people. There are other elements in this consensus also, one of which concerns taxation. In making his Financial Statement, the Minister for Finance said:

Personal taxation is at an all time high and is a serious deterrent to our development. There must be reform in order to remove barriers to economic activity and to make the system demonstrably fairer. There must also be radical improvements in tax collection.

I agree with all of those sentiments and I welcome the fact that the Fianna Fáil Party in Government now espouse them. We would all have been greatly assisted if the Fianna Fáil Party had shown the same zeal about the improvement of tax collection when we were debating the 1983 Finance Bill in this House and other Finance Bills which have come before us in the meantime. In 1983, improvements in tax collection procedures were regarded by the then Opposition as being repressive. It is interesting to note that there is not one single reference in this year's Financial Statement to the series of useful reforms in both direct and indirect taxation carried out in the years between 1981 and 1986. I wonder whether this Government have either the enthusiasm or the imagination to tackle these matters, but having said that, I must say also that perhaps we are fortunate that the Government have not allowed their imagination to run too far away with them in relation to tax policy this year. Some of the more imaginative measures seem to have set a course for disaster. There can be no doubt that the imaginative imposition of a 35 per cent withholding tax on professional fees will have more of fantasy about it than reality. The treatment of mortgage interest relief shows the same dull lack of sensitivity that has, through successive Fianna Fáil Governments, given us inequities in both taxation and expenditure. There is no evidence here of the careful targeting which should be the hallmark of fiscal measures which have a social dimension.

References in this year's Financial Statement to tax reform are perfunctory and have every appearance of being there just to take the bare look away from things. There is no evidence, either, in relation to direct or indirect taxation, of any continuation of the close review of the system which led the last Government, over four years, to bring about a number of useful improvements in the structures of direct and indirect taxation here.

Let the Government not plead that it produced this budget after only three weeks in office. This is not an obstacle, since I know perfectly well that a whole series of small but useful improvements which are all well documented can be produced at the drop of a hat by the Department of Finance. They have all been well analysed. All they need is a decision, a choice.

I have mentioned already the one overt reference to tax reform in this year's Financial Statement. What else has been said on this matter? The Minister for Finance in his Budget Statement said:

In the short term, it is not possible to reduce taxes. The Government will, however, give early consideration to major changes, as soon as the budgetary position allows.

He continues——

First of all I have to say that, because of the difficult budget situation, it is not possible on this occasion to provide for reductions in income tax. A choice has had to be made between reducing borrowing and reducing income tax and the more responsible course for all concerned at this time is to lower the borrowing figure.

That last reference is the only place in the Budget Statement where we find even a suggestion of the inevitable and unbreakable link between expenditure and taxation. I believe that we should spend a great deal of time examining that link. We do not have a taxation problem so much as an expenditure problem. If expenditure here were at a level which allowed all of our income tax rates to be five points lower and all our personal allowances to be 50 per cent higher, there would be fewer arguments about alleged anomalies or disincentives in our tax system and I am convinced there would be a much more ready acceptance of the basic principle of equity that is involved in a progressive income tax structure. I think we should attempt, and the Government should try, to direct more and more public attention to the link between expenditure and taxation. It is there that we really have the debate about where equity lies both in expenditure and in taxation. It is there that we can focus public attention on the part that each one of us, whatever our income levels, must play as members of the community to protect the weak and foster development for the future. If we discuss taxation policy without referring to that whole area, we are simply deluding ourselves. This all points to doing away with the basic cause of high taxation, namely, high expenditure.

Lest anybody in the House, — and there are none of the four here at present — be tempted to claim that there is another way of finding the resources to reduce taxation by collecting the allegedly outstanding sums due, usually claimed to be in the region of £600 million but varying depending on the speaker and the audience, notwithstanding the careful and comprehensive explanations furnished down the years in the annual reports of the Revenue Commissioners and by Ministers for Finance in this House, let me say immediately that that approach is both a snare and a delusion. I have frequently pointed out both inside and outside the House that those amounts are very largely estimated amounts. There is a constant inflow of amounts which are finally due and payable and a constant addition of new estimates being made. It is of course the case that if we found suddenly the magic key and all taxes were instantly collected when due, we would not have a figure for outstanding estimates and assessments. Equally, the extra amounts that would be collected would not be anything like the order of £600 million. This argument and this figure are just two more reasons which are seized upon by those who do not like to face the expenditure problem for avoiding the issue. I would ask those people if they really believe that if we had the magic key and we could unlock that box we could actually go out and collect £600 million at one fell swoop with complete justification and without causing also major disruption and unemployment in our economy. The answer is clearly no. Those who affect not to know that or who choose to ignore it are simple misleading the people. I think the simple message is that the expectation from the development of tax collection procedures, which I support, has been grossly overstated. Let me say also that I have more than a question-mark in my mind as to the reality of the £10 million which the Taoiseach expects 25 former Department of the Public Service officials to lead, stimulate and encourage the staff of the Revenue Commissioners to collect. I think the Minister for Finance might have been as well off not to make any allowance for such a figure in his budget. While £10 million at the end of a long session of budget discussions can resolve a few difficulties. I think it is there more to show the good intention rather than an expectation of an inflow of revenue.

The central plank of the Government's economic strategy in so far as it can be divined from this year's Budget Statement, is to act in a way that brings down interest rates. We have seen that message delivered publicly and with some energy and gusto over the past few days by members of the Government. It was very curious and even a little painful to watch the Minister for Energy last Sunday night repeating again and again: "We want to get down interest rates." He had almost got to the point where if somebody said "Hello" to him he would say; "We have to bring down interest rates." That appeared to be the central plank of economic policy, and it is an objective which is without any doubt totally deserving of our support.

I want to make it clear that we will support any measures the Government take that will have the effect of bringing down interest rates. Expenditure and borrowing are the key factors in this connection. I support the Government in their intentions and efforts but I must point out that, in order to be credible in this connection, budgetary, fiscal and economic policy must be firm and consistent. We cannot afford ill-considered actions which turn out to be mistaken and have to be changed. Neither can we afford ill-considered measures which turn out not to have the intended effect. In that connection measures taken by the Government in relation to housing grants where we had a subsequent change, in relation to inpatient hospital charges where there must be a change, and in relation to the withholding tax on professional fees where I am convinced the Government will find quickly that the objective will not be reached, are not at all helpful in creating or maintaining the climate needed to bring down interest rates.

A great many areas in the budget deserve comment but I want to make one final remark about the Government's reliance on reducing interest rates. As I have said, I support fully the intention of the Government in that regard and I will support fully any action the Government take to bring it about, but I am not at all sure that it is wise of the Government to put all their eggs — God knows they are few enough — into this basket, which is a fairly flimsy basket, at the moment. However, having said that, I want to make it clear once again that we will support the Government in the kind of action they will take.

I turn to the remarks made this morning by the Taoiseach. For his benefit let me repeat what I said before he came in, that we had had a sermon from him this morning which was delivered with exemplary zeal, the zeal of the recent convert. We have heard it before, and I almost put the Dublin end on that one too. We heard it before in 1980 and the intervening period did not seem to show results. We had statements from the Taoiseach in his address this morning of the following kind:

We made no expenditure promises or commitments in the campaign which would inhibit us in Government from taking the action needed to restore the public finances.

Perhaps that is true in the strict sense of the word, but I do not think it was quite the intention. What we can say is that during the last election campaign the Taoiseach and his colleagues made no commitment whatever to bring about reductions in expenditure. The Taoiseach went on to say in relation to expenditure:

I ... stated that the estimates for every area of public expenditure would be examined rigorously and in detail "and reduced to the irreducible minimum." We have carried out that work, and the level of Government expenditure, which was 56.2 per cent of GNP last year, will now be reduced to 55 per cent of GNP in 1987 as a result of the budget, the start of a process we are determined to continue.

I remind the Taoiseach and the House — I hope in a way which will simply underline the benign revolution that has taken place on the benches opposite — that the Taoiseach also spoke first during that campaign about keeping expenditure at its real 1986 levels. When he did not like that he said: "No, we meant keeping it at its real 1986 levels in relation to GNP." Today I am glad to say the Taoiseach is saying that, quite apart from keeping expenditure anywhere near real 1986 levels, he has reduced it from 56.2 per cent of GNP in 1986 to 55 per cent of GNP in 1987. We should consider that matter for the record in the light of what was said some time ago.

The Taoiseach said later in his speech:

In 1986 alone £1.5 billion was taken out of this economy with devastating results on investment and interest rates.

Further on again he said:

The astonishing fact about that outflow of funds is that there has been no precise information about its composition or cause.

The Minister for Finance made a similar comment during his Budget Statement. That contrasts remarkably with the kind of statement the Taoiseach and his colleagues were making up to a couple of weeks ago. At one stage they seemed to ascribe all of that to deposit interest retention tax. At another stage Deputy O'Kennedy, Minister for Agriculture, ascribed it to the fact that we had not enough signposts or signals. At other stages they ascribed it to the fact that there was not great confidence in investment in this country. Now in Government they find that there is no precise information about its composition or cause. The Taoiseach continued:

On taking up office, we instigated an investigation of the nature and cause of the leakage which is, of course, a new phenomenon in our economy.

I wonder what Deputies opposite must feel when they listen to that. Of course, what the Taoiseach says here is quite right, but it is not the first time it has been said. It has been said repeatedly over the past two years but, of course, there is nothing like having your nose right against the grindstone for concentrating the mind. Perhaps now we will have a clearer vision of the forces that are at work in our economy. I suspect when the report of this investigation into this new phenomenon becomes available, the Taoiseach and his Ministers will conclude that some of us on this side of the House were quite right to point out to them that outflows of that kind are an inevitable, essential part of the deals which the Irish Government make with multinational firms who come to set up here, who want profit centres here to contribute to their overall operations, multinationals, indeed, the Taoiseach and his colleagues take great credit for having attracted in here in the first place. All credit to them if that is what they have done.

The Taoiseach

Those profits were taken into the arithmetic before the £1.5 billion.

Mr. Dukes

The Taoiseach should try to distance himself from it. We have seen another area where the Taoiseach has come round to reality, and I welcome that awakening. Maybe spring coming on has brought a new budding of spirits that we can only welcome.

The Taoiseach referred to the situation following the proposed abolition of the farm tax. He said the Government had ensured that there would be no loss to the Exchequer this year because the reduction of £9 million in the amount of tax which would have been received from farmers will be offset by a reduction in the VAT rate provided. As I said on the night of the Budget Statement, I consider that a most ill-considered measure. The whole logic of the tax is that no part of it should fall on production. There is absolutely no reason for the Government, because they had a brainstorm about farm tax and moved away from that current basis of taxation, to interfere with the structure of value added tax in this stupid, mischievous and totally unnecessary way. The Taoiseach made a few other claims in relation to growth. I am glad for the Taoiseach's sake that he has found a professional commentator who is forecasting a 1.75 per cent growth this year. I hope he is right but one learns to have a certain degree of scepticism about some of the commentators. In his speech the Taoiseach said and I quote:

To reach the objective of a 2.5 per cent growth rate we need to secure an additional output of goods and services of £250 million net of imports in our economy. The elimination of the total £300 million we are now losing in shopping expeditions cross-Border and cross-channel would by itself alone, after deduction of the normal leakage in imports bring us up to our target.

I do not know who produced that particular gem for the Taoiseach. I recommend strongly that the Taoiseach go back to whoever produced that and get him to rethink it. What is the basis of the figure of £300 million that we are allegedly losing? That figure, on a quick reckoning, is equal to 1.8 per cent of GNP. Are we now in a position where we can pin that down and say, with certainty, that 1.8 per cent of GNP is spent on shopping expeditions cross-border and cross-channel. I should like to know the basis for that assumption and indeed I would like to see the evidence for it. The extraordinary part of it is that the figure, on the basis of the figures worked out here, of £250 million is equal to the difference between 1 per cent growth rate in GNP and a 2½ per cent growth rate. I note that the Taoiseach is not building in the extra bonus of 0.75 per cent which he has got from some unidentified commentator. To treat the dynamics of economic growth in this manner and to put forward this simple arithmetic as an illustration of what would actually happen throughout the economy from the change he is talking about here, displays to me a very worrying credulity, a credulity which I hope will not be carried through, during the lifetime and activities of this Government.

In his speech, too, the Taoiseach referred to the importance Fianna Fáil have always attached to the construction industry. I did not hear any cheers or applause from the Government benches when the Taoiseach made that announcement and expressed all the concern he has, not just for the construction industry but for the people who have been affected by the measures the Government have taken. I should like to say to the Taoiseach, and I hope he will not mind my giving him some advice — I have been on the other end of that stick also — that he will have a great deal of difficulty arising from the fact that in the past four years he has been one of those, and he has many compadres, on the benches over there who have done the same thing, who have deliberately encouraged the myth that if you want to expand the Irish economy you pump money into the building industry. He is now finding that he has to implement policies which are based on reality. As the economy expands demand for the products of the construction sector expands also. You must have growth before you can develop stimulated secondary growth in a sector that is there to provide the infrastructure for a continuing process of growth but which does not lead that process. This is one area where the Taoiseach will find himself in some discomfort having cultivated and propagated that kind of myth during the past four years and there are others, too.

I should like to refer to the last comments made by the Taoiseach when he said he was saddened to see strident newspaper headlines about the wary opening shots, threats, boycotts and so on. He asked, "On whom is it proposed to wage war" and went on to say that the answer is, of course, the Irish people. I agree with the Taoiseach on that. There is one point we should establish clearly in this House and which all of us should adhere to and it is this: when this House, on the basis of proposals brought in here by the Government, makes decisions and even where the House divides before making decisions we must accept those decisions whether we like them or not because they are the decisions democratically arrived at by the Government and the legislature. I will not give any encouragement to people, wherever they may be, who say: "We will not give effect to those decisions". The process of developing the consensus are far too important for any of us to play those kinds of games. I do not intend to do that nor do I intend to provoke interest groups, or to steer interest groups, on a course that encourages them to refuse to accept the democratic decisions of this House.

However, I will discuss with my colleagues in the House and with those outside who have a legitimate interest to put forward any issue on which we believe the Government are making unwise proposals and we will bring the wisdom we gathered from our own resources to bear on the futher development of the Government's budgetary policy as it will be manifested during the course of the Finance Bill and of other measures which come through.

In conclusion I hope I have made it clear to the Taoiseach that we are not opposing the general thrust of this budget. We believe it is on the right lines. Unfortunately it has come to the point where we have a consensus much too late for a great many Irish people. I am glad that we in the Fine Gael Party have brought about that consensus and we will build on that now for the good of the Irish people.

Mr. Roche

I should like to compliment the two previous speakers on their extraordinary creative interpretation of history. I compliment, in particular, Deputy Dukes on his closing comments. I hope his comments have been heard and taken note of by the other members of his party. I understand the tradition in this House was that the Government side spoke after the Opposition side. I note that there were two Opposition speakers called in your absence.

A point worth bearing in mind when discussing this budget, or any other budget, is that what Governments give, Governments must first have taken away. When the Ministers took up office on 10 March they were, in most cases, the inheritors not just of empty cupboards and empty departments, but of large stacks of IOUs. In the Department which was unfortunate enough to have been under the stewardship of Deputy Boland, not only was the cupboard bare but the contents of the Minister's Office and anything else in the Department that was movable seemed to have been pledged to the pawnbrokers.

Each and every Member of the 25th Dáil is all too familiar with the perilous state of the nation's finances as passed to the incoming Government by the outgoing regime. While this nation may now be impoverished in economic terms, from listening to other speakers it is clear that the native genius to conjure up myths is alive and well and flourishing in this House. That genius has already been well illustrated here in responses.

Debate adjourned.

Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.