What I was saying when the debate on this Bill was adjourned was that any reversal of the inward flow of funds into the country might create difficulties in the balance of payments and might reduce the liquidity of the banking system by depriving it of some of its external assets. This point becomes relevant in view of the fact that according to the report of the Central Bank, bank advances here have been increasing rapidly in recent years. Last year the increase in bills, loans and advances was ten per cent over that of 1962 which was the same as the increase in 1962 over 1961. This shows a very considerable increase in the demand for credit partly from the Government but partly from all sorts of private bodies. The report of the Central Bank classifies these various advances by saying that there is practically no type of trade or industry that is not borrowing more from the banking system now than it was a few years ago.
There has also been a considerable increase in the amount of hire purchase debt; in other words, the community as a whole, public authorities and private borrowers, are becoming more and more indebted. Therefore, anything in the nature of a sudden withdrawal of funds from the country might possibly create some difficulties for the banking system. I want to make it perfectly clear that there is no sign of any such difficulty at the moment. The external liquid assets of the commercial banks are adequate to meet any possible calls which could be made upon them. I want to clear up a point on which there has been a certain amount of misunderstanding, that is, in regard to what can be considered as liquid assets of the banks at present. The banks' external assets are classified in the consolidated balance sheet separately, but in addition to these assets, the banks now have deposits with the Central Bank and also have exchequer bills which can be rediscounted on demand by the Central Bank and these, for all practical purposes, amount to sterling assets. Therefore, if these are taken into account, the actual liquidity of the banking system is higher than appears from a mere view of the external assets set out in the consolidated balance sheet.
I want to make clear that there is nothing in the nature of a dangerous position in the Irish banks at the moment. But I want to make the point that a large inward movement of credit, if it suddenly became reversed to the extent of becoming what is known as "hot money", might create certain difficulties for the banking system and for the balance of payments which would call for correction and which would be very adverse to the continued progress of the country. I want to make abundantly clear that I do not suggest for a moment that there is any pressure of that kind at present and that the published figures of liquidity actually underrate the true liquidity because they do not take into account deposits with the Central Bank and exchequer bills which can be rediscounted by the Central Bank and which, for all practical purposes, are sterling assets.
The increase in real capital formation of the country has continued at a surprisingly high rate. The report of the Central Bank says that the amount of capital creation in 1963 was higher than in any previous year and that the amount of capital goods created at home and imported from abroad increased considerably. If one looks at the trade returns, one finds that of the total imports in 1963 producers' capital goods amount to 15 per cent; consumer goods, 21 per cent and materials for further production, 59 per cent. Of the latter a large amount were used in export industries and therefore figure later in the export figures. I know that the figures I have given do not add up to exactly 100 because there are one or two minor categories I omitted. The point I am making is that, side by side with the great increase in borrowing, there has been this remarkable increase in capital creation, that is to say, in investment.
At the same time as we have this increase in investment, there has been a remarkable increase in consumption. This may be the result of people buying before the imposition of the turnover tax last November. That would account for a certain amount of urgency in buying possibly, but other figures, retail sales and the number of new cars registered throughout the whole year, show a steady increase in consumption last year. Both consumption by the public and investment increased during the year. This great increase in expenditure could be inflationary and could have an adverse effect on the balance of payments. If the high rate of wages, as I said earlier, were to bring about an increase in cost and if the increase in money incomes were to bring about an increase in consumption there might be pressure on the balance of payment caused by the diminution of exports and increased imports. It cannot be sufficiently emphasised, even at the cost of repetition, that the crux of the Irish economic situation is the danger to the balance of payments caused by a continuance of inflation. I do not suggest that inflation as yet has got to the point of being dangerous but there are danger signals. The rise in income is proceeding rapidly and all that indicates that both costs and consumer incomes in the country are increasing and both types of inflation may possibly be on their way.
When we come to consider the question of where the savings came from to finance all this increased investment, it is satisfactory to know that the Central Bank comes to the conclusion that there was a great increase in savings during the year. The deposits in the commercial banks—by that, I mean deposits on deposit account as apart from current account—failed to rise but there may have been a reason for that not entirely unconnected with the Budget of last year. But the amount of savings in the Savings Banks, in Saving Certificates and Prize Bonds was higher last year than in the previous year. This, of course, only represents monetary savings. There must be a great deal of savings which do not figure anywhere in monetary statistics. There was a very large amount of savings from abroad. Investment in Ireland last year was largely financed by inward movement of capital. The saving was done by foreigners of various countries and the investment was done in Ireland.
These are all different aspects of saved capital coming into the country and being invested in one way or another. Therefore, between the entire monetary savings and the import of capital, the vast amount of capital investment which took place here was possible without any diminution in the external savings by Irish holders. It was therefore entirely satisfactory and did not involve any running down of the accumulated external savings of Irish savers.
I do not wish to delay too long on the Report of the Central Bank, but I should like to quote the conclusion to which the report comes to regarding the conditions in the country in 1963. It says:
The tentative calculations indicate that the recent slackening in the pace of economic expansion has been arrested during 1963 and that the economy is moving ahead encouragingly. When the tentative national expenditure figures are adjusted for the measurably smaller rise in prices generally, an increase from 2.5 per cent in 1962 to about 4 per cent in 1963 emerges in real terms; and the economy has entered 1964 on a promising note of rising industrial exports and production.
Therefore, in discussing the background of the Estimates, the year 1963 can be given a clean bill. On the figures published by the Central Bank, we can learn that the country was moving in the right direction.
When we come to the Central Fund Bill, to which the Estimates really apply, the conclusion of the Central Bank regarding the present year is a little less optimistic. There are two sentences in the Quarterly Bulletin which I shall read:
The trends disclosed in the preparation of the tentative assessment for 1963, taken by themselves, suggest that 1964, however, will be a more difficult year. Above all, the continuing and accelerated upward movement in monetary incomes contains serious economic risks, especially as regards external trade and payments.
That bears out what I have already said and is also corroborated by the Quarterly Report on Ireland published by the Economist Intelligence Unit for February of this year, from which I shall read one sentence:
Although gross national product will probably rise at an annual rate of more than four per cent in early 1964, prospects for further expansion are uncertain because of the risk of inflation.
The Central Bank and the Economist Intelligence Unit are agreed on that. Both point to the same danger—the risk of inflation by rising incomes and rising prices.
So far I have been dealing with the background against which the Estimates must be studied. I now come to the Bill itself, which brings the Estimates before the Seanad in the only way the Estimates are in fact brought before us. Nobody need be surprised at the increase in public expenditure: public expenditure in every country in the world is increasing and therefore the fact that the Estimates for the coming year are higher than last year need not be cause for surprise.
The Book of Estimates shows that the amount required in the coming year is £156 million—£16 million more that the amount in this financial year included in the Estimates, together with Supplementary Estimates. In order to get the total Government expenditure for the coming year, certain additions must be made to that sum. The Minister stated in the Dáil that the cost of increased salaries to the public service under the ninth round would come to about £7 million, that the cost of the Central Fund services will be up by £3,500,000, bringing the Central Fund services up to about £33 million. Grants to the Road Fund will be another £9 million approximately.
Therefore, it is not incorrect to say that the amount required for current expenditure in the coming financial year will be something between £205 million and £210 million. This is the amount which the Minister will have to find from taxation. As we all know, the very word "taxation" must not be mentioned in this debate on the Book of Estimates: this comes later in the debate on the Budget. However, I risk being told I am out of order by making use of a single sentence to the effect that there is no reason to believe that important additional taxation will be required to balance the Budget.
One thing I should like to say which is not out of order, I submit, is that the Budget must be balanced. In other countries, people are arguing in favour of Budget deficits. In the USA it is the fashionable remedy for the prevailing unemployment that there should be a deficit Budget. There is nothing in the Irish situation at all that would justify a deficit. The pointers in this country are all in an inflationary direction and if anything were appropriate to the Irish situation, it would be a surplus rather than a deficit Budget.
In the United States there is a fear of deflation and therefore a large amount of informed financial public opinion is in favour of deficit budgeting. In the United Kingdom, signs of inflation are appearing and many of the best economic commentators are in favour of a Budget surplus. Whatever may be said for a Budget surplus here, there is nothing to be said for a Budget deficit. Therefore, it may be said that the total amount for the current services, about £205 million, will have to be met by taxation.
What our taxation will be will be obvious when we see the Budget next month, and it is not proper for us to discuss it now. It is outside the scope of this debate. When we come to capital expenditure, we are largely in the dark about the amount required. The only part of the capital expenditure which we know is the very small part known as voted capital expenditure, that is to say, the capital expenditure which is called "above the line expenditure". When the Budget is introduced, we will be told the Minister's proposals regarding the capital expenditure below the line which will, as it always is, be considerably greater than that above the line. As far as one can judge from the Estimates, the increase in capital expenditure above the line is justifiable on the ground that it all happens to be for truly productive purposes. It is of a productive nature. We hope that, when the capital expenditure below the line is revealed next month, it will also prove to be equally productive in nature.
I should like to say again what I said earlier today: that this division of capital expenditure between above-the-line and below-the-line is rather out-of-date. A discussion of public finances would be facilitated if there could be a clear-cut distinction between current expenditure, on the one side, and capital expenditure on the other. There should be a current Budget and a capital Budget. At the moment the capital Budget is divided into two parts —the above-the-line capital Budget, which appears in the Estimates we have before us, and the below-the-line capital expenditure which will not be revealed to us until next month.
That is the position: that we will be expected to find about £210 million of taxation in the coming year and that also we will have to borrow a large but unknown amount to meet the capital expenditure of the Government. That brings me back to the question I asked at the beginning of my speech: are these amounts the country can afford? I would remind the House of the analogy I drew between the individual and the nation. When one is dealing with an individual one asks the questions: What is his income? How much of his income is he spending? On what is he spending it? Until we have answers to those questions, we do not really know whether that person is conducting his affairs in a prudent manner or not. It is the same in the case of the nation. We have to ask what is the income of the country. Are the Government spending at a greater rate than the increase in income and, if so, on what are they spending? Until we answer those questions, we cannot really say whether the estimates of expenditure are justifiable or not.
One thing we can say with safety is, without entering into any detailed statistics, that the rate of increase in Government expenditure is greater than the rate of increase in national income. The national income last year went up by about 4 per cent. The rate of Government expenditure is going up at a higher percentage than that. But that, of course, is, as I said, really a sign of the times. If you take almost any other country in the world you will find the same thing. Governments are doing more and more today, and to find that the ratio of public expenditure to national income is getting larger is not in itself a condemnation of the financial policy of the Government.
Actually, we all know that between now and this time next year the amount spent by the Government will be more than the amount in the Estimates. Of course, there will be errors of overestimation. At the same time, we all know that the Supplementary Estimates which will be introduced in the coming year will far outweigh the allowance made for overestimation. Therefore, the amount which will be spent by the Government in the next year will be more than the £210 million to which I have referred. This is really inevitable. It is not a matter for which the Government deserve any blame. It is partly the result of rising prices. Prices are rising in this country and in other countries. Incomes are rising; costs of all kinds are rising. Every private individual finds the cost of running his house going up; every businessman finds the cost of running his business going up. There is nothing exceptional, then, if the Government find the cost of running the public services going up also.
Furthermore, the Second Programme for Economic Expansion, which was very fully expounded by Senator Dooge today, involves a good deal of Government expenditure. How much we really do not know, because the Second Programme is still slightly mysterious. We are waiting to get details. So far we have only had volume one, and until we get volume two, until we know the actual amount to be spent in different directions, we shall not know the true nature of the Second Programme. However, there is one thing I think it is fairly safe to prophesy: it will involve an increase in Government expenditure of one sort or another. Therefore, we can answer the first question that the Government are spending a larger fraction of the national income than they spent last year or in previous years.
The second question is: on what is it being spent? Is it being spent on something productive, something which will add to the national income of future years; or is it simply being used for redistribution, for social services, for building up the standard of living of classes of people who, for one reason or another, are not able to maintain themselves at a decent standard of living? The answer to that question must also be hazardous. It is very largely a matter of opinion. A good deal of the additional expenditure is of a truly productive nature, As I said earlier, nothing is more productive as an investment than the education of the people. A good deal of the additional expenditure is on education of one sort or another. But, as I have also said in this House previously, expenditure of that kind takes a long time to fructify. In the long run it will, of course, pay dividends, but in the short run it imposes a burden on the taxpayer without any equivalent return. There is also another type of expenditure which is very much in the same category—State expenditure on agricultural production. The increase in the subsidies to agricultural production will in the course of time produce a result; but, as I said already, agricultural production is slow to increase and, therefore, the actual benefits we can receive from this type of expenditure may be rather delayed.
There are other items in the Estimates which are productive, judged by any standard—grants to the Export Board, grants to Bord Fáilte. All these are productive things, which in due course will yield a benefit to the country. But it must also be admitted that a certain amount of the additional expenditure is of a social kind. I am not condemning it on that account. I am not saying a Government should not redistribute national income or should not come to the assistance of the weaker members of the community. But there is a clear-cut distinction, when we are dealing here with the national accounts in a hardheaded way, between expenditure which will yield some sort of monetary return to the State and expenditure which will not yield such a return. A good deal of the additional expenditure, although perfectly justifiable, will not yield any monetary return.
When one comes to answer the second question I have asked—how is the money being spent?—one can only give conjectural answers. Some of it is being spent on productive measures and some of it is being spent on socially desirable but non-productive measures. It is being spent to compensate pensioners for increased wages and prices and to lift the standard of living of the less well-off members of the community. These are all perfectly proper objects, with which we all agree, but at the same time, looking at it as hardheaded businessmen, these are types of expenditure for which the Government get no immediate return. Therefore, all we can really say is that the share of the national income being spent is increasing and that part of the increase is being spent on socially desirable but unproductive services.
However, one might express the opinion that current expenditure is within the capacity of the country. It would be pessimistic for anyone to say the country is living beyond its means. It is perfectly true that expenditure is going up, but many individuals spend more this year than last year without necessarily being imprudent. On the whole, looking at the picture generally, I think the current expenditure forecast in these Estimates is within the capacity of the country.
When we come to capital expenditure we are really in the dark. We do not know what it will be, but I am prepared to give the Minister the benefit of the doubt. I am prepared to admit that the greater part of that capital expenditure will be productive, possibly in the long run, possibly in a generation or so. It may be on agriculture or it may be on education that will yield a dividend in the future, but it will impose an increase in the charges for the Central Fund Services in the coming years.
Here again I hope I am correct in saying that whatever capital expenditure is likely to be undertaken is within the capacity of the Government to borrow. As I said many times, the country is at the moment a creditor country with an inward movement of money. There is more money coming into the country than going out, and the capacity of extending credit is being increased. Therefore, unless the Government do something very wild in the sense of vast increases in expenditure on defence—of which I do not see any signs at the moment—we may say that capital expenditure will be within our means.
I should like to conclude by saying that I have tried to strike a note of optimism. I have tried to state that both current and capital expenditure are not excessive taking all the circumstances of the country into account, but I should like to qualify that by saying that these optimistic assumptions depend upon the present trend not being suddenly reversed, In recent years the trend has been favourable to this country, and that any deterioration in the position of the country either at home or abroad— any increase in our inflation relative to that of other European countries— might create a dangerous situation.
Therefore, while I think the Government have every reason to be satisfied with our projected expenditure, I do not think there is any room for complacency. If wages and price movements are allowed to get out of hand, if prices are allowed to go on rising as they have been rising in recent times without any stop, then, of course, a dangerous situation might arise. If the favourable circumstances which I have described of the inward flow of capital were reversed, or if the purchasing power of our customers abroad were to be interrupted by some slump, if inflation in other European countries were to slow down while ours still went ahead, there would be a very difficult situation in the balance of payments which would not enable the Second Programme for Economic Expansion to be implemented.
As Senator Dooge pointed out very clearly, the basis of the Second Programme for Economic Expansion is that we can tolerate a deficit in the balance of payments. If we were to find ourselves in a position in which we could not tolerate a deficit in our balance of payments, then the Second Programme for Economic Expansion would have to be drastically revised. It is accepted as national policy at the moment, and I think everyone approves of it, but it depends on the country being in a healthy condition, and remaining in the healthy condition in which it has been for the past five years. The Government must admit that to some extent they have been lucky. The circumstances of the past five years have been favourable to their two programmes, but if the trends suddenly reversed their luck would seem to have turned. Therefore, it is the duty of the Government to set their face against any additional inflation.
I should not like to sit down without saying that every advance which we have had in this country cannot be credited to the Government. The ordinary businessman who has actually run his business, and the ordinary individual worker who has done his day's work, are as much entitled to credit for the advances of the past five years as the Government who have, to some extent, planned them. I would equally say that any foolish greed either on the part of businessmen or trade unions might upset the policy of the Government. As Senator Dooge said in his very interesting speech, the Government can control the economy only within limits. The Government have been rather lucky in the past few years. World trends have been favourable, and the behaviour of the business people and the trade unionists in Ireland has been reasonable on the whole. But if those conditions were reversed we might find ourselves in considerable difficulties over which the Government would have no control. Therefore, the future of the country and our capacity to meet the increases in current and capital expenditure, depend not only on the Minister for Finance but on all of us: on every individual and, in particular, on the employers and trade unionists whose duty it is to try to preserve a rational incomes policy in the next few years.
