The Central Fund Bill is one of the few occasions in the year in which the Seanad has an opportunity of reviewing the state of the national finances. I do not think I need apologise on this occasion for making a review of that kind, as shortly as I can. In making that review I intend to be objective and detached. I hope to survey the good and bad financial aspects as they appear to me, and to emphasise—it cannot be over-emphasised—that the national finances cannot be studied in isolation but must be related to underlying conditions, such as production, trade and above all the balance of payments.
In saying what I am going to say, I shall repeat what I have said on many previous occasions. I make no apology for this. I think that the elementary principles of financial prudence are universally valid. I do not think one need apologise for repeating them, and they cannot be repeated too often. Although they are universally valid, I think that they should be proclaimed with particular emphasis on certain occasions. I think that the present debate is one of these occasions on which it is necessary to emphasise certain elementary financial principles which can only be ignored to the danger of the country.
Looking at the state of our affairs to-day, it seems to me there are two good features which must be considered. I am not going to enter into the question whether the Budget will be exactly balanced or not in the present year; there is a good deal of difference of opinion about that. Usually a Government attempts to show that the Budget is overbalanced, and that their revenue is buoyant, while the Party in opposition tries to show that the state of the country is such that the Government had not achieved a balanced Budget. In the debates in the Dáil on this Bill and on the Vote on Account, it was the Opposition who were claiming that there was going to be a surplus in this year's Budget, and the Government were proclaiming quite definitely that there was going to be a deficit. Taking the middle line, I think we can agree that the Budget this year is just going to be about balanced.
The second good feature in the situation is that equilibrium has been restored in the overall balance of payments. This is partly the result of the last Budget, which was of a deflationary kind, but it is the result also of certain happenings in the outside world, such as a dropping-off in prices of some imports and the disappearance of the necessity for stockpiling. Therefore, partly as a result of Government policy and partly as a result of certain developments in the outside world, the balance of payments is coming more or less into equilibrium in the present time.
As against these two favourable items, there are certain unfavourable matters such as unemployment and high emigration which is consequent on unemployment. There is a good deal of discontent existing amongst certain sections of the population. The Civil Service is protesting against the failure of the Government to implement the arbitration award. That is a serious embarrassment, I am sure, to the Government and to the heads of the Civil Service. As we have seen in the Book of Estimates, the expenditure of the State is growing. Taxation appears to have reached the point of diminishing returns. Finally, and most menacing of all, our agricultural production, as far as we know, continues to remain obstinately stagnant.
There is no great increase of output taking place. I think it is not unfair to say that the financial superstructure in the country tends to grow at a greater rate than the productive basis of our economy. If that tendency continues long enough, the superstructure may become too heavy for the base. That is, I am afraid, beginning to occur. It may be no harm to repeat that equilibrium in the Budget and in the balance of payments, however desirable that may be, are desirable as means and not as ends in themselves. The ends of economic policy are the solvency, progress and prosperity of the nation as a whole. One must always have regard to the level at which these two balances take place. Perhaps it is not incorrect to say that we should aim at attaining the balance of payments on the highest possible level and the balance of the Budget on the lowest possible level. I do not say that that is universally true, but I do say that the tendency in this country is rather tending in the opposite direction. The equilibrium in the balance of payments has been obtained by a downward pressure and the equilibrium in the Budget is being obtained by an upward pressure. That shows that the financial superstructure is too heavy for the national productive base. Efforts should be made either to lighten the superstructure or to strengthen the base.
As regards the superstructure, everybody must agree that the Government is faced with very grave difficulties. When asked to curtail expenditure, the pressure of vested interests is so great that it requires supercourage on the part of politicians to curtail existing services very much. I suggest that, on the grounds of justice, one type of economy that should not be effected, if at all possible, is economy which causes discontent in the public services and raises complaints that promises have been broken and legitimate expectations have not been rewarded. Having said that, I would say that no new commitments should be undertaken. Commitments, the full effects of which will not be seen until further Budgets, should be avoided rigorously. The time has definitely come, in the circumstances of this country, when further public expenditure cannot be embarked upon until the productive foundations of the country have been considerably strengthened.
I have to accept, looking at the Book of Estimates, that certain increases in expenditure are unavoidable or at least have become unavoidable. The question arises how far this additional expenditure can be met with the least injury to the welfare and the credit of the country. Most of the indirect taxes have reached the point of diminishing return and further imposition of taxation will not produce any additional yield. As regards direct taxation, I think that there might also be very wide agreement that anything in the nature of an increase in the standard rate of income-tax would have a very depressing effect on saving, on investment, on enterprise and on the country generally. Any further taxation of business profits should, in particular, be avoided.
I think this subject is so important that I should strengthen what I say by quoting an authority of high value. The recently published I.B.E.C. Report states that:—
"The business tax structure has probably been too high for Ireland's state of industrial development. The ostensible weight of this tax burden has been increased by what appears to be an inadequate allowance for depreciation and depletion, when consideration is given to the great need for strong incentives to encourage plant and equipment modernisation."
I think that the point of diminishing returns has been reached both in indirect and direct taxation. Possibly, to come back to a matter that was fully debated in this House before Christmas, the burden of direct taxation might be more equitably spread, but anything in the nature of an increase in the standard rate would have an adverse effect on incentive and should be avoided. It, therefore, seems to me—and I think it is a general opinion—that the lightening of the superstructure must take place by a reduction in expenditure rather than by an increase in taxation. Public opinion must be educated up to realise that Budget deficits for current expenditure are fundamentally unsound— financially, politically, economically and socially. This is particularly true at a time like the present when interest rates are high. Deficits that necessitate borrowing at the present time involve the payment of high rates of interest.
Everything I have said regarding the lightening of the superstructure is, of course, always conditioned by the strengthening of the base. Taking the longer view of matters which should be debated in this House in the course of this debate on the Bill, the strengthening of the foundations in this country is a matter which ought to engage the attention of every member of both Houses. One of the reasons why I regret the abolition of the capital Budget is that in that Budget the distinction between current expenditure and investment expenditure was at least clearly brought out and put in the forefront of the national accounts in a way that could not fail to impress even the most casual reader of the Book of Estimates.
The strengthening of the foundations in this country involves a considerable amount of capital investment. This is a word which has been abused and bandied about and used in quite a wrong sense in many discussions in recent years. Investment does not, in my opinion, include expenditure on durable consumer goods, however desirable from the social point of view those consumer goods might be. It does not include the construction of mere amenities, of what appear to be capital constructions ancillary to the provision of social services. Above all, it does not include expenditure of public money for the sake of giving employment, of making work. None of those three things is, in my opinion, correctly described as investment.
Investment, in the present context, and in the discussion of the national finances which should be carried out during this debate, must be narrowly defined. It must be defined as the production of truly productive capital goods, whether fixed capital or working capital or stocks of raw materials, which in the near or even in the distant future will add something to the size of the national income. And in the peculiar circumstances of this country I would go further and say that investment ought to produce the type of goods which will help the balance of payments, either by producing substitutes for imports or potential exports in the future.
Everybody must agree that investment of this kind is desirable from the national point of view. Everybody may not agree with my opinion that investment by private investors is preferable to investment by Government or by public authorities. I have three reasons to support that view. The first is the general political reason that individualism is, I think, to be preferred to socialism. I prefer to see enterprise undertaken by private people than by public authorities. The second reason is that private investment takes place under the stimulus of the profit motive and people working under the profit motive must be efficient at their peril. The third reason is that investment undertaken by private people leaves no legacy of debt behind, if it proves unsuccessful. It leaves no hangover in the form of vast fixed-income-bearing securities which have to be borne by the taxpayer in the future.
I have no doubt that in this country everything should be done to encourage private investment. Whether investment takes place by private investors or by public authorities it must be preceded by savings. That brings me to the central point—I am repeating what I have said before but I make no apology for that, for the matter is even more urgent now than on previous occasions—that we must investigate the sources of savings in this country and try to utilise whatever are available in the best possible way.
There are three sources of savings and three only. The first is new savings out of current expenditure by private individuals or by companies. The second is the obtaining of foreign savings by encouraging foreign investors to invest in the country. The third is to use up old savings by the repatriation of external investments. Savings may be obtained in all these three ways and I propose to say just a little about each of them in so far as they bear on problems which are relevant to this Bill.
As regards new domestic savings, I do not propose to quote any figures in what I say, but every statistician, every foreign observer and every businessman agree that current savings in this country have not been at a sufficiently high level in recent years. That is unquestionable. At this point, I just want to quote one sentence out of deference to people in the House and in the country who do not consider that any statement on public finances is adequate or up to date unless reference is made to the late Lord Keynes. I am going to drop my piece of incense on that altar at this stage and beyond that I will not drop any more. If there is sufficient investment, that new investment itself will create a source of new savings and therefore this process of investment which I am advocating may be a cumulative one in the sense that, if the investment is successful, further savings at a later date may become easier than they are to-day.
We fully discussed domestic savings in our debate on income-tax. All I will say is this. The Government can encourage domestic savings by differential taxation on that part of personal and company incomes which is saved. The allowances for life insurance can be modified in this direction. The depreciation allowance for companies, the taxation of undistributed profits— these are all matters which I will just mention as possible for encouraging the flow of savings. Savings of the less well-off members of the community should be encouraged, and can be encouraged by suitable terms for savings certificates, post office savings bank deposits, and in other ways. I am glad to note in the newspapers in the last couple of days that the Government is about to institute a savings drive.
There is one way in which savings can be obtained, but which, in our country, I think, should not be resorted to, and that is by Budget surplus. I think that savings obtained by means of a Budget surplus do not provide risk capital for the private investor and may even have the effect of reducing the incomes out of which risk capital might otherwise come. Therefore, I consider a Budget surplus in this country as a means of inducing savings something to be avoided or, if resorted to, only to be resorted to as a last resource.
The second source of savings is foreign savings. Here again I feel very strongly that, if foreign savings come into this country, they should come in the form of equities, risk-bearing capital, not loans from foreign Governments or foreign lenders. Such loans leave a legacy of debt behind of a kind that involves pressure on the balance of payments. In this matter, I think the country should learn a lesson from the experience of Marshall Aid. We know that we will be faced for a number of years ahead with an obligation to repay large sums in dollars out of loans which were advanced in recent years. I do not wish to enter into this particular controversy, but I think I can safely say that these loans were not all spent in such a way as to provide the means of their own repayment. But, although I object to the borrowing abroad of fixed interest securities, sometimes this may be absolutely necessary. I think that if money can be obtained in that way abroad more cheaply than at home it should not be despised.
The experience to which Senator Hayes referred, of the Northern Ireland Electricity Board, is relevant in this respect. The only thing I think that might be said about that is that, although we might be willing to borrow in that way, foreign Governments might not be willing to allow such borrowings. In the last couple of weeks, the Treasury refused to allow a public authority in New Zealand to borrow in the London market for the construction of a bridge. A similar veto might easily be imposed on borrowings which we propose in this country which were not directly related to improving the balance of payments of the sterling area, which is the test that I understand was applied on that occasion.
I think that the possibility of attracting private capital from abroad has not been sufficiently explored. Numbers of people in other countries would like to get access to the Irish market, comparatively small though it may be. Others would like to use Ireland as a base from which to reach markets inside the sterling area. Others would like to diversify the risks of their investments in a period of international uncertainty. Therefore, I think the Government should consider ways in which foreign investors could be encouraged to invest in production in Ireland. The making of double taxation agreements with other countries is one way in which this could be done. The amendment of the Control of Manufactures Act, which was advocated 15 years ago by the Banking Commission, should again be considered. The possibility of Irish companies being quoted in the London Stock Exchange lists should also be investigated. These are ways in which I think foreign capital could be induced or encouraged to come into this country.
The final method of obtaining capital, the repatriation of external assets, is one which has been discussed in this House many times; but it is so current, so relevant, so topical and so misunderstood that I would like to say a few words about it once more. I do not think it is sufficiently appreciated that the process of repatriation consists in inducing the owners of those assets to shift them into private domestic investment.
The best way to induce people to shift their assets is by having low costs of production in Ireland, low taxation and a feeling of confidence in the future credit of the Irish nation and the Irish Government. To the extent to which private investors fail to avail themselves of and respond to inducements of this kind, the Government and the public authorities should try and encourage people to shift their foreign investments into Irish loans. One way of inducing them to do that is by offering high rates of interest—and when I say "high" I do not mean exorbitant rates. But I think that if a slight increase in the rate of interest has the effect of attracting a considerable amount of Irish capital home, then that is a justification for it which ought not to be overlooked.
Of course, as has been said over and over again, and as every member in this House will agree in principle, repatriation of that kind can only be justified when home investment is of a truly capital productive nature of the type which I tried to define. When we come to judge the priorities of such investment, certain problems have to be faced which I think have not been fully dealt with in Ireland up to the present. As regards private investment, the banks should be asked to exercise certain orders of priorities. The English banks, everybody knows, take their orders in this respect from the Central Bank. There is one small amendment of Irish banking which I should like to see, that is, a classification of bank advances on the same lines as the English bank advances are classified. We could then see whether private credit was being directed towards productive purposes and above all towards export productive purposes.
When it comes to the allocation of priorities in regard to public investment, I refer again to the Banking Commission of 1938 which recommended the establishment of a national investment board. One of the curious things about that Banking Commission Report was the selective manner in which its recommendations were adopted by the Government. The recommendation for setting up the Central Bank was adopted, but there were other recommendations which were ignored. The amendment of the Control of Manufactures Act, the cessation of the compulsory powers of land purchase and the establishment of an investment board—all these matters were recommended by the commission but were not adopted by the Government of the day, or by any Government since.
I cannot sufficiently emphasise that the repatriation of external assets is never justified to maintain current consumption and is never justified to create employment simply for making work for work's sake. Even for productive purposes, in the narrow and most correct definition, it is a process that must be undertaken with great caution and prudence. The amount of our external investments tends to be exaggerated and they are usually stated gross and not net. Their value has gone down, through no fault of our own, but owing to the rise in the sterling price level. To the extent to which they are dissipated, they never can be replaced. They are a sort of iron ration, an essential reserve to be kept for a contingency. The income that is derived from investments abroad is bridging a smaller and smaller proportion of the adverse balance on visible account. For all these reasons, the process of repatriation should be undertaken with great caution.
The final matter I wish to refer to shortly is one which I have not dealt with before in the Seanad, but I think it is important and a matter which should be ventilated. Whether our investment is based on new domestic savings, on foreign capital or on the repatriation of external investments, it all could be lubricated and facilitated if the Irish capital market could be improved. The question of the Dublin capital market was investigated by the Banking Commission in 1938, but, in the past 15 years, many changes have taken place and I suggest to the Minister that the question might be reinvestigated to-day. There are certain matters which could be investigated. One is a reform of the company laws. That, I understand, is already taking place. Others are a reform in the requirements regarding information in published balance sheets and changes in the Trustee Acts.
A more important suggestion is the foundation of some corporate institution which might act as a collector of small savings. Saving in modern times, with high direct taxation, will have to take place more by the less rich than in the past, and it becomes a matter of importance, which is being discussed in other countries, to direct all these small rivulets into one stream. I suggest that in this country there might be room for something in the nature of an investment corporation, the capital of which could be found by the banks, the insurance companies, the building societies and other authorities handling large liquid funds. A corporation of that kind could quite possibly be used as a source of loans for agriculture. It could also act as a support for prices in the Dublin market. Some very well informed foreign investors have complained that the comparative illiquidity of the Dublin market makes them disinclined to deal there, because, in a falling market, there is no support. A body of that kind might perform certain jobbing functions which might have the effect of supporting the market. To that extent the liquidity of the Dublin market would be increased and it would become more attractive for savers at home and abroad.
Finally—a more controversial and difficult technical question—a body of that kind might deal perhaps in short obligations of Governments, public authorities and private firms. Something in the nature of a domestic money market could at least be investigated. An investigation of that kind might lead to positive practical results. But, even if it did not do so, it at least would answer a great deal of uninformed criticism of the Irish banking system, that it does not lend sufficiently at home, that it lends short money at low rates in London and that the Irish Government and Irish borrowers are not accommodated at the lowest possible rates in the Dublin market.
Any inquiry of that kind, I suggest, however, should be made with the co-operation and goodwill of the existing financial institutions. It would be better still if it could be made by the financial institutions themselves, of their own initiative; but if the Government decides that a public inquiry of that kind should be made, it is most important that it should be made with the co-operation and goodwill of the existing financial institutions. The most important thing at the moment is to create a feeling of confidence regarding the future solvency and credit of the country, and any serious difference of opinion, or of outlook, between the Government and the banking system would not be conducive to that result.
This confidence will not be engendered by mere financial gadgets. It must rest on a sound financial policy. This brings me back to the point at which I began what I am afraid was a rather long speech, namely, that the public finances of this country have now reached a stage where they require the most thorough investigation. The financial superstructure has become too heavy for the productive base. Public expenditure should, if possible, be pruned, with due regard for existing commitments and legitimate expectations. New public expenditure should be avoided at all costs.
If these observations sound pessimistic and alarming, I do not make any apology on that account. I have said nothing that was not said 15 years ago in the Report of the Banking Commission. That report was criticised very adversely in many quarters and yet I think many people will agree to-day that some of its warnings have proved to be only too true. Its insistence for financial prudence was derided as the utterance of timid, old-fashioned, foolish pessimists. But even the utterances of quite foolish people sometimes have good results. It must not be forgotten that the Roman Capitol was saved by the cackling of that most foolish of all birds—the goose.