This Bill as the Members of the House are no doubt aware has as its purpose the stimulation, by tax incentive, of coal production, exports, new industrial buildings, new hotel accommodation and to make arrangements in respect of depreciation for machinery in certain cases, as well as to provide the legislative provisions necessary for the prize bond issue that I intend to make early in the new year and to which I have already adverted in public. I think it would be desirable to ask the Seanad to consider the provisions of this Bill as part of a more general picture and therefore I propose to make something in the nature of a review of that general picture into the framework of which I ask the House to put this Bill.
We must remember that over the past years we have had an endemic internal inflationary situation, in which we have always had endemic balance of payments deficits. During the shortage that existed throughout the world at the time of the last war that position was reversed because of the then international situation. It was reversed then because there were not sufficient goods for us to purchase from abroad. They were not available and consequently we could not get them. In considering this problem we must always remember that in Ireland we have not got a closed economy but a wide open economy. Very often when people are considering the economic problems which appertain to us they are inclined to assess those problems on the opinions they obtain themselves or obtain from other economists of what is occurring in other countries and the solution that has been found for those problems by other countries. Frequently they are inclined to overlook that those comparisons are of little use unless one is comparing like with like. The causes of economic difficulties and the remedies for those difficulties are entirely different in an open economy from a closed economy. It is essential therefore that we always ensure when considering our problems and comparing the manner of meeting them with the manner in which other countries have met theirs, that the circumstances which we are comparing are in fact alike.
We have had for many years, excepting the years of the emergency, a situaction in which we were not producing sufficient goods at home to meet the demands; we were not producing sufficient goods to meet the demands created by the level of money incomes of the community. In a closed economy, if that were the position it would have the effect of driving up internal prices. In our situation it did not have that internal effect, but the effect it did have was that we brought in from outside more than the goods which we sent out could pay for. In consequence we had, over the years, a continuous and endemic balance of payments problem. Up to this we have been able to meet the deficiency that arose in our pattern of trade and in our pattern of invisible items by three factors. Those factors are not now available and we must face the fact that their existence up to this concealed the real weakness of the Irish economy.
I have, of course, referred to those factors frequently during the course of the last year. The first factor was the Marshall Aid Loan Counterpart Fund which was expended completely before the end of 1951. The second factor was the spare external reserves of the commercial banks and the third factor was the spare external reserves of governmental departmental funds. Marshall Aid is completely gone. The spare reserves, both of the commercial banks and of departmental funds, have now been utilised to such an extent that the remainder are only sufficient, on the one hand, to meet normal trading operations which must be financed by the banks and in respect of departmental funds, to meet the reserve that must be held. Having regard to the fact that those three factors which operated up to this and which concealed, if you like, the real weaknesses of the economy, are no longer there, I would suggest that it is urgently necessary that we should get down to a rock bottom analysis of the causes of our difficulties and of the remedies that we should propose in order to meet them.
We must face the fact that one of the causes of the difficulties has been that our savings as a community have never been anything like high enough. It is essential we should all realise that it is only by building on a high savings ratio that we can make real progress. It is unfortunate, as I say, that in relation to our position we have not got here the high savings in relation to national product which we have in other countries. It is also an unfortunate fact that the less developed a country is, the more it is essential that it should set aside a greater proportion of its current income for the purpose of building up for the future.
If it does not set aside more than a developed country the result will be that it will fall further and further back in the race. We must, therefore, face that issue and make certain our people appreciate that there is here a vital need to step up our savings as a community and to ensure that we make real progress in the future by being able to build on the same sound basis that has been used as the rock in other countries.
If we take the position as it was last year, 1955, we find that our gross domestic capital formation, when considered as a percentage of gross national product, was somewhere around 15.9 per cent. It was only even at that figure because of the substantial external disinvestment last year. It was because of that external disinvestment, higher than in 1954 when the figure was 13.6 per cent., in 1953 when the figure was 14.9 per cent., or in 1952 when it was 13.1 per cent., but, notwithstanding that, it was very much lower than other countries which were forging ahead.
Western Germany, for example— and these figures are taken at constant prices over the years—had as its percentage in 1955, 25.6. In every year since 1949 it set aside out of its gross national product more than one-fifth as savings for future development and to ensure an expanding and a progressive economy. Every country that we can look at in Europe which shows any progress is in the same position. Britain is higher than we are in their savings ratio, higher even though they are a very developed community. France is higher again than we are. The Netherlands in 1953, 1954 and in 1955 were over 20 per cent., running up in 1954 to 26 per cent. They set that aside out of their national product towards gross domestic capital formation.
Sweden, Denmark, Italy and all the O.E.E.C. countries have an average far better than we have here. As I say, it is unfortunate that not merely is that the absolute fact, but also that we must accept the view that the less developed a country is, the more it has got to set aside out of its current resources if it is fully and adequately to develop itself and keep up in the international race.
Not merely is that so from a comparison at that angle but it is also a fact that other countries in Europe have increased the volume of their savings and capital formation far more than we have in Ireland. If we take the year 1949 with 100 as a base line we find that in 1955 the volume of savings in Western Germany was 228. In other words, they have more than doubled what they set aside out of their current income for future development. In Italy it was 177; in Britain it was 148 where they are setting aside approximately half as much again. In Sweden it is 145, the Netherlands, 140, Belgium, 135 and ourselves, 131.
Of all those countries we in that respect too are doing less to build up future development than the countries I have named, and, in consequence, we must, if we are not to fall further behind in the race, change that pattern. I am afraid we must also accept the situation that not merely are we in consequence putting less by for development in the future than other countries but that our national product is not rising as it should be.
If we take the countries published in the O.E.E.C. report, we find that we are very low down in that list in comparing the increase that there has been in our national product in recent years with the increase that there has been in other countries. It varies, as members of the Seanad can see upon looking at the report, from 20 per cent. down in our case to an increase of 2 per cent. That is perhaps an unfair comparison in one respect because it might be fairer to compare national product by per head of the population rather than by geographical entity, but even by taking the comparison per head of the population we still find that the comparison varies from 20 per cent. down in our case to 4 per cent.
That situation is not a happy one and it is one which a country suffers much worse when there is a sudden jolt to the economy as there was in recent times.
Even if the pattern that we had here were a satisfactory pattern, some of the things which have happened in the recent past would have caused us some dislocation; but when our pattern was as unsatisfactory as it was, naturally enough that caused even more dislocation.
In 1955, we had a switch, a turn from saving to spending. We had a drop in the amount saved by the community; it was very substantially reduced and indeed to some extent in certain ways there was a draw down on past savings. The total effect of that was substantial and was one of the basic causes of the balance of payments deficit of £35,000,000 in 1955.
I noticed also during the course of last week a reference in Cork to this problem at a Rotary Club luncheon. I noticed a suggestion was made there that the accumulated Budget deficits over the years were a substantial contributory factor in our difficulties. I would like to make it clear that I agree with that view. We must get out of the rigid line we have held here over the past 30 years. I do not think that in any part of that period there has ever been a deliberate budgetary surplus created for the purpose of meeting an economic difficulty of the moment. Other countries utilise that weapon and it would be silly and stupid for us not to appreciate that there might be circumstances in which it may be desirable that one would budget for a surplus for the purpose of avoiding inflation and the misery that would go with it, just as in other times it might be desirable that one should deliberately budget for a deficity.
We must get out of the attitude of mind that it is a rigid matter and we must appreciate that the method of financing our capital programme is something that must vary with the economic circumstances as we see them from year to year. It is undoubted that one of the reasons why we were in the difficulties in our balance of payments in which we were in last year was that savings dropped to the extent to which they did. They have somewhat recovered now, but members of the House can easily see from the comparisons I have made with other countries that we have a long way to go to be able to compete with them on equal terms.
The second reason for our difficulties in 1955 was that money incomes rose more than production and in consequence, as the result of a rise in money incomes not matched by production, we had a greater demand on external sources with which to make up the gap between our own production and the money incomes of the community. The obvious remedy to deal with that is to bring production up into line with money incomes. These measures—and other measures which have been announced by the Government—are a part of the effort to do that. I want to make it clear that until production is brought up into line with incomes, we must have stability in those incomes. If we do not have stability in those incomes until production has increased to meet the demand, then inevitably in our economy we will have more and more balance of payments deficits.
Political Parties on every side of the House accept the view that it is undesirable that we should run balance of payments deficits. They must. It is obvious that we cannot go on indefinitely buying more from abroad than we sell abroad because it would be like the ordinary household which was in the same position. I hope, therefore, that it will be fully realised through the community as a whole that the paramount thing at the present time is to build up production, to make production come into line with money incomes and that anything which would disturb that paramount need would not redound to the benefit of the economy.
The third reason why we had the unfortunate deficit of last year was the change which occurred in the terms of trade. I have mentioned this on several occasions but it cannot be too often stressed. It cannot be too often stressed because amongst other reasons it is a matter over which we have absolutely no control here in Ireland. We cannot possibly decide at what price other countries will sell us their goods; neither are we sufficiently large to be able to determine the price which we can obtain for our own exports. In recent years there has been a very substantial worsening of the terms of trade, a worsening which arose because both import prices had been going up and export prices had been going down.
Indeed if we take it in the form of the normal ratio of export to import prices, taking the post-war year of 1948 as a base of 100, we find that from 1953 that ratio has dropped from 105 to 98. That is a drop which is very serious indeed—so serious that if we compare the third quarter of 1956 with 1953, the worsening in our terms of trade, the higher prices that we have to pay for what we import and the lower prices that we get for what we have to export, would have meant on that basis in the first nine months of this year some £10,000,000 loss in our country's trading position. If we take even this year, the period January to October and compare it with 1955 we find that in that period import prices rose by 2 per cent. and export prices fell by 3 per cent. so that in fact the terms of trade disimproved by 5 per cent.
Comparing 1956 with 1955 imports of the same volume as we brought in in the first 10 months of this year cost us £2.7 million more than exactly the same imports would have cost at the same period of 1955. On the other hand as we know also to our chagrin export prices have fallen. Indeed if export prices had not fallen the value of exports this year would have shown no reduction. It was a lower export price that accounted for the reduction of £2.8 million in the first ten months of this year.
There is only one way in which we in our national situation can meet that, by producing more and when we produce more, having more in volume to export which will mean that we will get more with which to pay for imports. Everything therefore, it is clear, in the present situation turns on being able to get greater production. Particularly in these modern days production depends on capital development. The more science advances, the more mechanisation develops throughout the world, the more capital is required to get greater production. It is perhaps easy to understand that by this simple example. If we want to get half as much produced again there are two ways of doing it—one is that all of us work half as hard again and the other is that we apply our work more intelligently to produce the same result. In modern days it is the second method which would be successful.
To apply our work more intelligently means that we must get inanimate objects to assist us in that application and that again comes back to what I was saying about the necessity for capital to develop and to ensure that we get the best results from our labours. It is sometimes suggested that in capital development it is public expenditure that provides the real results rather than private expenditure. There must always be, of course, enterprises to which the private concern cannot aspire. The E.S.B. and Bord na Móna are clear examples of efforts in production that could not be operated in private hands, but we must at the same time accept and realise that it is on private development far more than on public development that our future will depend. We should also realise that private development gives far more employment over the whole economy than public expenditure. It is essential, therefore, that in any planning of what we intend for the development of the economy as a whole we should take account of the fact that there must be adequate funds for that private development, adequate funds which can only be made available by a greater savings ratio.
I know that politically the steps that were taken by the Government early this year at my instance to correct the deficit in our balance of trade and in our balance of payments inevitably were not popular. We made it clear several times why we deemed those steps necessary, but I am glad to be able to say that it is clear now that the steps we took then are having their effect in changing the very dangerous pattern that then existed, a pattern which if it was not then corrected would have meant that our Irish money would have been in danger of losing its value vis-á-vis the outside world.
It was because we were determined to do what we could to prevent that eventuality and prevent a situation arising in which we ourselves would not be able to select the imports that we required, to prevent a situation in which others would be able to dictate to us the terms on which we could import what we needed—and not merely for consumption but also for raw materials for industries—that those steps were taken by the Government. It was vital no matter what difficulties they might create that they should be taken. If they were not taken there would be no solid rock upon which to build a sound and progressive economy.
In 1955 bank deposits fell by approximately £13,000,000. They were still falling in the first six months of this year. They fell approximately £9,500,000 in the first six months of this year. I am glad to be able to say that in the five months from mid-June—when the figures are taken—to mid-November they have already recovered the loss that there was in the first six months of this year and they now stand at £290.6 million, virtually the same as they were at the end of 1955, but of course still £13,000,000 below where they were at the end of the previous year. They were below that largely because of the factors to which I have already referred.
I am also glad to be able to say that thanks to the co-operation of the community as a whole with among other things the Savings Committee, small savings have started to show a more satisfactory picture. It is only the beginning of the turn and I do not want anybody to feel that it is a completely satisfactory picture—it is not— but for the first eight months of this financial year, from 1st April to 30th November, the amount of small savings available through saving certificates and deposits in savings banks shows an increase over the corresponding period in 1955. I hope and I believe that those figures indicate a growing awareness on the part of the public of the necessity to build up our savings and so get into a position in which we can compete on better terms for the future with other countries.
The House will also have noticed that the effect of those measures on our balance of trade has been substantial. The import excess which was running badly against us not merely in 1955 but also in January and February, 1956, has been brought under control. If we look at the figures for the five months from July to November we will find that the import excess was almost £18,000,000 less than it was in the same period of 1955 and, in addition, that it was £2,500,000 less than it was in the same period of 1954. If that position had arisen through an increase in exports it would, of course, be far more satisfactory. There has been a slight increase in exports in recent months— a matter of some £3,000,000 or so—but that is not enough to compensate for the alteration against us in the terms of trade nor is it enough in any way to enable us to buy the imports that we would wish to purchase. It has been necessary therefore, in order to protect that balance, that we should have quite a substantial restriction on our imports and that restriction is, in fact, reflected in the figures that were published last week.
I do not want to hide the fact that it is satisfactory that the measures taken by the Government have had that effect of bringing things more into line but I want to stress that it is essential that everyone would realise why our payments have come more into balance. They have come more into balance because of the measures that were taken but if those measures were cast aside without thought and too quickly, the result would be a reversal to the position which we had before Let me take the simile of a doctor with a patient who is convalescing. The patient hates far more obeying doctors' orders when he is getting better than he does when he is very ill and he is far more likely to kick over the traces when he is getting through to a period of convalescence.
We have got out of the worst trough in relation to our balance of payments deficit as it was in 1955 and in the early part of this year. However, we have done that on a basis of the measures taken and until such time as we can increase substantially our production to meet the imports we would wish to make some types of measures will be necessary. This Bill deals with the positive aspect. The restrictive measures that were taken and that had to be taken were the negative aspect. No member of the Government had any doubts whatever about the better way to meet our difficulties. The better way is to produce more.
Any effort by us to build greater production had to be made on a proper solvent basis. The measures that have been taken by the Government over the past 12 months have enabled us to build now for positive production within the four walls of solvency and this Bill, from the tax incentive point of view, aims to get that greater production. If we are not able to get it, there will be little chance of a progressive rise in our standard of living, of a progressive development for the economy as a whole. I believe, however, that once the need is fully appreciated throughout the country for greater production and for greater savings to enable more to be produced, there will be a response by the people as a whole to that need and, in that way, we will be able—provided we do not lose our heads—to finance the development that is necessary in the right way. I believe we will be able now on this basis to set about a cure for our problems.
The Bill itself, if I might come to it, deals, as I have said, with five different parts. In Part I, the only thing of importance to which I should refer at this stage is the fact that we are providing a new method of depreciation for machinery that is utilised either in conjunction with a mine or a quarry. The purport of that section is to provide that the depreciation allowance can be calculated in relation to the length of life of the quarry or mine where the machinery is being worked rather than to the length of life of the machinery alone. It could very easily arise that some expensive machinery would be erected at a mine and that the machinery itself would have a much longer life than that of the mine. Under the existing income-tax code, the Revenue Commissioners would have been bound to arrange the depreciation allowance on the length of life of the machinery even though for part of that life, the machinery would be standing idle because the mine had been worked out. This corrects that anomaly.
Part II of the Bill gives relief from income-tax and corporation profits tax to an extent of 50 per cent. in so far as additional coal is mined over that mined in a datum period. In this part of the Bill it is volume that we are considering—the volume of coal that is produced—and in so far as a company increases its production of coal over and above that of the datum year it ranks for 50 per cent. relief in respect of the profits arising from that excess. The datum year is whichever one of two years the company itself chooses— either the 30th September, 1955 or the 30th September, 1956. The company has the option itself of choosing whichever year it wishes.
Part III of the Bill deals with exports. Exports are so variable in character that we would not be able, in computing the concession we wished to make to stimulate further exports, on the basis of volume as is done for coal. In consequence, in relation to exports, calculation is made not on volume but on the value of the goods exported. Here again, the company concerned has the right to choose as its datum period either the year ending 30th September, 1955, or the year ending 30th September, 1956.
One of the reasons why I gave such an option was that it was quite possible a company could have had a freak contract in 1956 and the existence of such a freak would mean that its trading returns for that year would not be in accordance with its normal pattern. The provisions in this Bill mean that if a company increases its exports over the datum year it will rank for the concessions offered in respect of the proportion of its profits that its excess exports are to its total sales. That is a slight variation in the method of calculation from the basis originally announced but it has been made for the purpose of ensuring that where a manufacturer goes out and seeks an export market there will be an inducement to him to do so even though the ratio of profit in that export market may not be as high as the ratio of profit at home.
The concession is for manufacturers. It is for those who are producing or processing goods at home. It is done in that way because we want fundamentally to increase the amount of goods and because if we do increase the amount of goods we shall have more to export. In addition, we want to urge industrial manufacturers by every stimulation we can provide to seek markets outside the country, knowing that if they do so and if they increase the export of goods in their particular line they will get very substantial tax concessions in relation to those increased exports. The concession again here is 50 per cent.—half the income-tax and corporation profits tax normally chargeable. I think all of us must agree that is a worthwhile benefit.
Part IV of the Bill deals with industrial buildings allowance. It means that we are allowing now, for income-tax deduction purposes, capital expenditure after the 30th September, 1956, on a building or structure which, as is provided in Section 16, is an industrial building or structure. That concession is intended to stimulate modernisation and, as I indicated at the beginning of my remarks, it also includes the provision of additional hotel accommodation. In the past few days we have been reading assessments of the value of our tourist trade. While quite clearly one of the things we must do in relation to that trade is to extend the season, another thing we must do is to extend the accommodation available and Section 17 of the Bill lists the extension of hotel accommodation as being one of the things that rank as an industrial building for this allowance.
Part V of the Bill provides the necessary legislative machinery for the issuing of prize bonds. I do not think there is much I need add to what has already been said in relation to a prize bond issue. I hope to have it early in the New Year and I believe that the issue will form a useful addition to the existing measures for the encouragement of savings. I hope the issue will appeal to a large section of the community. There are considerable demands by the public from time to time for opportunities to win substantial sums of money and I think it would be a pity if the State did not take advantage of that demand, particularly in present circumstances.
However, I want to stress very definitely one aspect of the prize bond that is different from an ordinary lottery or gamble. The prize bond scheme is founded on the basis that the investment in the bonds will always be there. It is founded on that fundamental difference from a gamble. In the case of a gamble when you lose you have lost not only your chance of a prize but you have also lost your stake. Prize bonds are not in that category. The intention is quite clearly set out that the investment will remain in the scheme for as long as the investor wishes and that at any time he may, in accordance with the administrative procedure we will announce in due course, request the repayment of his investment. But so long as it is left in the scheme he will have, not interest, but the chance of winning a substantial prize. I think it is a good encouragement to saving and I hope it will be so accepted by the public.
Those are the five points covered by this Bill. A detailed explanation of any section should, I think, wait over for the Committee Stage. I want to present the Bill to the House as part of a general picture that was announced by the Government at the beginning of October of the steps they deemed necessary urgently to increase production and achieve results such as I have mentioned here to-day. I want to present the Bill to the House as part of the acceptance by the Government that, while restricive measures may be necessary to curb the economy, the real remedy lies in increasing and expanding the goods we produce and the services we give here at home, that if we increase and expand production then, by that increase, we will have more available to export. Particularly under Part III of this Bill, the stimulation is given by means of the very substantial tax concession involved to ensure that those who are in the position of being able to do so should be urged to go out and do what is a really vital national task.
