I wish to give one minute of my time to Deputy Cullen.
Adjournment Debate. - Interest Rate Increases.
I am sure that is satisfactory.
The steep rise in home loan interest costs is just one symptom of a growing crisis in this Government's economic policy. For many householders, the so-called tax-cutting budget has already been completely wiped out. For many, the budget only promised marginal improvements, and now disposable income is being squeezed again. It is not clear what the effect of the latest rises in interest rates on the Exchequer will be, but it may already mean that the Government's predictions are being blown off course.
This makes it all the more imperative that the Minister for Finance spell out exactly what Ireland's interest rate and exchange rate policies are. We cannot accept glib assurances that our fundamentals are sound.
At the end of 1992, the IR£-DM exchange rate was 2.67. Now it is 2.22. The IR£ has devalued significantly relative to the deutschemark and the yen. Our policy of tracking the DM is losing its grip. The IR£ is at the bottom of the ERM grid. Our currency has weakened as against the French franc and the Danish Kroner. In relative terms, our most stable relativity has been with sterling with which we have no formal policy linkage.
While it may be argued that the policy of tracking the DM imposed a useful discipline on Irish fiscal policy in the past, we are now lagging so far behind the DM that, in athletics parlance, we only catch sight of the DM's heels on the straights. We are simply losing touch with the four fast-track currencies of the ERM.
We should now face up to the facts of our situation. We need a credible and sensible policy on interest rates and exchange rates.
We need a Government that is committed to fiscal responsibility. We need tight control on public spending; we cannot afford to throw more money onto the bonfires of badly managed semi-State companies. We need control on public pay and emphasis instead on increasing real take home pay by reforming tax. We need less borrowing. The large-scale transfers from the EU should not deflect us from a tight and disciplined approach to public finances.
Now is the time for the Government to re-establish the credibility of its economic policies. The markets and the voters want the Government to spell out a new rationale which can be understood. Now is the time for the Government to demonstrate that Ireland has sound money, that Irish policy is committed to controlling public spending, that we are not simply being carried along in the slipstream of the DM.
We cannot afford a Government that is content to muddle through. All the danger signs are there for the IR£: lax controls on public spending; no clear exchange rate policy; no readily understood interest rate policy; no clear targets for growth in public spending: no multi-annual budgeting and an all-pervading sense of laxity and drift. Added to this lethal cocktail is a Government which appears to be suffering from an internal ideological paralysis and the result is potentially disastrous.
Every home owner, worker, enterprise and employer is crying out for leadership on economic matters, but there is no leadership available in the present Government. From the people who are bringing us privatisation to fund equality payments, we are now getting complacency and muddle.
From the point of view of the home owner and the taxpayer Irish economic policy, interest rate policy and exchange rate policy are rapidly becoming a nightmare. I call on the Government to re-establish public confidence in the capacity of this Government to manage the economy, control interest rates, have a reasonably well understood exchange rate policy which commands international and national respect and give to taxpayers what was promised in the budget, that is, a real increase in disposable income.
I thank Deputy McDowell for giving me a minute of his time. It is much appreciated.
When the Minister for Finance outlined his fiscal strategy in the budget he used the best case scenario as a marker of economic growth, job creation, interest rates and inflation. Now that the wheels have started to come off the wagon, he has no room to manoeuvre. It is clear that in regard to the exchange rate policy we are trying to look in two different directions to take. The Government likes to talk about tracking the DM but we are lagging far behind as the second lowest currency in the ERM — only the Spanish peseta, which has recently been devalued, is below us. Our need to be close to sterling is understandable because of our trade relationship with that country. However, it is not possible to sustain the policy as enunciated by the Government: there is none. The Central Bank is making some effort to defend the IR£ but its efforts seem half-hearted in some respects. The Department of Finance is not giving the required leadership.
In bringing back a current budget deficit in 1995 the Government has sent the wrong signals. There is still time, in the forthcoming Finance Bill, for the Minister to take action and not have a current budget deficit this year as one contributing step towards stabilishing the situation for householders and taxpayers.
I welcome this opportunity to rebut the allegation made by Deputies McDowell and Cullen.
Let me begin with interest rates. It is the Central Bank which has the statutory responsibility for monetary and interest rate policy. It is the body entrusted with the task of operating monetary policy in such a way as to maintain a low level of inflation. Maintaining a low level of inflation of course is a vital part of protecting workers' living standards and the value of their take-home pay.
The Central Bank raised its short-term facility twice recently, by half of one per cent in each case. Before these two rises, the short-term facility was at the historically low level of 6.25 per cent. These rate rises had the objectives of maintaining price stability and supporting the relative position of the Irish pound within the European Exchange Rate Mechanism (ERM).
These decisions by the Central Bank were in line with those taken by other central banks whose currencies are encompassed within the ERM. It is worth remembering that even after these rates rises, the Central Bank's short term facility is close to historically low levels. Irish interest rates were not affected when the UK raised its base rate three times, by half of 1 per cent each time, over the period from August 1994 to February 1995.
As to the effect of these changes in Irish interest rates on mortgage rates, it is not true to state that they will eliminate all the budget improvements in take-home pay. I am surprised at the Deputies making such a claim because it is demonstrably untrue in a number of respects.
To begin with, the bulk of workers do not have mortgages. The Revenue Commissioners estimate that only 320,000 tax paying units, out of a total of 900,000 tax paying units, claim mortgage interest relief. Thus nearly 600,000 taxpayers are not affected by the rise in mortgage rates.
Second, so far only a small number of institutions have raised their mortgage interest rates, mostly by only half of 1 per cent, although the Irish Permanent Building Society has raised its rates by 1 per cent. The reality is that mortgage lending rates are determined by the cost of funds to the institutions and by competition between the institutions themselves. The Central Bank has statutory responsibility for monetary policy, including official interest rates, but has no statutory power to determine the retail rates, including mortgage rates, charged by individual financial institutions.
Third, not all mortgages are contracted at variable rates. Workers who have fixed-rate mortgages will not be affected by recent rate increases. Since 1992 fixed interest rate mortgages have become much more widely available. In 1993, fixed rate mortgages accounted for some 65 per cent of all mortgages advanced by building societies that year. While activity in the fixed rate market declined in 1994, because of the higher costs associated with longer-term money, a significant proportion of mortgages is still advanced at fixed rates. This means that a sizeable proportion of borrowers, particularly the new and generally younger homeowners, are afforded a significant measure of protection from increases in the cost of their mortgages.
It is also important to keep in perspective the impact of a mortgage rate increase. The average mortgage outstanding is about £20,000 and a 1 per cent rise in the mortgage rate would add about £150 a year to the repayments on such a mortgage. If Deputies look at the tables in the Principal Features of the Budget they will see that the bulk of income levels show gains from the budget tax and PRSI changes well in excess of those levels. The budget changes are not the only matters affecting pay this year: the Programme for Competitiveness and Work, must also be taken into account.
Taken together, the pay increases under the second phase of the Programme for Competitiveness and Work and the reductions in taxation and PRSI in the 1995 budget will result in substantial increases in take-home pay for workers this year. For example, those earning the average manufacturing wage can expect increases in their take-home pay in the range of 4.5 per cent to 5 per cent: about £500. Given the expected inflation rate of 2.5 per cent, these increases will allow further gains in real take-home pay. These gains will be bigger for those with children, because of the increase in child benefit of up to 35 per cent this year. Even with an increase of 1 per cent in mortgage interest rates, workers with mortgages will enjoy real gains in living standards this year.
There is also the question of income tax relief on mortgage interest. In 1993, the ceilings for the level of interest that can be taken into account for mortgage interest tax relief were increased from £2,000 for a single person and £4,000 for a married couple to £2,500 and £5,000 respectively. In addition, a further measure was introduced to assist first time house purchasers, the priority group for any mortgage relief assistance. The percentage of interest allowable to such persons for the first five years in which they claim mortgage interest is now 100 per cent, subject to the normal ceilings, without any de minimis threshold applying.
The existing interest ceiling of £5,000 for a married couple, will mean that, even after allowing for a one percentage point increase on the average mortgage interest rate, a married couple will still have the full interest on an outstanding mortgage of in excess of £60,000 taken into account for tax relief purposes. This position, coupled with the specially favourable tax relief arrangements for first time buyers I have outlined above, means that for the vast bulk of mortgage holders the impact of the mortgage rate increase will be cushioned by the income tax system.
In short, the Deputies are wrong in their claim about the impact of mortgage rate increases. They do not affect the large numbers of workers who are not mortgage holders; a significant proportion of new mortgages are at fixed rates, and moreover, mortgage interest tax relief will absorb some of the impact of a mortgage interest rate rise: this is especially true of first time buyers in the first five years of their mortgages. The budget tax and PRSI changes, and the child benefit improvement, where relevant, significantly exceed the impact of even a 1 per cent rise in mortgage rates at most income levels. Adding the increases in the Programme for Competitiveness and Work will improve the position of workers still further. In the light of all this, I am sure Deputies will agree that their motion is not justified.