That newspaper performs in the marketplace like any other. The Deputy, along with his fellow correspondents and colleagues, frequently puts out the same type of material. In fact, there is a certain similarity, verging on a mantra-like repetition of certain points. The third part of the Deputy's speech, to which I wish to respond, was the serious economic analysis and sincerely held views in relation to what we should do over the next number of years, particularly with regard to another national agreement if there is to be one.
I thank Deputy McDowell for the opportunity to outline the importance of the consensus approach to pay determination and policy development adopted by all Governments before and since 1988. I compliment his party's role in those Governments because the personalities in his party who were in Government have between them, on my calculation, more than 20 years' experience of being in office if one takes the ministerial career of Deputies Molloy and O'Malley.
The consensus approach various Governments have adopted has made a major contribution to our economic development over recent years. However, the last three agreements have not been confined solely to pay and taxation changes. They covered a wide range of policy areas including care for the less well-off sections of our society and the need to increase employment. The Government's firm and prudent management of the economy has helped in achieving the goals of the consensus approach in line with the Programme for Competitiveness and Work and will facilitate the continuation of this approach in the future.
The last three centralised agreements have involved the Government, the main trade unions, employers and farmers since 1988. The current agreement, the Programme for Competitiveness and Work— 1994-96 — was agreed in early 1994 and seeks to build on the achievements of the Programme for National Recovery and the Programme for Economic and Social Progress. All three agreements represents a consensus-based approach to wage determination covering both the public and the private sectors. They have sought to improve the competitiveness of the economy through moderate pay increases in a framework in which fiscal and monetary policy are geared towards price stability. A national pay norm is set after negotiations between the social partners. Payment by firms of the increases is not automatic, however, but depends on their ability to pay. Accordingly, the national pay agreements have allowed for an element of flexibility which is vital for employment protection and growth.
The agreements also cover other areas of policy such as Government expenditure and taxation reform. Under this integrated approach pay increases are influenced by the Government's overall tax and expenditure plans. The agreements have also embodied the Government's medium-term economic strategy and, in particular, its commitment to respect requirements of the Maastricht Treaty. The Programme for National Recovery, the first of the agreements, sought to rectify imbalances in the public finances. The latest agreement, the Programme for Competitiveness and Work, in addition to pay restraint, includes a comprehensive package of measures designed to enhance the economy's productive capacity. These measures include plans for taxation reform, structural reform of the economy and investment plans, all of which are geared towards preparing the economy for the final stage of economic and monetary union. The Programme for Competitiveness and Work is monitored by a central review committee, comprising representatives of all the social partners.
The Irish economy in recent years has been characterised by consistency in budgetary, monetary and exchange rate policy which has provided coherence in overall economic strategy and credibility both domestically and internationally. The continued economic stability and moderate pay terms provided by the Programme for Competitiveness and Work, and its predecessor agreements, have enhanced the competitiveness of the economy and contributed to the excellent performance in terms of output and employment growth. Furthermore, fiscal policy in conjunction with monetary policy has maintained confidence in the exchange rate, contributed to securing low interest rates and underpinned non-inflationary output and employment growth. The consensus and social partnership achieved under the three national programmes have contributed enormously to this process.
Over the nine years 1987 to 1995, GDP growth in Ireland averaged approximately 5 per cent per annum. This was more than twice as fast as growth in the European Union as a whole which averaged 2.3 per cent during the same period. The corresponding figure for the United Kingdom was 2.1 per cent. It is very important to note our better growth performance did not give rise to undue inflationary pressures. Between 1987 and 1995, our inflation rate averaged 2.1 per cent compared with 2.7 per cent for the European Union as a whole and 4.2 per cent in the United Kingdom.
Nor was our good growth performance the result of excessive levels of Government borrowing. In fact it was quite the reverse. Our general Government deficit has averaged 3.2 per cent over the past nine years and it has been comfortably below the Maastricht Treaty reference figure of 3 per cent every year since 1988. By comparison, the average Government deficit for the EU as a whole was 4.3 per cent for the same period.
There are now clear signals that rapid economic growth is being translated into impressive increases in the number of people at work. There are more people at work here than in any time since the 1930s.
While our strong growth rates are by now fairly widely known, it is perhaps not so widely appreciated that Ireland's employment performance in recent years has also been significantly better than both the European Union average and that of the United Kingdom. Over the same nine year period from 1987 to 1995 to which I referred earlier, employment growth here averaged 1.3 per cent per year. This was more than three times as fast as annual employment growth in the European Union. Our unemployment rate has also fallen in recent years at a time when unemployment rates in the European Union generally have been on the increase.
In 1996, for the third year in succession, the Irish economy will be among the fastest growing if not actually the fastest growing in the OECD area. GDP this year is projected to expand by 5.75 per cent compared to a projected OECD area average of about 2.5 per cent. Our strong growth performance this year derives mainly from increased domestic demand in the form of increased payment investment and private consumption. As in 1994 and 1995, this strong growth performance is being translated into jobs. Employment, after increasing by 40,000 in 1994 and 45,000 last year, is again expected to increase rapidly this year by about 31,000 or 2.5 per cent. This is the second fastest rate of employment growth in the European Union, only Luxembourg has a faster rate. It is also about two and half times the projected rate of employment growth of 0.9 per cent in both the European Union and the OECD area.
Despite our very rapid rate of output and employment growth, inflation is expected to remain fairly moderate this year at around 2.25 per cent. This compares reasonably favourably with the projected inflation rate for both the European Union and the United Kingdom which, in both cases, is expected to be close to 3 per cent this year. However, having said this, it is vitally important that we keep cost increases in Ireland down to the absolute minimum and, if possible, well below those of our trading partners. This has indeed been our record over the last decade or so, but we must maintain this progress.
Irish interbank interest rates are at their lowest levels for decades and this is reflected in the low rates of interest currently available to people borrowing to invest in businesses, to those wishing to purchase their own homes, to those who are already repaying mortgages and to personal borrowers. The low level of interest rates currently enjoyed by the Irish economy is a symptom of success — success in maintaining a low level of inflation; success in maintaining a stable and credible currency, success in maintaining a strong balance of payments position and success in maintaining discipline in fiscal policy.
Economists, bankers, pension funds and insurance companies — managers of investments around the world — have looked at the Irish economy and have given it an unequivocal "thumbs up". This is reflected not only in the strong international participation in the Irish bond market but also in the willingness of investors to put their funds into Irish pounds.
The Government in its programme A Government of Renewal commits itself to continuing the process of tax reform. The programme stresses that reform should favour the incentive to work, tackle the poverty trap, aim to reduce the tax wedge and encourage enterprise development and growth. I reject the false impression being created by some that no progress is being made towards reducing the tax and PRSI burden on employment income. That is simply not the case. Over the past number of years successive Governments have been undertaking a programme of tax reform with a view of increasing competitiveness and growth and thereby contributing to the maintenance and creation of sustainable employment. In recent years we have made significant progress in this regard.
In line with A Government of Renewal, a central tenet of the last two budgets has been to reward work by increasing take home pay. The 1995 and 1996 budgets have confirmed this Government's policy to continue, within responsible budgetary parameters, the process of tax and PRSI changes as an important element in overall strategy. Over the two budgets combined, personal allowances have been increased by close to 13 per cent. The standard income tax band has been widened by £1,200 in the case of a single person and by £2,400 for a married couple. This is an increase of close to 15 per cent — an amount which more than compensates for the reduction in mortgage interest and VHI reliefs. These increases are significantly above the expected rate of inflation for the two year period of under 5 per cent.
The last two budgets also focused on the lower paid by increasing the general income exemption limits by 8.3 per cent, thereby taking a significant number of workers out of the income tax net altogether. A new PRSI free allowance was introduced in 1995 and increased to £80 per week this year for most employees. This measure, a unique new feature in the Irish social insurance system, means that in the case of most workers, the first £80 of their weekly wage is disregarded when calculating their PRSI contribution. This allowance is of particular benefit to those on lower pay as it gives valuable relief to those who are already exempted from income tax and who would not benefit from further increases in either the exemption limits or the personal allowances. Furthermore, the threshold for payment of the health and employment and training levies has been increased in line with pay increases.
The combined effect of these measures has been to increase take-home pay, especially in the case of lower paid workers, thereby making employment more attractive. Equally importantly, these measures will ensure that we continue the progress being made in reducing both the employees' average tax burden and the overall tax wedge. Let me illustrate this point with a number of examples.
In 1994-95 the average tax take, including income tax, PRSI and levies, for a married couple, one earner with two children, earning the average industrial wage, was over 23.4 per cent; in 1996-97 this figure is expected to fall to below 22.1 per cent. For a single person, on the same wage level, the average tax take in 1994-95 was 31.3 per cent; in 1996-97 this figure is expected to fall to 29.7 per cent. In 1994-95 the average tax wedge, including employers' PRSI, for a married couple, one earner with two children, earning the average industrial wage, was almost 31.8 per cent; in the tax year 1996-97, after allowing for wage increases, the tax wedge is expected to fall to around 30.4 per cent. For a single person on the same level of income, the average tax wedge is expected to fall from almost 38.8 per cent in 1994-95 to around 37.2 per cent in 1996-97.
If we look at the period of the Programme for Competitiveness and Work, the percentage increase in take home pay for a single industrial worker on gross pay of £9,000 in 1993 has increased by 14.6 per cent when the tax changes and the basic pay increases, of slightly over 8 per cent under the Programme for Competitiveness and Work, are taken into account. For a family with one earner and two children the corresponding percentage increase at £9,000 is 16 per cent. For those further up the earnings scale the corresponding increases are not less than 12 per cent. These increases are significantly ahead of expected inflation over this period of around 7.3 per cent. A very large proportion of the increase in real take home pay over the period of the Programme for Competitiveness and Work is due to the improvements introduced in the income tax and PRSI areas.
Also over the period of the Programme for Competitiveness and Work the threshold at which the top rate of income tax applies in the case of a single industrial worker has increased by £1,914 to £12,850, even after allowing for the non-renewal of the PRSI income tax allowance. In the case of a married couple, one earner, the threshold has increased by over £4,100 to £24,900. This represents increases in the single and married thresholds for the higher tax rate of 17.5 per cent and almost 20 per cent, respectively, which are well above twice the expected rate of inflation.
These figures give a clear indication of the progress being made in the income tax and PRSI areas and refute statements which have been made repeatedly in this House by those who seek to minimise or understate this Government's achievements. I hope to achieve greater progress and it is my goal to continue the progress which has been made in the past two years, but it is clearly wrong to complain about the absence of tax reform as some have done. If tax changes are to be pursued, it is best to do so on a sustained basis. A succession of seemingly moderate tax reductions from year to year can, over a relatively short period, make a substantial difference. That is what we are in the process of doing.
A further aim of this Government is to encourage the development of enterprise in order to generate and maintain employment. To this end the lower rate of employers' PRSI was reduced from 9 per cent to 8.5 per cent and the income threshold for the higher rate increased from £173 per week to £250 per week, that is, from £9,000 to £13,000 per annum. This represents an increase of around 45 per cent. In addition, the main rate of employer contribution was reduced from 12.2 per cent to 12 per cent. For an employer with 30 employees earning £13,000 per annum, this has resulted in a reduction of almost £14,500 per annum in employer PRSI costs. These reductions are, of course, of significant benefit to the services sector which, as the Deputy is aware, includes many labour-intensive activities.
For several years now, the policy of successive Governments in relation to corporation tax has been to reduce the standard rate and to facilitate this by broadening the base. This Government recognises that the corporation tax rate is a critical factor in creating a pro-enterprise environment and in determining the competitiveness of Irish industry in international markets. Therefore, in my first budget in 1995, I reduced the standard rate of corporation tax from 40 per cent to 38 per cent. This was a further significant step towards our securing a standard rate which is comparable with the rates that exist in competitor countries. Deputies will recall that I indicated at the time that it is this Government's firm intention to reduce the standard rate further in future years, as resources permit.
In this year's budget I introduced a new reduced rate of corporation tax which will apply to all businesses liable at the standard rate. The new rate of 30 per cent applies from 1 April 1996 to the first £50,000 of taxable income in an accounting year. While all companies will ultimately benefit from gradual reductions in the standard rate, this year's measure provides proportionately greater benefit to the small business sector. This is in recognition of the fact that the small business sector has shown the capacity to create substantial additional employment.
A reduced corporation tax rate will facilitate the retention of profits for reinvestment to build up business and create employment, particularly in small businesses. This gives a positive signal to entrepreneurs who are deciding to expand their business. I hope the companies concerned will respond to this measure and use the facility to expand their business with a view to creating further sustainable employment. Of course, all proposals for changes in relation to the taxation of business must be considered in the context of the overall reform of the corporation tax system.
If our aim is to reduce the tax rate, then we must be prepared to broaden the tax base and endure that the various reliefs, concessions and exemptions make a net contribution to the state of the economy. For this reason, I introduced measures to curtail abuses of certain tax reliefs and to refocus relief measures on the productive areas for which they were originally intended. Deputies are aware that I took such action in relation to the relief for patent royalty income. I was not prepared to tolerate a situation where a relief was being misused by certain taxpayers at a significant cost to the Exchequer without a tangible return in terms of increased R & D activity.
The changes which I am introducing will limit the scope of these costly abuses, while ensuring that the relief is still available for genuine R & D activity. Similarly, the Finance Bill measures on the BES and section 35 relief for film investment are aimed at curtailing unintended uses of these reliefs and refocusing them on productive employment enhancing ventures.
Economic growth is the key to achieving a better material society for all. Ultimately, we want continued improvement in living standards for all members of the community, not only those in employment or in business for themselves, but also those who are the least advantaged, namely, the unemployed, the sick, the elderly and families with dependent children. There must be an equitable sharing of the fruits of economic growth if we are to achieve progress in a socially cohesive manner. A sharing society is one that will, in the end, provide the necessary incentive to ensure that we continue to grow and prosper into the future.
The Government has, of course, made the achievement of greater social solidarity a key objective in its economic and budgetary strategy in the past two budgets. In pursuit of this objective, we have adopted a range of measures aimed at improving the real level of social welfare payments, particularly for families with dependent children, and encouraging those who are currently unemployed to actively seek and secure employment.
In round figures, about 27 per cent of social welfare spending goes to pensioners; 28 per cent goes to the unemployed; a further 28 per cent is spent on family income support; 5 per cent goes on administration and the balance on illness payments. Each group of beneficiaries has had its social welfare payments increased in the past two budgets. All weekly payments and all adult dependant allowances have been improved in real terms. Over the past two budgets these increases have been in excess of 5.5 per cent. This compares with an inflation rate in the period of under 5 per cent.
These improved rates will ensure that the real purchasing power of social welfare payments will show an increase over the two year period 1995-96. In terms of the Exchequer, they will cost an estimated £180 million in a full year. Members will agree that this is a very significant commitment. It is indicative of the Government's and, ultimately, the general taxpayer's willingness and desire to ensure that the more vulnerable people in our society continue to share in the "growth dividend".
The policy direction initiated in last year's budget with regard to financial support for children was continued and further developed in this year's budget. Following from the substantial increases of £7 per child given in the 1995 budget, child benefit this year is being increased by £2 per child per month from next September. This will bring the monthly payment to £29 for the first two children and to £34 for the third and subsequent children. Taking the last two budgets together, a 45 per cent increase has been provided in respect of the first two children and a 36 per cent increase for other children. This represents real support for families with dependent children.
Research shows that families with a number of dependent children tend to be most at risk of falling into poverty. This applies in particular to those families where the head of the household is unemployed. Over one million children and almost half a million families benefit from child benefit. It is of particular value to families on low incomes. Furthermore it is not withdrawn when an unemployed parent takes up employment. In this sense, it does not constitute a disincentive to taking up employment. It is estimated that when the full year effects of both this year's and last year's significant improvements have worked their way fully into the Exchequer accounts, child benefit will cost in the order of £390 million per annum.
It will be generally accepted that the Government has made significant progress in recent years in ensuring that the least advantaged members of our society have shared in the benefits flowing from our excellent economic performance. Social welfare payments have been improved in real terms and the position of families rearing children has been particularly well catered for. A range of well targeted pro-employment measures have also been adopted and enhanced with a view to getting increasing numbers of the unemployed back into the jobs market. In the long-term, I believe this approach represents the best way of tackling poverty in our society.
The calls of those who espouse fundamental tax reform are invariably linked with demands for increasingly stringent control of public expenditure. I fully acknowledge that firm control of public expenditure, as part of a prudent overall fiscal strategy, is essential if the necessary additional resources are to be released to allow scope for meaningful tax reform. In this context, I have no difficulty defending this Government's record on controlling public expenditure. The facts speak for themselves.
This Government has succeeded in keeping the growth in public spending to its lowest level since 1989. In the period 1991-94, the average real increase in day-to-day Government spending was 6 per cent. Since taking office, this Government has succeeded in not only containing but actually reversing this excessive growth trend. In 1995 the real increase in public expenditure was just over 3 per cent and in the 1996 budget I have provided for an increase of 2.5 per cent. Gross non-capital supply services spending as a share of national income is planned to be lower this year than in any year since 1990. These facts prove that this Government has succeeded in keeping public expenditure under firm control — something which previous Governments since 1990 did not manage to achieve. This Government is fully committed to maintaining its prudent stance on public spending. This is being done as a wider budget strategy designed principally to ensure that Ireland continues to be in a position to meet the Maastricht convergence criteria.
The Programme for Renewal limits the growth in gross current spending to an average annual rate of 2 per cent in real terms in 1996 and 1997 — the first time that a Government policy programme has given such specific targets for controlling public expenditure. In setting our public expenditure targets. the Government has taken a considered view about the appropriate level of spending growth given Ireland's social and economic development. The modest increase in current spending provided for under our targets allows sufficient scope to ensure that the benefits of economic growth can be used to improve essential public services, particularly for those in greatest need, while at the same time providing resources for significant tax reform, especially reform directed at removing the disincentives to job creation.
Further evidence of this Government's committed and innovative approach to overall public expenditure and budgetary management — if indeed such evidence is required — can be found in the planned move to a new system of multi-annual budgeting which I announced in my Budget Statement on 23 January 1996. The phased introduction of a multi-annual budgetary framework, with effect from the 1997 budget, will make an important contribution to the overall effort to maintain firm control on the growth in public expenditure. The multi-annual approach, involving three year benchmark projections for the budgetary aggregates, will facilitate a planned approach to the management of the public finances. The process will involve the establishment of baseline projections of expenditure for three years ahead which will be agreed by the Government. These projections will be costed on the technical assumption of a continuation of the existing level of programmes and services. While it will still be open to Departments to seek additional resources over and above the baseline projections, the existence of such Government approved projections will provide a valuable benchmark against which such demands may be more rationally assessed, and should serve as a restraining influence on expenditure generally.
Earlier, I set out the role of the Programme for Competitiveness and Work. The provisions of the Programme for Competitiveness and Work pay agreement are helping to control the level of increase in pay rates and deal with restructuring issues. Moderate increases, in accordance with the terms of the agreement, combined with the fact that no further cost increasing claims may be made or processed under the terms of the agreement, are helping to control public expenditure. This control is essential if we wish to make further progress on tax reform. Continued moderation and certainty in pay costs is also essential if we are to improve competitiveness and bring further growth to reduce unemployment.
As already stated, the Programme for Competitiveness and Work is due to conclude at the end of 1996 — though the public service pay agreement continues until the end of June 1997. I would see merit in a new programme to succeed the Programme for Competitiveness and Work in order to address the major challenges which our economy and society as a whole will face in the next number of years, including involvement in Economic and Monetary Union and continuing to tackle employment through flexibility and improvements in competitiveness. A new programme would allow the social partners to play their part in addressing the challenges ahead and would continue the consensus approach to the management of the economy which has served the country well in recent years.
Let me repeat the essential and incontrovertible facts. This Government's firm and prudent management of the economy, combined with the moderate Programme for Competitiveness and Work wage increases and the significant tax and PRSI changes introduced over recent years has contributed to real increases in take home pay for workers. They have also led to low inflation, low interest rates and strong economic growth which is now being converted into a rapid expansion in numbers at work.
The Government will continue the process of tax and PRSI reform as resources allow. The principles and priorities which will guide the Government in this regard will include targeting lower paid workers, widening the standard rate tax band, increasing personal allowances and exemption limits, reviewing the efficiency of tax expenditures, continuing the improvements in the tax collection system and strengthening the Revenue's audit capacity in the fight against tax evasion.
While we have much work to do, the process that we have adopted over successive Governments, in some of which the Progressive Democrats, but not Deputy McDowell, were members, have brought us to the point where our record in European terms and OECD terms is the envy of other countries including New Zealand. I do not doubt that there is much more work to be done but we will continue to do it with the same level of success which we achieved to date.