When I came in this afternoon I did not expect such an important speech from the Minister on the Appropriation Bill. In view of what he said, I feel it a duty to refer to the matters which he discussed. If I had had a little more notice that these matters were going to be raised on the Bill I could, perhaps, deal with them more adequately. At the same time, in spite of my lack of preparation, my mind regarding what I want to say is quite clear.
I can say that I entirely agree with everything the Minister has said. He said very little which I did not myself say in the Seanad in the last couple of years. The Central Bank, of course, is the depository of our main external reserves. It is understood that central banks in every country in the world either themselves or, as the Minister said, through an exchange equalisation fund, should hold external assets. That is one of the primary functions of a central bank and if our Central Bank did not discharge that function it would not be worthy of its title.
As the Minister said, the Central Bank could, if it wished, hold all its assets in gold. Under the Currency Act of 1927 gold could be held in the Legal Tender Note Fund. Gold at the present moment can be bought quite easily in the bullion market and it now can be obtained at the statutory United States price for the first time for several years. If the Central Bank wished to buy gold it would have no difficulty in doing so. In holding part of its reserves in British Government securities, although the rate of interest earned on them is low, it is earning a great deal more than it would by holding its reserves in gold. By holding them in gold they would be in an entirely sterile form, the gold would have to be kept in safes, insured and otherwise looked after; whereas the large British Government securities holdings are yielding quite a substantial revenue which—it is not sufficiently understood I think— ultimately mainly goes into the pockets of the State. The surplus income of the Central Bank is transferred to the State. Therefore, whatever is earned on those assets, when the Central Bank's expenses are paid, accrues to the benefit of the State itself.
I entirely agree with the Minister that the holding of a large volume of external assets of this kind in no way limits the capital resources available for investment in the country. Capital for investment must come from the savings of the people. The savings of the people of this country are largely held in deposits in the commercial banks.
Whether the savings are contributed directly by individual people or by the commercial banks, the effect is really the same. The savings of the population are being rendered available for investment—usually in the form, nowadays, of Government securities. There is no evidence whatsoever in this country of a shortage of savings that would make it necessary to raid the Legal Tender Note Fund of the Central Bank. The commercial banks have abundant assets which are available for lending to the Government if the banks desire so to lend.
I dealt with this matter last year in this House. I pointed out that, if the Central Bank had power to lend to the Irish Government and if it elected to use that power, the only effect would be a once-for-all swap of external for internal assets, limited to a certain rigidly defined maximum amount. The most extreme monetary reformer would not suggest that the external assets of the Central Bank should fall to zero. Therefore, the amount that could be made available would be, perhaps, in the neighbourhood of 30 or 40 per cent. at the very most of the liquid assets in the Legal Tender Note Fund. A swap of that kind would involve the sale of existing sterling assets to somebody in the country—it might be individual people, it might be the commercial banks, it might be a Government fund—but, as the Minister said, sooner or later the effect would be to swell the external assets of the commercial banks at the expense of the external assets of the Central Bank. With that I agree. The point I really want to make is that all it would mean is that there would be a once-for-all exchange in the Legal Tender Note Fund of external for domestic assets.
I said in the Seanad before that I do not think an operation of that kind would do very much harm; but I said then and I say now that I do not think it would do very much good. A mere swap of the assets in the Legal Tender Note Fund is really a matter of a technical nature of no great fundamental importance and it certainly would not increase the capital funds available for investment in the country. On that matter I am in complete agreement with the Minister.
It is not sufficiently realised by the public, I think, that the increase in the sterling assets in the Central Bank reflects the growth in the internal monetary circulation. Under the Currency Act, 1927, Irish currency can be issued only against sterling. When there is an expansion of Irish currency, the sterling assets in the Central Bank automatically rise by the same amount. This rise in the Irish monetary circulation may be caused by better trade or it may be caused by higher prices or by both; but, whatever it is caused by, it is an effect and not a cause of economic conditions. An increase in the Irish monetary circulation is not, in my opinion, a cause of any inflation in this country: it may be a reflection of an inflation—a matter to which I am going to return. The Central Bank has no right to refuse to issue Irish currency against sterling. Therefore, when the Central Bank increases its sterling assets it simply is doing what it is bound to do under the Currency Act of 1927: it is bound to issue legal tender notes in return for sterling. That increase in the monetary circulation almost certainly reflects the rise in prices in which, in this country at the moment, there is an inflationary element. I would go so far as to say— I would even go further than the Minister—in no way does the possession of these external reserves limit the capacity of credit expansion in the country. I think it helps it. I think the possession by any country of large gold holdings or large external holdings strengthens its currency, and by strengthening its currency it strengthens its credit, and by strengthening its credit it makes it possible for Government and other borrowers to borrow more cheaply than they otherwise could. If there were any question of depreciation of the Irish currency in relation to sterling, the Government's borrowing difficulties would be greatly increased.
To come to what I had prepared to say to-day, before this important statement was made by the Minister. I would say there are signs in this country at the moment of a possible undue expansion of credit. Whether credit is being unduly expanded or not is a matter of opinion, but one thing is perfectly clear, namely, that credit is expanding. Therefore, the movements in credit which are taking place are not in any way inhibited by the increase in the Legal Tender Note Fund sterling assets.
I am afraid that the Appropriation Bill usually tempts me to indulge in a certain number of platitudes year after year—certain homely truths of a financial kind which I think it a duty to repeat, since sometimes a thing has to be repeated more than once before it is clearly stated. One of these platitudes is that a balance of payments ought to be balanced at the highest possible level and a Government Budget at the lowest possible level.
Applying that criterion, the present Budget for 1953-54 has topped the £100,000,000 mark for the first time on both sides of the account. I know that prices are rising and that that is a factor; but there is no getting away from the fact that the public revenue and public expenditure are both growing. There is no sign of any reduction. The National Development Fund will absorb £5,000,000. Health services will grow. Old age pensions will grow. There is no great hope of reduction of public expenditure except possibly on the side of efficiency in public administration. It would be interesting to know how much of the £3,500,000 mentioned in the Budget speech for economies in administration has, in fact, been realised. There is a great movement in Irish industry to-day associated with the Irish Management Institute to reduce costs, to bring in efficiency experts, production engineers, accountants and so forth, to try to reduce the costs of running industry in Ireland. Has any similar operation taken place in Government Departments?
Another platitude which I feel called on to repeat is that a growth of Government expenditure, in itself, is not necessarily a bad thing. The burden of a Budget depends on the size of the national income of a country. You cannot say how much a burden weighs until you know the strength of the shoulders which are called on to bear it. On this matter, I should like to quote from an article in The Statist on 24th October last, which was written by the Minister for Finance. In the course of that article he stated that the expenditure of public authorities on current goods and services has remained from 1938-39 to 1952-53 at about 17 per cent. of the national income. Compared with other countries, that is rather a low figure; but, before we can congratulate ourselves too much on it, we must remember certain things.
In the first place, from 1938-39 to now we have incurred a great deal less expenditure on defence and military matters than most countries in the world. Secondly, our average income per head is rather lower and, therefore, the taxable capacity of the country is not very high. Thirdly, the national income is not rising (except in money terms) as fast as people would like it to rise. Therefore this 17 per cent.—although it has remained stable for 15 years—may perhaps, in our peculiar circumstances, be higher than perhaps 20 per cent. or 25 per cent. in countries differently circumstanced.
When we pass from the current to the capital accounts we find that the State has been spending at an increasing rate on capital development. Capital expenditure has been increasing more rapidly than current expenditure. State investment is proceeding more rapidly than private investment. In the article in The Statist the Minister for Finance says:—
"State-financed capital schemes now account for well over half of the total net domestic capital formation."
He goes on to point out the great growth in these schemes. In 1950-51, when the State capital Budget was presented in a comprehensive form for the first time, the total was £25,000,000. In the two following years it exceeded £30,000,000. In this year the State capital Budget provides for an expenditure of £39,000,000. The debt charges in respect of this State capital expenditure are growing very rapidly. The Central Bank Report for the year ended 31st March, 1953, page 13, draws attention to the fact that many of the assets which are ranked as assets in the Capital Account of this State are not earning assets. It says:—
"This increase in the service of the debt may seem surprising in view of the growth of Exchequer assets as revealed by the table but many of these assets yield little or no revenue to the Exchequer and consequently the cost of servicing the debt brought about by their creation falls mainly upon the taxpayer."
These are undoubted facts. I do not find fault with them. I think there are certain circumstances in Ireland which justify a considerable amount of capital expenditure by or on behalf of the State. The history of the country is one of underdevelopment. A great deal of leeway has had to be made up since the Treaty to develop our national resources. Many of the national development schemes require very large amounts of capital. In their nature, they are large and indivisible schemes. Bord na Móna, the E.S.B., C. I. E. are all investments that require very large amounts of capital. The return in some of our investments is rather distant. Afforestation, drainage, land reclamation will yield a return but it will be some years before full return is realised.
There is a shortage in this country of the ordinary source of risk-bearing capital. There is no very rich class of people in the country with a large surplus income. There is no great industrial tradition. High taxation on individuals and companies has reduced the amount of savings available for private investment. I should like to return to a suggestion I made in the Seanad before, namely, the possibility of appealing in a slight and by no means vicious way to the speculative instincts of the Irish public to try to raise some risk capital. I mentioned this matter in this House before but everybody who spoke after me disagreed with what I said. I can now quote a very respectable authority. I have here a copy of The Times of the 21st of this month. In it is a report of an address delivered to the Manchester Institute of Bankers by Lord Piercey, chairman of the Industrial and Finance Corporation. I need not quote the whole of this report.
The point I want to make is that this gentleman, who is a very prominent figure in the financial world, draws attention to the fact that there should be some method of canalising the large flow of small savings into risk-bearing securities. He points out that the figures show that there must be scope for additional thrift in England. He points out that the very heavy expenditure on drink, tobacco and entertainment shows that there is some margin still for saving. He points out that there is a good deal of spending on waste. He argues that, in order to get at that margin for savings, some attempt should be made to appeal to the speculative instincts of the people which are so strong in England.
He refers to the lotteries of the early 19th century and suggests that the time has come to inquire whether some sort of lottery loan could not be revived. I mentioned that matter in the Seanad before but nobody agreed with me. I still think that it is an idea that ought to be explored. In fact, I think it is an idea that will come into practice sooner or later.
I am quite prepared to admit, in the circumstances of this country, that a good deal of borrowing by the State is necessary. It is very important from the point of view of the credit of the country, I think, that borrowing should take place at the lowest possible rates. I repeat that the present currency arrangements, with large external assets, help in keeping down the rate of interest. That is distinctly stated in the report of the Banking Commission. I agreed with the statement the time the report was made, and I agree with it still.
Another matter is that the period of Government loans must be related to the maturity of the investment they are meant to finance. Some of these purposes I have mentioned would take a long time to mature. For a Government to borrow even reasonably short loans for long period investments is possibly involving future Governments in difficult conversion operations. Short borrowing, either from the commercial banks or from the Central Bank, for purposes of this kind, would be entirely wrong.
What is more important than the terms or source of the borrowing is the use to which the borrowing is put. I feel that if the investment is right, the actual details of the borrowing are a matter of rather secondary importance. When I say "right," I admit that it is a very question-begging term. It is very hard to say what is the criterion of right or proper investment.
In the days of full-blown capitalism, when practically all investment was left to private individuals, the profit test was a very good rough and ready guide. I suggest that public investment could be largely subjected to a profit test to-day, that the various types of public utilities in this country which obtain their funds from State sources could be subjected to very rigorous accounting, accounting of the same rigour as that applied to the private industrial company. There could be the same bona fide allowance for depreciation, writing down of stocks, interest on all loans, and so on, and in that way a certain amount of misplaced or misdirected investment might possibly be avoided.
I do agree in general that, in regard to public investment in this country, the mere short period profit and loss test cannot be completely applied. There must be a certain amount of not immediately remunerative investment and a certain amount of investment of an amenity or social kind which does not provide any liquid return. That brings me to another platitude, namely that the selection of priorities for investment in this country should be made on a very determined and rational basis. The investment council recommended in the Banking Commission Report, which has never been set up, could, side by side with the Central Bank, fulfil a useful function in this country.
What should the tests of proper investment be? The first, of course, would be an increase in national production and, above all, an increase in production which would relieve the balance of payments. There also are certain clamant social amenities which cannot be postponed. Hospitals, schools and a certain amount of housing cannot be postponed for any financial consideration. One type of investment which should not get a high priority is investment that carries a high labour content. The fallacy that work is an end in itself, that employment must be given at all costs, is a very expensive fallacy for Governments or Ministers for Finance and for the taxpayers.
Applying the rough tests I have suggested, how does the present investment programme fare? I come back to the article by the Minister for Finance. The £39,000,000 in the present capital Budget contains over £10,000,000 for housing, over £6,000,000 for health services and over £1,000,000 for schools. In other words, a very large fraction of it is for non-productive investment, investment which certainly will do nothing, in the short period, to ease the balance of payments position. That is why the Central Bank at page 15 of the report make the following observation:—
"In recent years our capital market has been almost monopolised by borrowing for the public sector, much of it for purposes which, however commendable on social grounds, cannot be relied upon to improve real output and provide employment on a permanent basis."
I suggest that investment of this kind can have inflationary consequences and that it is the cause of the inflationary symptoms which are appearing in our system to-day.
I venture on another platitude, that the primary financial duty of a Government is to keep up the value of money, to keep up the value of the monetary unit, without which all contracts, all social services, all promises and all debts become mere unrealities. The rise in the Irish price level in the past 15 years has been mainly caused by circumstances outside the control of the Irish Government. Sterling at present has become very largely a stabilised currency. There have been, in the last year, disquieting symptoms in the Irish price statistics. When import prices have been falling, and when world raw material prices have been falling, many Irish prices have been rising. The figures on page 11 of the Central Bank Report bring that out quite clearly. I quoted these last week on the Supplies and Services Bill and do not propose to repeat what I said then. The Central Bank draws attention to these indices and, on page 17, comes to the conclusion that inflationary symptoms are developing in the Irish system:—
"Money incomes in many spheres have continued to expand without a corresponding rise in output and so have tended to inflate domestic costs, thus reducing our ability to compete in foreign markets and lessening the attractiveness of the country as a field for investment and for tourism."
The Minister will agree with me that if inflation is in the system it should be squeezed out. When you come to squeezing out inflation you come to difficult questions of policy. The correct policy may not be popular. May I suggest that it may be the greatest duty of Governments sometimes to do things which displease rather than please the population; that a policy of mere bread and circuses may pay in the short run but not in the long run?
Again, of course, it is another platitude to say that in the long run an expansion of production will reduce the inflation but, as Lord Keynes used to say, in the long run we are all dead and we have to regard the matter in a shorter period.
I do not want to weary the Seanad with a long discussion on this matter but I feel it worth saying that there are only four ways in which, in the short run, an inflationary condition can be reduced. One is by reducing private expenditure on consumer goods. There is not very much room for a further reduction there because taxation is very high. The only place where possibly a further reduction could be considered would be in relation to the remaining food subsidies, which might be allowed to be reduced gradually. The second thing that can be done is to reduce the amount of private investment. Everybody is agreed that there is too little private investment in this country and not too much and, therefore, nobody wishes to see private investment reduced. If there is inflation in this country it certainly is not caused by excessive private investment.
The third thing that could be done is to reduce public expenditure on current account. I have already stated that except for economies in administration there is very little hope. That brings me to the fourth, and I think relevant, possibility, a reduction of Government capital expenditure. I would prefer if possible to avoid a reduction of capital expenditure from every point of view. I think it could be avoided if capital expenditure was always pushed in the right direction. If all capital expenditure as far as possible could be concentrated on primary production, agriculture and, above all, on exports, and if the return was not too distant, it might be possible to maintain the existing amount of Government capital expenditure without at any rate increasing the amount of inflation.
In regard to some of the amenity capital expenditures I think the Government ought to try to see that it gets complete good value for the money it expends. The largest single item this year is housing. It is a matter of common knowledge that building costs are unreasonably high. I suggest that one method of reducing inflation, while keeping up the supply of amenities, would be to make very serious inquiry into the possibility of reducing building costs. Another item that accounts for a great deal of capital expenditure is transport. Everybody knows that the Irish transport system is suffering from a redundancy of labour. If these nettles are not grasped, the possibility of pursuing capital investment without inflation will become very remote.
Another point I should like to make is that the more productive investment there is the more unproductive investment becomes possible. The more production is raised by investment in agriculture and the primary industries the easier it will be to justify investment in hospitals, schools and houses.
I do not wish to weary the Seanad more than I have done already but I should like to repeat that I felt bound to enunciate a number of platitudes. These platitudes are, I think, the commonplace of domestic housekeeping. I would end on this note by repeating another point of great importance which I made. That is that, now that outside sources of inflation have come to an end, any inflation that takes place in this country must be laid at the door of the Government. It is the duty of the Government in the interests of pensioners, debt holders, salaried workers and everybody with monetary claims to avoid inflation at all costs.
Finally, I would like to repeat what I said in the beginning. I agree with the Minister that the possession of large external reserves in the Legal Tender Note Fund in the Central Bank is a force which tends to reduce and not increase inflation. It strengthens our currency and credit and generally increases the economic stability and health of the nation.