I move:
That Dáil éireann takes note of the 1992 Estimates for the Public Services (Abridged Version) and of the 1992 Summary Public Capital Programme."
The publication of the Abridged Estimates Volume and Summary Public Capital Programme for 1992, marks the completion of the first stage of preparations for the 1992 budget. The Estimates give a partial but important view of one side of the budget. The revenue side will be made known when the White Paper on Receipts and Expenditure is published towards the end of January. It is then, also, that the position on Central Fund services will be given.
In introducing this general debate on the 1992 Estimates it is my intention to take stock of developments over the past year, to review performance against expectations and to chart, in a preliminary way pending my Budget Statement, the course for the year ahead. As my predecessor said, his 1991 budget was prepared at a time of exceptional uncertainty about prospects for the world economy. The extent of that volatility became apparent during the year. The year 1991 was one of great political change, uncertainty and turmoil internationally especially in Eastern Europe and the Middle East. This resulted in economic turbulence on a scale which had not been anticipated either by economic forecasters or political commentators and which has affected the 1991 budget out-turn.
I will deal first with the Government's general economic strategy. A primary objective of the Government is to foster output and employment growth in the economy. Everything else depends on that. The Government, and their predecessor, have worked towards this by adopting a policy mix which is clear, credible and consistent geared to maintaining a low inflation economy where social harmony, born out of shared concern and shared responsibility, prevails. We are creating an economy which can compete in an increasingly more integrated Europe. That is the road to the jobs and incomes growth which all of us want. It is also the only secure basis for the level of public services to which we aspire.
The Government's strategy rests on a few key elements. First, a determination to foster economic confidence, and minimise inflation by an unequivocal commitment to the narrow band of the exchange rate mechanism of the EMS. Second, an equal determination to reduce the overhang of debt which had been holding back confidence and economic performance. Third, the fact that moderate income increases and harmonious industrial relations are vital, and to that end to bring the main social partners together in a consensus approach for the good of all.
The budget targets for 1991 were, as I have already said, set against a background of considerable international economic uncertainty. Growth in output — GDP — and national product — GNP — were both projected at 2.25 per cent, well down on growth rates over the previous two years, which had averaged more than 6 per cent per annum. These 1991 projections were also rather less buoyant than had been anticipated towards the end of 1990, when the Programme for Economic and Social Progress was being negotiated. In the event, GNP and GDP are now expected to grow by about 1 per cent and 1.5 per cent respectively. While this is slower growth than we achieved earlier, it compares well with the picture in other economies.
The end-June Exchequer returns showed that problems were emerging on both sides of the Exchequer account. On the receipts side, a downturn in consumer spending, reflecting, inter alia, the pattern of rising unemployment, led to significant shortfalls in indirect tax revenues this year. On this expenditure side, the economic slowdown was increasing unemployment costs due mainly to the virtual cessation of emigration. These factors, together with some slippage emerging on other fronts, especially health, left the Government facing an overrun of at least £200 million. Clearly, some of these factors could not be reversed and would have to be absorbed. Nevertheless, action was called for to limit the size of the budgetary overrun in 1991 and to reduce the adverse knock-on effects for the 1992 opening budgetary position.
Resolute action, backed up by a firm resolve to see it through, was called for. Ministers reviewed priorities within their expenditure programmes right across the spectrum of Government spending, so as to contain slippage and, where possible, to offer savings to offset unavoidable slippages on other expenditure programmes. As a result, the mid-July corrective package held the budgetary overrun well below the excess of £200 million which then threatened. I now expect that the outturn EBR — Exchequer Borrowing Requirement — will be about 2.5 per cent of GNP against a target of under 2 per cent of GNP. The exact outturn will not, of course, be known until the new year.
The actual EBR this year will be more than 1 percentage point below the budget target when the proceeds of the flotation of Irish Life are taken into account. Taking account of these proceeds, Exchequer borrowing is set to decline in 1991 for the fifth consecutive year.
The burden of debt and its servicing still remain a major problem. The debt/GNP ratio, which had increased rapidly over the early to mid-eighties to reach 129.4 per cent at the end of 1987, has since been dramatically reduced. By the end of last year the ratio was under 110 per cent, and it will fall again this year. The Government are committed in the Programme for Economic and Social Progress, and in the revised Programme for Government, to the further reduction of the debt/GNP ratio towards 100 per cent by 1993.
Debt service costs as a percentage of GNP have fallen from 11.9 per cent in 1986 to 10.2 per cent in 1990. They, too, are set to fall again in 1991. But they continue to pre-empt too much of our resources. We must maintain our progress in reducing the debt burden.
In March 1987 Irish interests rates were considerably higher than those of many of our European partners. For example, the key three-month interbank rate in Ireland was about 9 percentage points higher than the corresponding German rate. These differentials have been considerably reduced. By the end of last year Irish three-month rates were only 2.25 percentage points above the German levels. At present the differential is down to about 1 percentage point.
It is clear that overseas investors have made a very positive reassessment of our position. This is evident not only from the improvement in our relative interest rate performance which I have just noted, but also from developments on the market for domestic Government securities. Non-resident investors now hold about one-third of the total outstanding compared to about 10 per cent at end-1986. This is a significant advance for what is, by international standards, a small market. The involvement of these investors in Irish markets makes for stronger, more liquid markets and helps Irish borrowers, especially the State, to get the best possible deal.
In a situation of increasing openness of international financial markets and greater freedom of capital movements, it is essential that the Irish economy be in a position to capture and hold its full share of available foreign investment. The continued maintenance of responsible fiscal policies and of a firm exchange rate within the EMS is crucial in this respect. While the debt/GNP ratio has fallen sharply it remains a huge burden on the public finances. It is vital that we achieve our target of reducing this ratio towards 100 per cent by 1993.
The improvement in the public finances over the past four years has not been achieved at the expense of those least able to afford it. Social Welfare spending has been increased, and targeted more closely on those most in need, while improving the controls against fraud.
In recent years, increases in the basic rates of payment have matched and in many cases exceeded the level of inflation. In fact, all long term rates are now at or above the priority rate recommended by the Commission on Social Welfare. Short-term rates have also been increased significantly.
Deputies will be aware that, despite the budgetary difficulties this year, arrangements have been made to pay a Christmas bonus to all long term social welfare beneficiaries, at a cost of some £28 million.
At the heart of the policies followed by this Government and their predecessor has been a concern to ease the overall level of taxation and at the same time to bring about real tax reform — in the interest of economic growth, job-creation and social equity.
A large part of the increase in the tax burden through the early and mid-eighties came from income tax. The proportion of taxpayers paying at more than the standard rate increased from 11.5 per cent in 1980-81 to 44.1 per cent in 1987-88. In the current year, that proportion is down to less than 40 per cent.
Tax reduction and reform requires prudent control of expenditure. That is the only substainable policy. That is the policy that has been followed by this Government and that has allowed reform to be achieved simultaneously with the reduction in the Exchequer deficit. That is how we intend to proceed, so that we can continue to move steadily towards a more equitable, simpler and more economically efficient tax system through a widening of the tax base and lower rates of tax.
Since 1987, both the standard and top income tax rates have been cut by six points. The top VAT rate has been cut by four points. Income tax allowances and rate bands have been increased and tax reliefs for low-paid families have been dramatically improved.
Far-reaching reforms and improvements have also been made in the tax administration system. These include self-assessment, current year assessment for the self-employed, power of attachment on tax defaulters and a radically improved system of tax enforcement.
The international slowdown with recession in some major economies has dragged on longer than most experts were predicting earlier this year. But the view of the main economic agencies is that 1992 will see a modest recovery after this year's poor international performance. The EC Commission's recent annual economic report forecasts that growth in the Community will pick up from 1.25 per cent to 2.25 per cent in 1992. The forecast for the United Kingdom is particularly encouraging from an Irish viewpoint. The UK economy is expected to expand by 2 per cent, in contrast with a decline of almost the same order this year. Growth in world trade is expected to improve.
But continuing fiscal responsibility at home is one of the essential preconditions. The 1992 Estimates have sent a clear message to all that we are determined to keep firm control of public spending in 1992. A responsible approach to spending is crucial to our success. More borrowing to finance increased spending would jeopardise the lower interest rates we have already achieved and impose a bigger future debt burden. This would inevitably lead on to higher taxes than would otherwise be necessary — pushing up prices, cutting take-home pay or diminishing profitability and the capacity for future investment. Advocates of higher expenditure cannot evade these consequences.
I am satisfied that our low inflation, our firm commitment to a stable exchange rate policy within the EMS, our improved competitive position and our continuing adherence to a responsible fiscal stance gives us, with a recovering international economy, the basis for improved growth in output and jobs over the year ahead.
We cannot, however, expect unusually fast growth next year. That would be an unreal expectation against the background of modest recovery in the international economy. Growth in jobs too is unlikely to be as strong as in recent years. Given the growth of our labour force, the prospect is that unemployment will rise further, though at a much slower pace than in 1991. In framing the Estimates accordingly I have provided for an average level of unemployment next year of 275,000. I should emphasise that this figure does not take account of the proposed employment and training initiatives recently discussed with the Commission, and announced last week by the Taoiseach. The impact of these schemes and of prevailing labour market conditions will be taken into account by the Government in formulating the budget.
In summary, then, the timing and extent of the international recovery remain uncertain. Nevertheless we can look forward to an improvement in the course of the year and this should enable the Irish economy, in line with the EC as a whole, to grow more rapidly than in 1991. However, it seems clear that the domestic growth rate, in the short term at least, will be more modest than that experienced before the current slowdown began. The budget will have to be framed against this background.
The move to Economic and Monetary Union will play a increasingly important role in shaping our economic and budgetry policy over the coming years. While most attention may have focused recently on the monetary aspects of European Monetary Union, the economic and budgetary implications of the European Monetary Union Treaty agreed at Maastricht are no less significant.
The impact on Government policy will be seen in a number of ways. The member states of the Community have agreed that greater economic convergence is necessary if the future European Monetary Union is to have a solid foundation. For that reason the criteria which member states must fulfil to enable them to move to full European Monetary Union are strict. Government economic policy will be directed towards ensuring that Ireland will be in a position to move to the final stage of European Monetary Union along with the front rank of member states.
There is no doubt that the budgetary prospect for 1992 is extremely difficult. Growth and domestic consumption will remain subdued and, as I have already indicated, there is no prospect of a return in 1992 to the buoyancy achieved in 1989 and 1990. Similarly, the position in the UK labour market will maintain social spending at a very high level.
The opening budgetary position remains well above the level which would be consistent with staying on course for the 1993 targets set in the Programme for Economic and Social Progress and recently re-affirmed. Given the restrictions on borrowing which are implicit in these targets, a considerable amount of tightening has yet to be done to ensure a satisfactory budget in 1992.
We have won the confidence of investors and consumers at home and of capital markets internationally. We have to keep that confidence if economic progress is to continue as it should.
That is why we must adhere to our fiscal objectives, why we must continue to reduce the national debt/GNP ratio, why we must keep working towards broad balance on the current budget. It is not really a matter of choice. No responsible person should advocate change in these fundamentals of our strategy. Departure from this stance would very quickly undo the progress of the last few years and would undoubtedly damage our longer-term prospects in the more integrated new Europe which is emerging.
The Government had no option but to look at public service pay in continuing restraint on public expenditure. There are two reasons for this — firstly, the fact that public service pay now accounts for such a large slice of voted non-capital expenditure — 54 per cent in 1991 — and secondly the size of the cost facing us in respect of further pay increases.
If all liabilities on the pay front were to be met in full, the total increase in the exchequer pay and pensions bill in 1992 would be £354 million. That would have brought the total bill to £3.8 billion, an increase of more than 10 per cent over the projected outturn of £3,444 million in 1991. This would be about three times the anticipated rate of inflation in 1992. Of the £354 million increase, some £187 million would arise from increases in rates of pay, both the general increase due under the Programme for Economic and Social Progress and the remaining phases of special increases due to be paid from dates in 1992.
Given our budgetary strategy, the Government simply could not meet this increase in pay costs without imposing severe cuts in levels of services in big-spending areas like Social Welfare, Education and Health. Were that to happen, not alone would it have unacceptable social consequences but public service employment in those sectors would have to be reduced.
I explained the seriousness of our situation to the Irish Congress of Trade Unions when I met them some three weeks ago. I pointed out that we had no choice but to look hard at our options on pay and I asked that they reflect on this situation and meet me again in a few days to discuss the matter.
Regrettably, this meeting did not take place. Given the timetable to the budget and the deadlines for putting changes into effect, this left the Government in a situation where we had no realistic alternative but to take decisions on the provisions to be made for public service pay in the light of the prevailing constraints.
The package of measures announced by the Taoiseach on Friday last were carefully drawn to strike a balance between what can be afforded in 1992 in the context of keeping the Exchequer finances on course, and dealing with issues of major concern to staff — namely protection of those on lower rates of pay to the greatest extent possible, and honouring payments still due in respect of special increases. The package provides for
Payment of the 3 per cent general increase due on 1 January next subject to the minimum increase of £4.25 in the Programme for Economic and Social Progress and an upper limit or ceiling of £5 a week;
payment in full of the remaining phases of the special increases on 1 January 1993, with full retrospection to the due dates also payable on that date; and
having regard to the very high cost of meeting this commitment in full, payment of the 3.75 per cent general increase due on 1 January 1993 subject to the minimum payment due of £5.75 per week and an upper limit or ceiling of £6.50 per week.
The published Estimates are based on rates of pay in force today. The effect of the Government's decision is that a further £70 million will be added on budget day to today's Estimates volume figure of £3,611 million for the Exchequer pay and pensions Bill. This will bring the total provision for 1992 to £3,681 million. This represents an increase of £237 million — or 7 per cent — over the projected outturn for 1991. This is as much as can be afforded in 1992.
At this point I would like to make a comment on the issue of tax collection. In much of the coverage of the public service pay issue in 1992 the suggestion is repeated that the problem would disappear if only tax collection were geared up, that there is some £200 million extra tax out there just waiting to be collected and that this is the solution to the problem. There has in some instances been the implication that if only the Government took tax collection as seriously as they should there would be no difficulty.
If only things were as easy as that. I can assure the House that if such an easy source of revenue were available the Government would jump at it.
We are committed to improving tax collection and tackling tax evasion and avoidance and we will push ahead urgently with measures on those fronts. However, the proposition that there is an additional £200 million of tax out there which could be realistically collected in 1992 does not stand up. Given co-operation by various staff groups, Revenue plan, however, through additional audits, to collect not less than £30 million in 1992 in addition to a repetition in that year of the £30 million yield being pursued in 1991 on foot of an initiative in the 1991 budget. These figures are already in the budget arithmetic, but the problem of public service pay I have outlined still stands.
I fully understand the feelings of public servants and their unions on the aspects of public service pay that we have had to grapple with and their reaction to the decisions which the Government have had to take. I hope, nonetheless, that they will on reflection appreciate the serious budgetary situation in which the Government find themselves and come to accept what has had to be done.
Needless to say, I am available to meet with representatives of public service staff to discuss the overall situation with them and, within the scope of the decision taken, to enter into dialogue with them on any issues of concern to them.
I now propose to make some general comments on the 1992 Estimates for the Public Services and the summary public capital programme. Other Government Ministers in their contributions to this debate will deal in more detail with the spending allocations for which they are responsible.
Total net voted services for 1992 amount to £7,419 million, an increase of £276 million on the latest 1991 projected outturn of £7,143 million. Given the upward pressures on public expenditure, the Government's firm resolve to contain spending is reflected in this relatively modest increase of 4 per cent.
In arriving at this figure, we have had to reduce departmental demands for Exchequer funds by about £600 million. These cuts include savings on public service pay. On the non-pay side, spending levels have been held down to minimum but adequate levels. Of the £500 million of non-pay savings, £300 million are on the current side and the balance on the capital side.
For many Votes, 1992 expenditure has been held very close to or even below the 1991 allocation. For example, the Vote for the Office of Public Works is, at almost £99 million, slightly down on 1991. The votes for the Department of the Taoiseach is down by 5 per cent and the Vote for my own Department is down by 24 per cent. These represents significant reductions in real terms.
In many other cases, allocations have been kept very close to the expected rate of inflation.
The main components of the £276 million in net-voted services increase mentioned above are:
Social Welfare, up by £57 million.
Health, an increase of £66 million; and
Education, up by £90 million.
As indicated in the published Estimates, spending on the Social Welfare Vote is expected to reach £1,773 million in 1992. This is about £57 million or some 3 per cent higher than the 1991 provisional outturn. A number of factors account for this increase, principally the increase in the live register. This is expected to cost some £66 million more in 1992. This is a significant additional cost which highlights just how sensitive social welfare expenditure and indeed the overall budgetary arithmetic is to changes in the unemployment situation. Another factor pushing up expenditure in 1992 is the carry-over costs of the Social Welfare improvements made in this year's budget. These amount to £81 million approximately. However, there is the projected increase in PRSI income which is helping to moderate these cost increases. The extra yield from PRSI reflects expected growth in incomes and employment in 1992.
Social welfare spending constitutes a major component of total public expenditure. In recent years, it has averaged over 25 per cent of total non-capital supply services. This means that even relatively small changes in social welfare rates have important implications for total public expenditure and for the Government's room for manoeuvre at budget time. For example, a 3 per cent increase in basic social welfare rates in line with the expected increase in inflation would cost over £38 million in 1992 and some £86 million in a full year. In the context of the very tight budgetary situation facing the Government, amounts of this magnitude will not be easy to accommodate. The Government, nevertheless, remain committed to protecting social welfare payments against inflation.
The Government are committed to providing for the continuation of the approved health service levels. A satisfactory and effective public hospital service will be available to those who require and opt for it. The less well off members of our community — those with medical cards — will of course continue to benefit from the totally free medical service. The 1992 Health Estimate also allows for a continued improvement in areas such as services for the mentally handicapped and for those suffering from AIDS. It also allows for some limited development of critical services in the acute hospital sector.
The 1991 Budget net provision for Health was £1,348 million. Developments in 1991 gave rise to further presures for additional funding which, after the effects of the mid-year corrective package, resulted in a Supplementary Estimate of £50 million. The final out-turn, including the provision from the Remuneration Vote, £64 million, is expected to be £1,462 million.
The total net provision for 1992 is £1,529 million, an increase of £181 million, up 13 per cent on the 1991 Budget allocation. This reflects the Government's resolve to maintain a satisfactory level of service. All governments are faced with the increasing costs of advancing medical technologies and the ever-rising costs of more sophisticated drugs. These factors are under constant review by the Government in order to ensure that optimum use is made of the available resources.
The Government are committed to preserving and improving the quality of our educational system and the allocation proposed for the education sector in these Estimates reflects that determination. Nonetheless, we have to balance this priority with the recognition that, in the financial circumstances confronting us in 1992, it will not be possible to fund further initiatives over and above the significant improvements already introduced in 1991. Measures have accordingly been taken to contain the costs of expansion and improvements in the education sector, while accommodating the thrust of Government policy in this area.
The Vote for the Office of the Minister for Education is to fall by 1 per cent. Relevant measures here include tight control of the provision for school transport services and of the current cost of youth and sport services, which will fall by 3 per cent. On the capital side, there will be a 37 per cent reduction in the allocation for major sports facilities, although the amount provided will cover the cost of all projects maturing in 1992. There is no provision for the national sports centre as the Government have decided that this project will not now go ahead.
The allocation for first level education is to rise by nearly £46 million, or 9 per cent. About £19 million of this total is attributable to the cost of an extra pay day for primary teachers in 1992, which arises because, for technical reasons, the first pay day of 1993 is brought forward into 1992. The balance of the increase is accounted for by the full year cost of the Programme for Economic and Social Progress measures introduced in 1991, a reduction in the pupil-teacher ratio and the appointment of significant numbers of remedial teachers and teachers for disadvantaged areas — by the carry-over costs of the 1991 pay round and specials and by increments and other miscellaneous pay related costs.
The net increase at second level is of 2 per cent, but the gross increase is 5 per cent. This is a measure of the challenge confronting the management of the public finances: without any change in policy, without any provision for pay increases, without any of the further improvements in educational facilities — over and above those we introduced in 1991 — the cost of this Vote will rise by a gross £26 million. This increase will be partially offset by higher Appropriations-in-Aid arising from the carry-over into 1992 of certain ESF receipts which are not now expected to arrive in 1991. The gross increase is attributable by and large to the same factors that give rise to the increase at first level: pay carry-overs and the full costs of improvements — pupil-teacher ratio and others — introduced in 1991.
At third level there is an increase of nearly £37 million or 16 per cent. The cost-increasing elements include the same factors that apply at other levels of education, but the increase here reflects another significant element of Government policy: the determination to provide extra student places at third level. This has consequences in regard to both current and capital expenditure.
There will be further growth in the Public Capital Programme in 1992. The 1992 programme, at £1,869 million, is 8 per cent up on 1991. Exchequer financed expenditure is up by £23 million, while non-Exchequer financed spending, which consists for the most part of spending by the commercial State-sponsored body sector, will grow by £120 million.
Deputies will see from Table 1 of the Public Capital Programme booklet how expenditure is set to change between 1991 and 1992, broken down by sector. I will now outline some of the main elements of the Public Capital Programme.
The sectoral economic investment category is set to fall by 5 per cent to £538 million. The allocation for industry falls by 15 per cent to £272 million. Capital expenditure by the IDA at £125 million is down £21 million on 1991 levels, reflecting in the main the direction of policy on the reduction of grant percentages payable to individual projects. Since we have greatly improved the economic climate, we do not need to spend as much to attract industry. Údarás na Gaeltachta expenditure falls from £21 million to £16 million and reflects the fact that over £5.5 million of the 1991 allocation was in respect of a once-off project.
The allocation for agriculture is up by 12 per cent to £139 million. This increase reflects, in the main, spending under the Integrated Rural Development and LEADER Programmes, which are operational programmes under the Community support framework. The expansion of investment in forestry will continue in 1992 under the Community support framework. Grants for private afforestation will increase by 58 per cent from £10 million to over £15 million while there will be a slight reduction in the total allocation for Coilte Teoranta, down £3 million to £35 million.
The "productive infrastructure" category is up by £131 million, or 15 per cent and covers investment in energy, roads, transport, sanitary services and telecommunications. The increase in investment in energy is particularly significant — up by £67 million, or 39 per cent, on this year. The ESB plans to spend £138 million next year on improving and upgrading the transmission and distribution networks for electricity, the reconditioning of mothballed generating stations and developments of ESB information systems.
Bord Gáis will invest £90 million in upgrading their gas distribution network. The proposed gas interconnector pipeline, which will link Ireland to North Sea gas, will also require £54 million in investment in 1992, while phase III of the North Eastern project to extend the gas pipeline from Dundalk will cost £5.4 million in 1992.
Investment on roads, all Exchequer funded, will increase from £207 million this year to £228 million next year, under the Peripherality Operation Programme.
The social infrastructure category, which include housing, schools, hospitals and Government construction, will grow by 13 per cent from £307 million to £346 million. While there will be no overall increase in the level of investment in housing, the number of housing units to be provided in 1992 will increase by 23 per cent due to expanded activity under the new measures launched under the social housing programme earlier this year. There will also be increased provision for house purchase and improvement loans reflecting an expected increase in loan activity by the HFA on foot of the new measures.
Expenditure affecting the construction sector, at £1,120 million in 1992, will account for 60 per cent of total Public Capital Programme expenditure. The Department of the Environment expect that this will generate up to 2,000 jobs directly in the construction industry. In addition employment in the areas providing related services to the industry — for example, the professions, suppliers, etc. — is also expected to increase.
My outline of the 1992 Estimates and the economic context in which they must be assessed here tonight has been deliberately wide-ranging with a view, I hope, to contributing towards an informed and constructive debate by Deputies on both sides of the House. I commend the Estimates to the House accordingly.