The subject matter of this debate is rather narrow. It is limited to Government expenditure and Government expenditure as a whole. I take it that we are concerned in this debate with the total Estimates for the year and not with the individual items in the Estimates, which would take us very far afield. The debate is also concerned with expenditure apart from revenue. Later on, in July of this year, we will be debating the Budget in which case taxation and revenue will be the main subjects of the debate. The amount of taxation which we will have to face in the year is very largely—in fact, entirely—determined by the amount of expenditure decided today.
There is a very striking contrast between the State and the individual in this matter. The individual's expenditure is limited by his income, but in the case of public authorities and the State, their income is determined by their expenditure. In the case of the individual, unless he is very improvident and living beyond his means, he will make some sort of a budget as to what his income will be, and he will try to cut his cloth according to that measure.
In the case of the State and the public authorities, the first decision is how much the Government will spend and then how the money will be raised. Therefore, this division between revenue and expenditure is really fictitious. We are laying the foundation for the Budget today because the Budget will decide how revenue will be raised. The amount of revenue raised will depend on expenditure, and expenditure depends on the decision of the Dáil and Seanad in regard to the Estimates. Those are the matters we are debating this evening.
Looking at the trend of expenditure, there is no question at all that public expenditure has risen. That is not peculiar to this country. It is a world-wide tendency today. Over a long period there has been a trend for public expenditure in every country to rise in relation to national income as a result of some political forces, as a result of the growth of nationalisation, of increases in public and semi-public utilities. It is also a reflection of the growth of the social conscience. People are appalled nowadays at the spectacle of poverty, ill health and illiteracy and, therefore, in every country in the world more and more is being spent on the relief of those evils, on the operation of nationalised industries and public utilities of one kind or another. Therefore, this country is in no way an exception.
Public expenditure is rising all over the world in every country and, as the Taoiseach said at column 1194 during the debate in the Dáil:
The key question which the Government and the Dáil have to consider is not whether these extensions in Government services are desirable—there is no question of their desirability—but whether we can afford them. Because of the economic expansion which we have experienced in recent years, we can now afford a higher level of Government services than we could have afforded previously, and as long as that economic growth continues, so also will the scope of these services expand in line with the rate of growth.
Therefore, it seems relevant in this discussion to consider what is the probable trend in the rate of growth because of the possibility of public expenditure increasing. As the Taoiseach very properly said, expenditure is limited by the rise in the growth of the national income.
That involves casting our eyes back over the year which is coming to an end now, and casting our eyes forward to the coming financial year to which these Estimates apply. Looking backwards I think we could very shortly summarise 1961 as a year in which national income increased by five per cent. Investment and employment other than in agriculture increased quite substantially. Industrial output increased by nine per cent.; the population was stable; the rate of emigration was not greater than new employment in the industrial field. The balance of payments was not unsatisfactory. It is expected to show a deficit of about £5,000,000 on current account but there was an inward flow of reserves. The external assets in the banking system were substantially increased, with the result that the balance of payments is not such as would give rise to any anxiety.
As Senator McGuire said, the one disquieting element is the rise in wages and the rise in costs. The eighth round of wage increases does seem to have exceeded the increase in productivity of the average worker. Therefore, I do not think it is unfair to say that some evidence of cost inflation has begun to appear in the system. By cost inflation I mean a rise in prices caused by a rise in costs. Government expenditure has been rising more rapidly than national income. National income has risen by about five per cent., and Government expenditure has risen by more than that, and that brings about what the economists in their despised jargon call a demand inflation: an increase in prices caused by an increased demand.
Therefore, I think it is not unfair to say that most people would agree with me that, looking back over 1961, there is evidence of two types of inflation, cost inflation as a result of the increases of the wage level and demand inflation caused partly by increases in incomes and partly by increases in Government expenditure. Those two types of inflation mutually act and react upon each other and, therefore, I do not think it is unfair to say—I may be incorrect; I speak subject to correction and I am only expressing my opinion—that in 1961 there were exhibited in this country some symptoms of inflation, partly cost and partly demand.
I should like to examine shortly the reason for the growth of public expenditure. I think it can be divided into two classes. In the first place it is the result of a rise in the cost of existing services, and secondly it is the result of increases in services. That is an important distinction. The extent to which the increase in public expenditure reflects the increase in the cost of the existing services is to some extent unavoidable, and the extent to which it represents an increase in the number and type of services is less unavoidable.
As the Minister said in the Dáil, the increases in expenditure, both in the present year and in the coming year to which these Estimates apply, is a result of increases in remuneration. In other words, it reflects the eighth round wage increases to which I have referred. At column 1060 of the Dáil Debates the Minister referred to the additional expenditure of £5.24 millions caused by the increase in salaries and wages. Undoubtedly, that is a reflection of the general rise in salaries and wages throughout the country. No one could express disagreement with the Minister, even from the lowest practical point of view, apart from ethical considerations, when he said that remuneration given to public servants must move in the same direction as in private business.
At the bottom of column 1060 the Minister said:
The rates of public service remuneration are largely determined, under conciliation and arbitration procedures, by the rates in outside employment. Although productivity improvements are constantly being sought through better organisation and methods, remuneration charges in the public services cannot but be affected by the general increase in wage and salary rates, unless the public services themselves were to be curtailed.
That is unquestionable. There is no question at all that the rise in wages and salaries in the public service reflects the general rise in wages and salaries in the country generally. Having said that, I think we must say this on the other side, that although the Government are to some extent the victims of rising wages, they are to some extent responsible for them. In certain cases in this country the rises have been started in the public service. It is a two-way operation. There has been a raising of the level in private service which has been translated into the public service, but there has also been a raising of the level of wages and salaries in some public utilities which has been translated into private industry at the same time. In other words, there is a reciprocal relation between the public and the private sectors. Rises in costs in the private sector are, as the Minister said, undoubtedly reflected in the public sector, but rises in the public sector are equally reflected in the private sector.
The trouble in that case is that rises in the public sector may be tolerable, whereas rising costs in the private sector are not tolerable and cannot be passed on. In discussing this question of the raising of labour costs, one must draw a distinction between industries that can pass on rising costs and industries which cannot do so. Amongst industries that can pass on rising costs, in the first place, are the protected industries, protected in the home market. In the second place, we have a number of public services of all kinds—essential public services for which the public have to pay—and increases in those services can be passed on. That can be done by way of increased charges, as we see all around us, such as increased postal charges, or—which is a less desirable thing—they can be passed on by increased taxes. The protected industries and public services are able to make the consumers or the taxpayers, or in some cases, both, pay increased costs.
Industries which are trying to export, which are not protected and which have to meet competition from outside, are not in this happy position. Therefore, they find themselves faced with the danger that if costs rise in the protected industries and the public services, they may find themselves going to the wall. This is a very real danger today. It must be remembered that the field of public employment is growing all the time, and on that, I should like to refer to a British White Paper dealing with public expenditure, known as the Plowden Report from the name of the Chairman, which pointed out that "as a consequence of these changes in public expenditure, the public sector of the economy in Great Britain now employs about one quarter of the total labour force". I do not know exactly the figure for Ireland, but whatever it is, it is rising and it is considerable. Therefore if there is a substantial rise in remuneration in this considerable sector, obviously there will be demands for equivalent rises in the private sector and apart from protected industries which now are becoming less and less important in this country, these increases in remuneration may not be able to be met.
The Government, therefore, have a duty. It is perfectly true, and I agree with the Minister on this, that to some extent the Government are caught up in a tendency from which they cannot escape, but at the same time, they themselves are to some extent responsible for setting higher targets. Certainly at a time like this, when we are faced with the new competition in Europe, the Government have a very grave responsibility, indeed, to hold down costs in the public services. By holding down costs, I do not necessarily mean reducing money wages. As Senator McGuire has stated, real costs of production depend on a great many other things, such as mechanisation, automation, scientific management and intelligent use of existing resources. For the Minister to plead that the rise in the Estimates is the result of rising salaries and wages which reflect rises in salaries and wages in the private sector is only a half-truth. It is not untrue, but it is only a half-truth, because the rise in the private sector is, to some extent at any rate, a reflection of the rise in the public sector for which the Minister or some of the public utilities which the Government to a greater or a lesser extent control are— I do not like to say to be blamed—the people at whose door responsibility must be laid.
So much for the rise in the Estimates caused by increases in the cost of existing services. Another factor increasing the Estimates is, of course, the increase in the number of services. Here again, I do not want to appear critical of the Government because these rises in public expenditure, as I have said already, are a reflection of social progress, of the emphasis which has been placed more and more on social services and on public utilities and therefore a sign of social progress. As the Taoiseach said, again quoting from column 1194, it is a function of the Government.
to try to keep the rate of expansion of the services provided by the Government in line with the expansion of national resources, as well as to use the machinery of taxation to level out inequalities and to ensure the equitable distribution of the benefits of economic expansion among all elements comprising our national community.
That is perfectly true, but at the same time it must be remembered that, if public expenditure increases more rapidly than national income and if there are Budget deficits or near-deficits at a time like this, the Government are adding more fuel to the inflationary fire which we have already noted, because, as I tried to point out earlier, there are inflationary symptoms in the economy. If the Government by well-meaning but ill-judged increases in public services at a time like this increase public expenditure, they are adding fuel to the fire.
The difficulty in this debate is that anybody who criticises any new proposed services is looked upon or classed as being unsympathetic to advances in social services, and there is practically no claim that can be made for increased Government expenditure that cannot be very ably defended in debate, but at the same time, it is the duty of the Government to resist these demands if they outrun the capacity of the country to afford them. As I said already, quoting the Taoiseach, it is the unpopular duty of the Government to resist these schemes.
There are two main justifications put forward for these increases in expenditure. One is that, in the widest sense, they are social services, and the increase in expenditure in this country is largely due to this according to the Minister. I quote him from column 1061 of the Dáil Debates in which he said:
By far the largest category of expenditure is that comprising the social welfare and health services. These two items combined account for £36.6 million or 30 per cent. of the total of Supply Services.
Then, in column 1063, he says:
The next most important grouping of State expenditure is education.
Health, social welfare and education are all social services of which everybody will approve. Nobody would be so obscurantist or so old-fashioned today as to say that these are not a perfectly proper subject for public expenditure.
The next justification invariably put forward is that any increase in public expenditure would appreciably increase national productivity and on that I want to quote again from the Minister, column 1063 in the debate in the Dáil, where he justified £28 million expenditure on agriculture if it is directed either towards reducing farmers' costs or stimulating production. At column 1064 he said that grants for the promotion of industry continued to comprise a large and expanding element of expenditure. He said that for tourism, and industry with potentialities of rapid expansion, another million pounds would be available. In other words, the expenditure could be justified on the grounds of increasing production in agriculture, increasing production in industry and increasing production in the tourist trade. This is all perfectly true.
There is this to be said about the expenditure on the social services. It does not in itself make a demand on the national resources. It is of a redistributive kind. There is a plus and a minus. It does not make the demand on the national resources that such things, for example, as the Army and Navy do and we are lucky in this country to be saved large expenditure on defence for that reason. The greater part of the expenditure on social services is redistributive and there is a minus and plus which balance out. That expenditure is not exhaustive, it does not make a claim on the resources of the country. It merely shifts an amount of wealth into what the Government judge—rightly no doubt—to be productive or socially desirable uses.
The point I am coming to is this. Although this expenditure is redistributive mainly and though it has social justification—such things as health, education and the relief of poverty— and though it may be productive in the long run, in the short run it does involve the necessity for more taxation and puts up the Budget. That is what we have to face because this debate is on public finances in general and economic policy. From the public finance point of view, unless the national income expands very rapidly, increases in expenditure, however well justified on social or productive grounds, do lead to demands for additional levies and the shape of the Budget is being decided in these debates. If additional revenue is derived from indirect taxation we have more costs to face; the cost of living rises; the trade unions are on the warpath again; we have the ninth round of wage increases. If it is met from direct taxation on savings, enterprise and incentive are discouraged. The business people, the saving classes, find more of their income taken in meeting current Government expenditure. The Taoiseach has already stated in the Dáil debate that the rate of savings in this country is one of the lowest in Europe. "The percentage of our total national income which is saved for investment in future development is one of the lowest in Europe." An increase in direct taxation will lower it still more. So that, if this additional expenditure leads to a demand for additional revenue, it has to be met, assuming the Budget is balanced which I would assume, by increased indirect taxation and a ninth round or by direct taxation which reduces incentive for saving which according to the Taoiseach is already unduly low.
Therefore, I think we are entitled to warn the Minister of certain dangerous trends shown in this Vote on Account. Government expenditure seems to be increasing more rapidly than national income and though each individual item may be justified, taken in isolation, the total shown in the Book of Estimates is rather large and, as I said at the very beginning, this debate is concerned with the total, not with individual Estimates. We do not debate Estimates in this House; we debate only the total. The total shown in the Book of Estimates does suggest that Government expenditure is rising more rapidly than national income. Therefore, the trend is for expenditure to outrun current income which will inevitably call for an increase in taxation in the future.
So far I have been looking back, it is the backward look, at 1961. Now let us look forward to 1962, the year to which these Estimates refer. Again, I am expressing only my personal opinions, but they are opinions based on a good deal of study and research.
The balance of payments this year will not be as satisfactory as last year. That can be safely predicted. Agricultural exports will not be maintained because last year agricultural exports were largely maintained by running down of stocks. The inflation which is undoubtedly present in the system, in so far as it is a cost inflation, will make exports more expensive and less competitive and in so far as it is a demand inflation will call for additional imports. Therefore, it is reasonable to predict a deficit in the current year. The balance of payments in 1962 will be less satisfactory than in 1961.
As Senator McGuire stated, this country is exceptionally sensitive to external influences. It is probably the most open economy in the world. Every wind that blows in the outside world can have effects here. From the point of view of external markets the outlook is not unsatisfactory, if it were not for the complications regarding the Common Market situation. The future demand in Great Britain seems to be a rising one. Continental production is rising. There is no sign of a recession in the United States of America. Therefore, the external market position seems to be reasonably satisfactory. But there is no getting away from the fact that the prospect of Ireland either being admitted or not being admitted into the Common Market generates an atmosphere of considerable uncertainty and nothing is worse for business than uncertainty. If business people knew their fate one way or another they could take decisions but many business people now are completely baffled by the prospects. The result is that there is a running down of stocks. People are not making long-period production decisions regarding either working capital or fixed investment.
Therefore, the country is facing a position of great uncertainty with regard to its export markets, in spite of the fact, as I said, that the business condition in the main markets is itself satisfactory. We are entering into a position of great obscurity and there are certain questions which the Seanad is entitled to ask the Minister to apply his mind to. Is the national income in 1962 going to rise as rapidly as in 1961? I want to make a very clear distinction between the money income and the real income. Possibly the money income will rise, because when a country is in inflation money income rises quite rapidly. This is one of the symptoms. Will the real income, in terms of gross national product, apart from money value, rise in 1962 as rapidly as in 1961? I am asking that question. I do not attempt to answer it. Will the balance of payments in 1962 be as satisfactory as it was in 1961 to this extent, that although there was a deficit in 1961 it does not call, in my humble opinion, for anything in the way of a drastic correction: because the reserves increased, and the inward flow of funds more than neutralised the deficit in the balance of payments? Have we any reason to believe 1962 will be equally good? That is a question that must be faced by the Minister.
On the purely public financial side, which is what we are debating here, will the revenue continue to be as buoyant as it was? The financial year now closing has been very lucky for the Minister. Revenue has been very buoyant in view of all the uncertainties regarding production and the balance of payments. Can that buoyancy be expected to last? Will the amount of saving and investment keep up? The Taoiseach has already stated it is altogether too low. Will it increase or sink to a lower level? These are some of the questions which the Minister for Finance must ask himself and must attempt to answer when he produces Estimates showing an increase of 10 per cent. for the present financial year.
What I am suggesting is that the background is one which does not justify large increases in Government expenditure, that the prospect, as far as we can judge, of production and the balance of payments is one that calls for extreme caution in regard to public finances and in that I include not only current but also capital expenditure. The capital expenditure must be pruned quite as carefully as current expenditure because capital expenditure, although it may be met out of borrowing, does involve taxation in the future. I should like to refer to a valuable paper entitled: "Trends in Public Expenditure" published in the February issue of the British Bulletin for Industry which is very relevant to this debate. I am quoting from that now. It says:
Investment expenditure in so far as it creates new buildings, etc., tends to increase current expenditure in the future in the maintenance and staffing of new buildings.
I am sorry to have to weary the Minister with a subject on which I have harped year after year. It is of such importance that it should be repeated. Just as I have said in regard to current expenditure, that although the fact that it is productive may justify it, it does not avoid future taxation, in the same way the fact that a great deal of public investment is productive does not mean that it does not involve future taxation because a great deal of public expenditure of a capital kind may be productive only in the long run. Such things as school buildings, agricultural colleges, arterial drainage, are all things which, in the long run, will be productive but in the short run the debt service has to be met. As I have told the Minister at other times in other Senates—I hope it will be new to the new Senators because I feel ashamed repeating it— the distinction between productive and unproductive capital expenditure by the Government is not the same as that between the self-liquidating and dead-weight debt. If capital expenditure is not productive in the long run it has no justification at all but even the most productive capital expenditure may involve the Government in considerable dead-weight debt, in which case the charges in relation to the Central Fund will also increase.
In reply to a Parliamentary Question on Thursday the Minister stated that the debt service for the current year had risen from last year from £20 millions to £22 millions, or 10 per cent., the same increase as in the Estimates, and twice the increase in the national income. That is not a healthy situation. The national debt service must be very carefully watched for two reasons. As I have said over and over again in these debates, interest rates are not going to fall. If the Minister has the idea that he is going to be able to borrow at less than about 6 per cent. in the next few years he is nursing an illusion. Interest rates are keeping up. Secondly, although the population is stable and seems to have ceased to fall, the per capita burden of interest rates has not eased as it has in countries with a rising population. Therefore, the incurring of the dead-weight debt should be approached with great hesitation.
The only expenditure properly relevant to this debate, I agree, is the Supply Services but I think I am entitled to warn the Minister that expenditure below the line and expenditure on voted Capital Services can in the long run have just as evil effects on the public finances as increases in Supply Services. I know it is very easy for us to talk the way I have been talking and to advocate economy in public services. If one is asked on what services one would economise it is very difficult to give a satisfactory reply. Once a service has entered into the pattern of the Estimates it is very difficult to cut it out. If one looks at the British public finances for the past ten years one sees a very notable dip in the proportion of the national income taken in public services. That is the aftermath of the war, disarmament and reduction in defence expenditure. We have nothing of that kind. There is no large section such as Defence in a period after the war which can distinctly be cut. Therefore, I entirely agree with the Minister that it is very easy for us to advocate reducing the Estimates but very difficult to point to what should be reduced. The moral to be drawn from that is this. The Estimates of tomorrow result from the decisions of today. It is when decisions are made in regard to public expenditure that the future expenditure is decided. That, I entirely agree with. Once a decision has been made, once there is an increase in the social services, it cannot in practice be dropped. Therefore, if there is one lesson that should be learned and followed by Ministers for Finance today it is the necessity for planning public expenditure well ahead in relation to the problem of national resources.
Again, I refer to the report of the Plowden Committee on the Control of Public Expenditure, where the following opinion is expressed:—
Regular surveys should be made of public expenditure as a whole, over a period of years ahead, and in relation to prospective resources; decisions involving substantial future expenditure should be taken in the light of these surveys.
On page 8 of the same Report we read:
The other side of the survey is the prospective development of income or economic resources. This is susceptible to prediction five years ahead only within broad limits. Moreover, public expenditure will itself be affected by the rate of economic growth; and the rate of economic growth will be affected by the size and nature of public expenditure. Nevertheless, we think that it should be possible to form worthwhile judgments about whether a certain prospective size and pattern of public expenditure is likely to stimulate or to retard the growth of gross national product, and is likely to outrun the prospective resources available to finance it.
I draw the Minister's attention to that passage which I think should be learned and digested and practised in every Department of Finance.
In the long run, everything depends on the growth of the economy itself. If the national product continues to grow at the rate at which it has been growing for two or three years, the considerable expansion in public expenditure can be tolerated. It is just like the case of an individual man. If his income grows, he can afford things he could not afford earlier. As he becomes richer, he can afford things he could not afford when he was less rich.
As I said already, when we come to deal with the State, we have to draw this vital distinction between an increase in money income and an increase in real wealth. If a man's money income is increasing, except in a period of gross inflation, he is becoming better off. In the case of a nation, if the money income is increasing, whereas the net product is not increasing, the country is not becoming better off. It is simply running into inflation. We have already noted some signs of inflation in this country. If that inflation is not corrected, the Government may find it necessary, in carrying out an approved national policy, to damp down growth in the country by putting on brakes, monetary or fiscal controls that will curb the expansion of the economy and cut down the inflation to which I have already referred.
A slowing down of that kind, a brake of that kind may produce very undesirable consequences. It may produce symptoms of deflation, causing unemployment and in this country emigration as well as depression in the national income. Therefore, it should be avoided if possible. The way to avoid it, of course, is to prevent the necessity for it arising. The way to prevent the necessity for it arising is to curb inflation early.
One never picks up a discussion on economic questions today without reading that there is a conflict within stability and growth and that if the money income of the community grows too rapidly, instability appears in the currency, in the exchanges, and in order to restore stability the growth has to be retarded, held back, which, as I said, may produce extremely undesirable consequences such as redundancy, unemployment and in this country emigration.
In the long run, of course, there is no conflict between stability and growth. No country can grow healthily unless it has monetary and financial stability. Therefore, it behoves the Government, the guardian of the national finances, to preserve stability, because if they fail to do so, they may have to check growth in order to restore stability. In that case, the check on growth is a result of earlier unwisdom in the field of public finance.
To discuss all the measures necessary for a Government to preserve stability in the national finances would involve lengthening this speech which is already far too long. However, I would refer the Minister again to the important publication from which I quote, Bulletin for Industry, February, 1962, in which the British Treasury expresses these views which I commend to the Minister's attention:
In its measures to strengthen control over public expenditure the Government are applying the following criteria:
(1) insistence on value for money by working to secure maximum efficiency in use of public funds;
That, as Senator McGuire said and as I said earlier, is about efficiency in productivity in the public service.
(2) determination of the relative importance of different classes of spending at different times;
That is, priorities.
(3) allowance of special priority to classes of expenditure which will foster economic growth and improve Britain's efficiency and competitive power.
That is particularly true today on the eve of the new events in Europe.
(4) examination of public expenditure as a whole, over a period of years ahead, to see that it is planned in proper relationship to prospective resources.
If the Minister would observe these four counsels of perfection, he certainly would be deserving of the applause and approval of the Seanad in future years.