In the Budget Statement last March, I emphasised the need to give a sense of direction to the economy. It is generally recognised that in the ten months since then this has been done successfully. Exchequer borrowing has been greatly reduced. Interest rates and inflation have come down, the outflow of capital has been halted and business confidence has been restored. Above all, there is now a belief both at home and abroad in the ability of the Irish Government to break out of the cycle of debt and depression that has been characteristic of recent years.
There will be no change of direction. Government policy has been focussed on the closely-related objectives of improving the public finances and revitalising the economy. These objectives will continue to be pursued. Already there are signs that self-sustaining economic activity is growing and this will lead to increasing opportunities for employment. The estimates of expenditure, which were published in October, underlined the commitment to the improvement of the public finances. Today's budget confirms this commitment and at the same time focuses on the importance of a developmental approach to the economy. It also incorporates major changes in our taxation system.
The Programme for National Recovery, which has been endorsed by the major social partners, is the basis on which policies for the economy will be implemented over the next few years. This budget is in harmony with its terms and provides for implementation this year of several specific initiatives included in it. The general support from different sectors for a programme based on the necessity to live within our means, while successfully exploiting our resources, reflects a new realism.
The Economy
I am today publishing separately my Department's latest assessment of economic developments in 1987 as well as an outline of the forecast for 1988 on which the budget projections are based. These take account of the revisions to the balance of payments statistics published last week and the effects of this budget.
Review of 1987
Last year there was a strong economic recovery based on a major advance in exports, substantially improved tourism and a big increase in agricultural incomes. Economic growth, at over 3½ per cent, was significantly better than envisaged early in the year. The balance of payments on current account moved into modest surplus for the first time since 1967. The trend in inflation continued downwards with consumer prices rising by little more than 3 per cent, the lowest rate for 20 years.
Prospects for 1988
There is general agreement that underlying growth prospects for 1988 are relatively constrained. The international environment, reflecting the imbalances between the major world economies, will be less favourable than in 1987. Besides, the necessary curtailment of spending in the public sector will affect domestic demand. There should, however, be a signicant increase in investment in plant and equipment. With inflation set to decline further to about 2½ per cent, and the personal tax reliefs, of which I will give details later, also improving disposable income, personal consumer spending could show a small increase.
Exports should again achieve a substantial rate of growth, although not on the scale of 1987. Both the trade surplus and the overall surplus on the current balance of payments should increase further. Real GDP growth in 1988 is projected to lie in the range of ½ to 1 per cent. The trend in GNP growth will depend on the level of net factor outflows, the outlook for which is subject to major uncertainties. If these flows were to show the same trend as in 1987, there would be positive GNP growth. Should there be a reversion to previous trends in these flows, GNP would do well to maintain its 1987 level.
Framework for Economic and Financial Policies
I indicated in last year's Budget Statement that our general approach to economic and social policy would be based on the principles set out by the National Economic and Social Council in their report entitled A Strategy for Development 1986-1990. The Programme for National Recovery closely follows this blueprint and sets out the framework of the Government's economic and budget strategy for the period to end-1990.
The programme recognises that a fiscal policy which faces the financial realities is crucial to putting the economy back on the path to sustained economic growth. The Government are committed to stabilising the National Debt/GNP ratio during the period of the programme, a commitment which requires a reduction in the Exchequer borrowing requirement to between 5 and 7 per cent of GNP. Policies to control and curtail public expenditure will have to be continued to achieve this. However, this must be done in the context of a comprehensive strategy for economic recovery, which includes maintaining a stable exchange rate within the European monetary system, while improving competitiveness through pay moderation, and changes in structural and incentive policies. In parallel, practical measures are being intensified on a sectoral basis to exploit the economy's potential and to create new job opportunities.
On a wider plane, the programme also commits the Government to pursue reform of the tax system, in order to achieve greater fairness and to promote economic development. Furthermore, it confirms greater social equity as a prime objective of Government policy. This budget will represent a major instalment in meeting the Government's commitments under the programme, and in the implementation of our plans for the economy.
Improved competitiveness is a key element in the strategy for recovery. The private sector pay agreement associated with the programme will make a substantial positive contribution in this direction. Given our pressing employment needs, the low level of price inflation now prevailing and the significant income tax relief envisaged, there is no justification for pay increases higher than the level provided.
Budget Policy
The outturn on the 1987 budget targets was most satisfactory. When these targets were announced, considerable doubts were expressed about the ability of the Government to achieve them. The results for the year confounded the critics.
The current deficit at £1,180 million was £20 million inside target and Exchequer borrowing at £1,786 million was £72 million inside target. In terms of GNP, the current deficit of 6.8 per cent was the lowest since 1980 and Exchequer borrowing of 10.3 per cent, the lowest since 1977. The 1987 results showed significant progress on 1986. The 1987 current deficit was down by £217 million or 1¾ per cent of GNP on that for 1986 while Exchequer borrowing was down by £359 million or by nearly 3 per cent of GNP.
The approach for 1988 remains unchanged. There is no choice but to continue to reduce dependence on borrowing. The main emphasis must be on reducing public expenditure and already Government policy on this has been clarified. The only other course would be to increase taxation substantially but this is not a practical option. The reductions in expenditure are being made over a wide range of public services so as to minimise the impact on individual services and to achieve as fair a distribution as possible. They are essential and overdue. The economy is already responding to the improvement in the public finances. I am confident that we can look forward to further progress towards our goals this year. This is the only basis on which our ambitions for economic growth and employment can be achieved.
1988 Opening Budget Position
The opening current deficit, based on the published 1988 Estimates of Receipts and Expenditure, is £1,111 million, after allowing for the deduction of estimated departmental balances of £23 million. The opening Exchequer borrowing requirement on this basis is £1,490 million.
As explained in the notes to the 1988 Estimates of Receipts and Expenditure, these figures take account of increases in pay under the public service pay agreement; lump sum and related payments under the public service early retirement — voluntary redundancy schemes; the transfer of Exchequer funding of some house purchase loans to the private sector, and technical changes arising from the enactment of the Local Loans Fund (Amendment) Act, 1987.
Central Fund Services and Debt Management
The estimate for expenditure on Central Fund Services this year is £2,500 million of which £2,173 million is in respect of debt service payments. The comparable outturn figure for debt service in 1987 was £2,091 million, so that the 1988 provision represent an increase of less than 4 per cent. This is one of the lowest increases for many years but it is, nevertheless, an increase.
The low rate of increase has been made possible by the reduction in borrowing, the beneficial effects of the fall in domestic interest rates, favourable developments in international interest and exchange rates and the savings generated by the increasingly active debt management programme which my Department are pursuing.
The debt management programme has included:
—the issue of new instruments in the domestic market, such as the ECU bond and tax-exempt bonds for multinational companies, and the issue of short term notes in foreign markets, all of which have produced savings in funding costs for the Exchequer;
—the continuation of the programme for prepaying and refinancing foreign loans at lower cost;
—the extension of the programme of interest rate swaps which, especially as regards the foreign debt, is resulting in sizeable savings this year;
—an increase in the volume of Exchequer Bills sold because of the lower borrowing costs compared with gilts; and
—the promotion of the small savings schemes as a stable source of funding for the Exchequer.
It is my intention to ensure that small savers will continue to be provided with attractive investment opportunities and I look forward to an increasing contribution from this source to the financing of the borrowing requirement. My Department will be constantly searching for other ways to achieve more diversified and more flexible funding opportunities and to reduce the cost of managing the national debt portfolio.
Despite the progress already made, debt servicing costs continue to be a major drain on the public finances. The burden is evident from the fact that debt interest payments in 1987 absorbed 30p in every pound of tax revenue compared with 19p back in 1977. The only realistic solution to this problem is to continue on the present course of reducing Exchequer spending and borrowing.
The 1987 Exchequer funding programme was highly successful and resulted in a sizeable credit balance which is being brought forward to finance the 1988 Exchequer borrowing requirement. Given this favourable funding position, and the further reduction in the level of borrowing which will result from today's budget, the Government are in a position to continue to exert downward pressure on the still excessive domestic gilt yields and to help create the conditions for further falls in the general level of interest rates.
Departmental Spending 1988
During 1987, the Government carried out the most comprehensive and farreaching review of State spending programmes ever undertaken. The continuing justification for every major programme was called into question. Where programmes were seen to have insufficient justification they were curtailed or, in some cases, terminated. The results are to be seen in the 1988 Abridged Estimates Volume and summary Public Capital Programme which were published last October and which for the first time in 30 years show a reduction in the absolute level of State spending. No previous Government have been able to publish their spending plans so far in advance of the financial year.
By doing so we have enabled programme managers and spending agencies to plan for orderly management of their finances this year. I am glad to acknowledge the contribution of management in Government Departments to the review of spending programmes and their assistance, in conjunction with the managements of their respective agencies, in ensuring that budget allocations are observed.
Non-capital Supply Services Expenditure 1988
I have already referred to certain adjustments which have been made to the 1988 Estimates volume total for non-capital supply services. Also, having assessed the end-year Exchequer returns for 1987, I am making some further adjustments to the published 1988 allocations to reflect the most up-to-date information available to me on expenditure trends. Details of these adjustments are set out in the "Principal Features of the Budget", copies of which are being circulated separately.
Taking account of all these changes, the adjusted opening figure for non-capital supply services is £5,620 million or £5,597 million after allowing for estimated departmental balances of £23 million. This supersedes the figure of £5,649 million published in the 1988 White Paper on Receipts and Expenditure.
Social Welfare
Public expenditure in the social welfare area will exceed £2.6 billion in 1988. Despite this huge demand on available resources, the Government intend to honour their commitment to social equity and to protect those who are less well off in our society.
Last year, the Government brought forward the annual increase in welfare allowances from November to July to protect fully the real value of all such payments. Likewise this year a general increase of 3 per cent in personal and adult dependant rates of welfare payments from late July 1988 will at least maintain the overall value of social welfare benefits for the 12 month period from mid-1988 to mid-1989. Similar increases will be given to those in receipt of health allowances.
In line with our commitment in the Programme for National Recovery to consider special increases for those on the lowest payments, the personal rates of unemployment assistance and supplementary welfare allowance — which are the lowest social welfare weekly payments — will be increased by significantly higher amounts. The personal rate of long term urban unemployment assistance will be increased by an overall £4.20 to £42 per week, with pro rata increases in other personal rates of unemployment assistance and supplementary welfare allowance. This is equivalent to an increase of over 11 per cent. Child dependant allowances, payable with these payments, will be increased by 6 per cent, that is, the general increase of 3 per cent plus a special further increase of 3 per cent. Where an adult dependant allowance is payable, that allowance will be increased by the general 3 per cent rate.
At the same time, we are making a start on the rationalisation of the rates of child dependant allowances payable with social welfare weekly payments. The rate for the first and second child is being averaged; the rate for the sixth and subsequent children will be the same as that payable for the third to fifth children. These rationalised rates will then be increased in line with the general increase of 3 per cent, with an additional 3 per cent where appropriate, as I mentioned above. These increases will cost the Exchequer an additional £44.8 million this year and £101 million in a full year.
The proposed increases in social welfare payments will result in the following improvements:
—a single person on long duration unemployment assistance living in an urban area will, as I have said, get an extra £4.20 a week, giving a total of £42.00, while a married couple will benefit by £5.00 to bring them up to £70.00 a week;
—single persons in rural areas who are long term unemployed will receive an extra £4.10, bringing their weekly payment to £40.70, and a married couple will get an extra £4.90, thus providing them with £68.10 a week;
—a contributory old-age pensioner who is under 80 will get an extra £1.70 a week, bringing the pension to £56.80 a week;
—a non-contributory old-age pensioner who is under 80 will get an increase of £1.40 a week, bringing his or her maximum pension to £48.50 a week;
—where a married couple are both of pension age and under 80, the new rates of contributory pension will mean an increase of £2.90 a week, so that their total pension will be £99.10;
—the contributory pension of a widow under 66 will be £51.00 a week, an increase of £1.50;
—a widow under 66 with a non-contributory pension will benefit by £1.40, giving her a maximum of £47.60 a week; and
—the flat-rate unemployment or disability benefit rate payable to a single person will rise by £1.30 a week, while a married couple will get an extra £2.10, giving them a new total of £71.80 a week; these payments may, of course, be topped up with pay-related benefit.
While the structure of our social welfare system is being maintained and, indeed, extended to provide social insurance for the self-employed, steps will be taken to strengthen the controls already in force to reduce fraud and abuse of the system.
Jobsearch Programme
The Government have decided that the successful Jobsearch programme should be continued in 1988. Since the programme began in April last, 141,500 unemployed persons were interviewed and 40,400 were placed on either Manpower schemes, AnCo training courses or Jobsearch courses. A total of 4,200 found employment directly as a result of Jobsearch interviews, while 12,700 left the register voluntarily when invited to avail of assistance under the programme.
During 1988, a further 50,000 on the live register will be interviewed under the programme and schemes and course opportunities will be provided as in 1987. It is expected that in 1988 a further saving of some £10 million will arise as a result of the programme. These savings are already reflected in the adjusted opening position for non-capital supply services.
Equal Treatment
Equal treatment alleviating payments were introduced initially in November 1986 to ensure that the full implementation of the EC Directive on Equal Treatment did not result in hardship for those categories of beneficiaries adversely affected. These alleviating payments were due to end last November but, in order to avoid hardship for a vulnerable section of our community, were continued by the Government in the meantime. The Government have now decided that these alleviating payments will be continued until the end of 1988. There will be an additional cost this year of the order of £20 million arising from this decision.
Employee Social Insurance
Despite rising expenditure from the social insurance fund, there will be no increase this year in contribution rates to that fund. The current rates will continue to apply for the tax year 1988-89, subject only to the increase in the income ceiling from £15,500 to £16,200 which underlay the published Estimates. The ceiling for the health contribution will also be increased, from £15,000 to £15,500. The increase in the income limits for a hospital service card will, as usual, be announced by the Minister for Health at a later date. I am concerned about the solvency of the occupational injuries fund which is maintained entirely by employers' contributions. It is likely that a small adjustment to the contribution rate to that fund will be required in order to maintain its solvency. The details will be announced in due course by the Minister for Social Welfare.
Statutory Sick Pay
The Government established an interdepartmental committee to examine the various issues arising from the introduction of a statutory sick pay scheme under which employers would be responsible for paying employees for the first 13 weeks of illness. The committee consulted the interested parties and their report is currently under consideration. The Government are committed to the introduction of a scheme as soon as practicable.
PRSI for the Self-Employed
Last July, the Government decided in principle to extend social insurance to the self-employed, including farmers. That decision was affirmed in the Programme for National Recovery. Arrangements are now going ahead to implement the decision as from 6 April of this year.
The absence of a system of social insurance for the self-employed in Ireland is in contrast with the situation in other European countries. This means that the less well-off self-employed and their dependants here must rely on the social assistance schemes when their incomes are adversely affected by age or death. The cost of these assistance schemes is met directly out of general taxation and was over £300 million last year. Given the current budgetary situation, the Government concluded it was essential that the self-employed, who account for some 230,000 persons or well over a fifth of those at work, should be required to contribute directly to the financing of the social welfare system under which so many of them benefit. The Government also believe that it is important to improve the quality of income maintenance cover for the self-employed by providing them with pensions as of right and reducing their reliance on means-tested pension schemes.
The detailed provisions as regards contributions, qualification conditions and benefits of the social insurance scheme to be introduced for self-employed will be the subject of legislation to be brought to the House by the Minister for Social Welfare. I wish, at this stage, to advise the House of the main features of the scheme as decided by Government. The benefits to be extended to the new contributors will be old age and survivors' pensions. Qualification for those pensions will be subject to broadly the same conditions as regards contribution record as apply to existing contributors generally.
The National Pensions Board calculated that the appropriate rate of contribution should be 6.6 per cent. In the Government's opinion, the imposition in one step of a charge of that size would be unduly harsh. Accordingly, we have decided to phase in the charge over a period of years. This will be provided for in the enabling legislation. The initial rate that will apply from April of this year will be 3 per cent, subject to a minimum contribution equivalent of £4 per week. I believe that this rate will not give rise to serious difficulty for any of those who will be liable. Moreover, in the case of persons who have been notified by the Revenue Commissioners, on the basis of information furnished, that the scale of their operations is such that liability to income tax will not arise unless circumstances change for such as small farmers, their contribution will be limited to a flat rate of £2 per week. Farmers an smallholders' unemployment assistance will not be liable for any contribution.
The income to which the contribution rate will apply will be the same as for the health contribution and the employment levy, with capital allowances being deductible for levy, social insurance and health contribution purposes from 6 April. The same annual income ceiling of £16,200 will apply for PRSI for the self-employed as for PRSI contributors generally. I estimate that, as a result ot these changes, there will be a net £12 million gain to the Exchequer this year, reflecting a £14 million gain on the expenditure side of the budget, offset by a reduction of £2 million in tax revenue. Details are given in the Principle Features of the 1988 Budget.
The Government recognise that this initial level of contribution from the self-employed will not be adequate to finance the social insurance benefits to be extended to the self-employed. I have already mentioned the cost to taxpayers generally of over £300 million a year in providing non-contributory pensions, which largely go to former self-employed persons. Equity rules out any question of an additional Exchequer liability arising from the social insurance benefits for which the self-employed will in future be eligible. Indeed, it is the Government's intention that the extension of social insurance to the self-employed will bring about a more equitable sharing of the cost of social welfare services as a whole. Consequently, it is important that the 3 per cent rate of contribution should be widely recognised and accepted as an initial rate and one which has to be increased not only to finance the extra benefits to be provided but to ensure that the cost to taxpayers in general of providing pensions for former self-employed persons will not actually be increased. The Government have therefore decided that the 3 per cent rate for the tax year 1988-89 will rise to 4 per cent in 1989-90 and to 5 per cent in 1990-91.
