This debate is one of the few occasions upon which general financial policy can be discussed in the Seanad. It is concerned with the raising, as apart from the spending, of money which will be debated on the Appropriation Bill. The Budget nowadays is more than a statement of public accounts: it is a regulator of the economy. If the economy is growing too rapidly, a surplus Budget acts as a brake, whereas if it is not growing rapidly enough, a deficit Budget acts as an accelerator.
The Budget must be studies against the background of the world and of our own country. These interact on each other as Ireland has such an open economy. The volume of external trade is so large that Irish conditions are very sensitive to outside influences. Irish prices, especially the prices of labour and capital, are greatly influenced by those in the outside world. This sensitivity to outside influences is growing and as has been stated in the Report of the Central Bank: "External factors are of increasing importance to the Irish economy."
In studying the world background, the central feature is the recent American stock exchange crisis. It is an important question whether a business recession is imminent in the United States. The prices on the stock exchange and business act and interact on each other. A fall in share prices reflects the expectation of business losses while it reduces purchasing power especially for consumer durables.
The trouble in the United States, as in every other country, is that any effort to stimulate growth may cause an outflow of gold. This is typical of the conflict between internal and external policies. Internal policies of expansion may have to be damped down because of balance of payments considerations. Every country in the world is trying to increase its exports while not increasing its imports. This is, of course, impossible and leads to recurrent foreign exchange crises. Government policy has to look to the short period and be defensive, with bad effects on business confidence and investment. The ultimate cure for this state of affairs is an increase in the international reserves. If central banks had increased liquidity Governments would have more elbow room and would be able to expand more without incurring balance of payments crises. This could be obtained by fluctuating exchange rates but orthodox financial opinion is completely set against that today. Therefore, it need not be discussed any further as it is practically out of the question.
Another thing that could be done is something in the nature of a world clearance system. That is referred to with approval on page 23 of the Report on the Irish Central Bank, that more and more international collaboration is taking place for the safeguarding of currencies. The trouble there is that the complete system will take time to evolve and require a great deal of international agreement. Possibly the most satisfactory and most immediate solution would be an increase in the price of gold but that, of course, brings us far away from Irish problems into American politics. Gold at the moment is still the basis of the world's monetary system. The price of gold has not risen in the past 28 years whereas the price of everything else has. The amount of gold production is not increasing at the same rate as world trade. Therefore, a great many people believe that the only immediate solution of the general shortage of reserves in the world is by the United States increasing the dollar price of gold. But, as I say, that takes me far away from the subject of this debate to which I now propose to return.
In spite of what I said about the world tendency towards deflation, the immediate outlook in the majority of countries in the world does not appear to be too bad at the moment. Take the United States of America. I notice in to-day's Times a dispatch from their New York correspondent which states that:
Mr. Per Jacobsson, managing director of the International Monetary Fund, said last night that the United States economy had shown "a quite remarkable improvement" in the last year and he did not believe it was heading towards a recession. The stock market decline, he said, could be attributed to the end of post-war inflation, which might in itself be a sign of strength rather than weakness. He did not think the decline was likely to affect the United States economy in the coming months.
The same opinion is expressed in the Report of the Irish Central Bank. As regards the United Kingdom, which is the country to which we export most, general opinion is that nothing in the nature of recession is imminent and that a condition of stability has been reached. The official view seems to be that a period of expansion is about to take place. Last Thursday in the House of Commons the Financial Secretary to the Treasury said that the Budget was based on the view that an element of expansion was still appearing and exports were climbing. Public expenditure was certainly rising at least as strongly as forecast in April. Consumer spending also showed signs of increasing.
As regards the European Continent, trade and production are expanding and, therefore, in the main parts of the world with which Ireland trades the immediate outlook is that trade seems to be fairly satisfactory and not of a kind to give rise to alarm regarding the future potential of Irish exports.
To come nearer home, as I said, the Budget must be framed in relation to the world background and the Irish background. As regards the Irish background, we are lucky this year to have a considerable amount of very well-informed comment. There has been a report by the Organisation of Economic Co-operation and Development on Ireland which discusses the long period view. Perhaps, I should say that in respect to this background we have to consider the long period view—is the economy growing?—and the short period view—is it stable from year to year? One of the great problems in the world today, in the United States and elsewhere, is an apparent conflict between growth and stability. An effort to grow too fast leads to instability. As regards the rate of growth, the Irish position is quite satisfactory. The Central Bank Report shortly summarises the findings of the survey by the Organisation for Economic Co-operation and Development—
The general position may be briefly stated. In 1961, for the third year in succession, total national output expanded at a rate substantially higher than that postulated in the White Paper on Economic Expansion issued in November, 1958. Over the three year period, the average annual rate of growth exceeded 4½ per cent. The major contribution to the increase in 1961 was again made by the industrial sector. Current external results and payments showed a small surplus. Capital inflow combined with this surplus to produce a substantial increase in external reserves.
I shall not quote fully. I shall simply quote the final sentence which said:
The picture emerging from the foregoing very brief summary is an encouraging one.
That is the verdict of this international body. There is one feature to which attention is drawn of a less satisfactory kind and that is the need for further investment. Although the Irish economy is growing, the rate of capital investment is lower than that in most European countries. On that subject I should like to quote from the June number of the Irish Banking Review where it states that:
Even during this period of expansion the level of capital formation has been unduly low. In 1960, for example, the percentage of national production devoted to fixed capital assets was 13 as compared with 21 within the countries of the EEC.
This insufficiency of investment is particularly regrettable at a time when great changes will be called for in production to meet the changing conditions in Europe. Technical innovations and increases in productivity call for considerable investment.
The whole uncertainty regarding the Irish position in the Common Market has led to a specific inquiry into how Irish industry should adapt itself to the difficult position which may lie ahead and, as the Seanad is aware, a Committee on Industrial Organisation was appointed to investigate these problems. The first report of the Committee directly bears upon the Finance Bill which we are discussing because the Bill incorporates some of the Committee's recommendations. The Committee made specific recommendations which are summarised on page 21 of the Report of the Central Bank. The principal recommendations which are now coming near the Budget are:
First, that the legislation dealing with industrial grants should be amended to enable An Foras Tionscal to make a grant in respect of an industrial project which involves a switch from one field of activity to another ...; secondly, that the size of coverage of technical assistance grants payable by the Department of Industry and Commerce and the marketing grants payable by Córas Tráchtála should be reviewed; thirdly— and this directly affects us—that the initial allowance on industrial plant and equipment should be raised from 20 per cent. to 40 per cent. and on industrial buildings from 10 per cent. to 20 per cent.
The fourth is that loans, with waiver of interest payments and deferment of capital repayments over a period, normally, of five years, should be provided by the Industrial Credit Company Limited towards financing re-equipment by industrial undertakings within their existing spheres of activity; and the fifth, that the Revenue Commissioners should examine the practicability of a scheme enabling losses incurred by a newly-established joint industrial enterprise to be charged for tax purposes against the profits of the parent enterprises.
The Report states:
In the course of his Budget speech, the Minister for Finance stated that the Government had decided to proceed on the basis of the Committee's recommendations.
Having made these preliminary remarks regarding the economic background, I shall now come nearer to the actual Budget. I think everyone will agree that the first object of this Budget, as of every Budget, should be to encourage growth, to stimulate growth in the economy. Everything must be done to make investment attractive both for Irish citizens and for foreigners but, at the same time, as I have already said, this growth must always be within limits which are consistent with the stability of the economic system.
As I have said earlier, in other countries today, including even the United States, attempts at growth seem to give rise to balance of payments crises. Therefore, the Minister for Finance must have regard not only to the long period aim of growth but to the short period aim of preserving the value of the Irish currency, preventing our balance of payments getting out of equilibrium and the loss of our external reserves.
In order to understand the short period problem apart from the long period problem, I should like to refer the Seanad to a document issued on the eve of the Budget which gives a picture of the immediate background of the Budget apart from the longer background referred to in the Report of the OECD. The outstanding features of these economic statistics are shortly summarised in "Economic Statistics Issued Prior to the Budget of 1962." In 1961 there was a surplus in the balance of payments. The external assets of the Irish banking system increased. The national income increased by eight per cent. Fixed capital formation rose by 15 per cent. from £87,000,000 in 1960 to £102,000,000 in 1961. Total savings increased by about £9,000,000 to £68,000,000, the highest figure yet recorded. The index of average weekly industrial earnings increased by 7.8 per cent. and hourly earnings by 11 per cent. The report states that the analysis of the events of last year is satisfactory.
The Minister, of course, in framing this Finance Bill was concerned with the outlook for the present year rather than the events of recent years. When we come to the outlook for 1962, on the face of it it would appear that a deficit in the balance of payments is a possibility. That view is taken in the Central Bank report. It was also taken in the debate in the Dáil by the Taoiseach. The Taoiseach took the view that, despite the possibility of a deficit in the balance of payments, a deflationary policy should not be pursued because, as he said, everything points to a capital inflow and, if there is an inflow of capital, a deficit in the balance of payments can be sustained without loss to the external reserves.
I do not wish to quote at length from the Taoiseach's speech but he said that the Budget was aimed not at a reduction of purchasing power but a transfer of purchasing power within the community, a balancing operation in the interests of equity and social justice. If this analysis of the immediate past and the prospects for the future is correct, there is no need for the Budget to be framed in order to obtain either a surplus or a deficit. There is no sign of such an acceleration of the economy as to call for a surplus to put on the brake and there is no such sign of a recession in the country as to call for a deficit to give acceleration. Therefore, from the point of view of regulating the pace of the economy the Budget should be neutral.
To come to the narrower sphere of public finance, of course the Budget must be balanced in the sense that expenditure must be covered by current revenue, and as far as possible new capital expenditure should be covered by new savings. Otherwise inflation might occur. A deficit or capital expenditure incurred by borrowing from the banks might lead to inflation which the country simply cannot afford at the moment. That is a matter to which I shall return in view of the uncertainty regarding the Common Market situation.
The outturn of last year's Budget was very satisfactory and in spite of increases in expenditure revenue was buoyant and the year's out-turn was a deficit of £708,000, a very satisfactory result. When we come to regard this Finance Bill we have to allow for the fact that public expenditure will inevitably rise. That is part of the trend of the times in every country in the world, and this country is no exception.
This matter is referred to with some alarm in the Report of the Central Bank. At page 14 the Report says:
There are already indications of official proposals for expenditure beyond the provision made in the Budget. It would be optimistic to expect a faster rate of economic growth in 1962 than in 1961. State expenditure, borrowing and annual debt service charges are thus increasing much more rapidly than national output.
Assuming that this increase in expenditure is almost inevitable, new taxation becomes necessary. It would be too much to hope that existing taxes would be so buoyant as to bring in the revenue necessary in this great additional expenditure. The Minister in his Budget speech faced up to this situation. He stated what he considered would be the new expenditure necessary in the coming year. The deficit on the Budget, assuming no change in rates of expenditure or taxation, would be £745,000. To that had to be added the increased initial allowance recommended by the Committee on Industrial Organisation—£100,000; an increase of pay recently awarded to teachers—£460,000; certain increased pensions amounting to £1,075,000; additional agricultural grants amounting to £2½ million. All these together come to a deficit of £5,330,000.
The Minister also proposes to abolish entertainments tax. The resulting loss of revenue would increase the deficit to £5,780,000. The Minister quite properly allows for errors of estimation a sum of £2 million, leaving a gap of £3,780,000 to be raised. In order to bridge this gap, the Minister had to propose additional taxes. The additional taxes are an increase in duty on beer, spirits and tobacco. As Senators are aware, the duty on tobacco has further been increased in the past couple of weeks as a result of unforeseen additional expenditure.
Before making any comment on these additional taxes, I should just like to refer to the capital budget. The outturn on the capital account last year showed that the State had spent £57 million as compared with an estimated £55 million. The estimate for this year is £66 million, most of which is of a productive kind. The Minister emphasised in the Budget debate in the Dáil that this expenditure would all be productive in the long run. That is no doubt true but, to repeat a point which I have made every year in the Seanad, outlay that may be productive in the long run may cause deadweight debt in the short run. It may be productive without being self-liquidating. Therefore, although it may be perfectly justified from the point of view of the future of the national income, it may create in a short period difficulties regarding additional debt and the service of that additional debt and sinking fund.
I apologise to the Seanad for harping on this theme but I think it is one which should be repeated. The fact that expenditure may be productive in the long run does not mean the debt is self-liquidating and, therefore, from the purely budgetary point of view, which is what we are considering in this debate, the short period effect of borrowing may, perhaps, be more important.
No investment is more productive than education. But it may take a generation to mature and, while it is maturing, the public debt in relation to it may impose very heavy burdens on the Budget. That is my first criticism of the Budget—that a certain amount of the debt incurred in relation to the capital budget will impose a burden on the taxpayer in the short run. This view is corroborated by the Report of the Central Bank, page 17, which states:
The financially non-remunerative character of a great part of the expenditure treated as capital suggests that a proportion of that expenditure should be financed out of ordinary revenue. The available information for other countries indicates that a more conservative policy in this regard would be in line with practice elsewhere.
My next point on the Finance Bill is one which was made in the Dáil and one which I personally do not agree with and that is that more social benefits should have been provided for certain sections of the population. We should all like to see higher pensions, higher social benefits: everybody is agreed about that. But the Minister has to exercise restraint in this matter. The resources available are not unlimited. I have no doubt that he would have liked to give more to needy sections of the population, but the public finances of the country at the moment simply would not stand generosity of that kind.
When we come to consider the new taxes, speaking for myself, I entirely approve of what the Minister has done. If there has to be new taxation, far better to have it indirect than direct. It has less adverse effect on investment and on production. I do not think it could be sufficiently emphasised that the expansion of the national income depends on increased productivity and that increased productivity depends mainly on increased investment. I should like to refer, on this, to a striking passage in the Report of the Central Bank, page 16:
In the first place, it should be better appreciated that, inasmuch as increases in labour productivity simply mean a faster rise in output than in manpower engaged, these increases are mainly due to a fuller or better utilisation of capital or an increase in capital in relation to labour employed. This is not to say that important contributions to productivity could not also be made by better organisation and more efficient use of manpower or by additional effort on the part of employees. But to the large extent that increased output per man-hour depends on investment and on the efficient utilisation of capital, excessive increases in real wages in relation to output can only be at the expense of the very technological change which produced the higher output per man in the first instance. Shifts in income which unduly restrict the profits available for further investment are in the long run contrary to the interests of the employees themselves, as well as of the economy as a whole.
That is a passage which I would like to see engraved on the portals of every business house and of every trade union branch.
Therefore, from the point of view of stimulating growth the new taxes must be approved. The doubling of the initial allowances encourages investment and most of the public investment will be productive in the long run. I should like to say that I agree with the plea of Senator Hayes that the death duties might be amended. Senator Hayes' criticism of the code is based on the hardship caused to certain weaker members of the community. Mine is based on the fact that death duties have an adverse effect on saving. If death duties could be abolished or materially reduced, domestic saving and foreign capital would both be stimulated. The income tax concessions have attracted foreign capital into the country but death duty concessions would attract not only capital but capitalists.
I do not intend to press this point because the whole question of direct taxation is under review but I do ask the Minister to keep it in mind. Nothing acts as a greater disincentive to saving than rises of prices which make money a wasting asset. This brings me to the second aim of the Budget, the preservation of stability. From this point of view the Budget must also be approved inasmuch as it does nothing to encourage inflation. At the present time when a lowering of tariffs is so much in the air, it is most important for every country to keep its price and cost levels competitive, otherwise countries suffer from exchange crises and losses of reserves. The Report of the Central Bank calls attention to the efforts which are being made by other countries in this respect:
There is clear evidence that in a number of countries inflationary trends have become the subject of special anxiety. In March, 1961 the group of experts commissioned in 1959 by the Council of the OEC reported on price increases in the member countries of that organisation. According to their report it is necessary for Governments to consider price stability.
While we can do nothing to avoid an imported inflation from the outside world, we can refrain from adding fuel to the fire. The Report of the Central Bank refers in strong terms to the necessity for Ireland avoiding inflation at all costs:
What all this means for Ireland is that unless the strong efforts to control cost increases in other countries are matched by similar efforts here the encouraging growth of recent years may not reach the stage we wish, or could even be reversed.
The Budget must, therefore, be applauded on the grounds that it is anti-inflationary. Current expenditure is covered by current revenue and new State investment will be covered by new savings. The new taxes reduce to some extent the purchasing power of consumers. Therefore, the addition to the social services does not make any net addition to demand.
All the benefits of the Budget could be eliminated if either a cost inflation or a demand inflation developed. A cost inflation means a rise in costs, principally wages, which makes Irish exports uncompetitive and thus leads to balance of payments difficulties. A demand inflation results from too large a flow of consumer demand which increases imports and equally causes trouble in the balance of payments. Both these types of inflation, it should be said, can be partly caused by the Government itself—cost inflation by unduly high wages in the public services and a demand inflation by too much public expenditure not matched by taxation. Therefore, it is not right or fair for the Government to issue warnings or exhortations to private employers when they themselves in many fields are setting the bad example. That matter has been referred to on page 12 of the Report of the Central Bank where it says:
The opportunity which Ireland had in 1961 of achieving a relative reduction in production costs and gain in competitiveness was missed. It may be remarked, incidentally, that with this result a substantial share of the responsibility rests on the public sector of the economy.
One might say in conclusion that the Budget is neutral and properly so. It could be described as a standstill Budget. A great many departments of public finance are the subject of enquiry at the moment; the relation between national and local taxation is being investigated and fundamental changes in our whole tax system may be necessary if we enter the Common Market and, therefore, it is not a time for dramatic changes in the Irish taxation system. The present Budget is neutral and standstill, neither a brake nor accelerator should, therefore, be applied. The only danger is a deterioration in the situation abroad or at home. There is no sign of such a deterioration. I have already quoted authoritative sources in relation to the United States and the United Kingdom and current forecasts in relation to this country are quite optimistic. If a deterioration did occur it could be dealt with when it arose. It is better for the Minister to err, if he does err, on the side of optimism than pessimism. It is better to have an encouraging than a discouraging Budget. A deflationary restrictive budget could have a bad effect on confidence and investment and I think we can acquit the Minister of bringing in a Budget of that kind in the present year.