I understand that there is agreement that Nos. 5, 6 and 7 be taken together on Second Reading. Therefore I propose to deal in this speech with the Finance Bill, the Prices (Amendment) Bill and the Appropriation Bill, and to take them in that order.
The provisions in the Finance Bill may be grouped into three broad categories. There are, first, those sections which incorporate in permanent legislation the matters referred to in the Financial Resolutions passed in Dáil Éireann on budget day. Secondly, the Bill makes legislative provision for other proposals of which notice was given in the Financial Statement. Thirdly, it deals with some matters which were not mentioned in the budget statement and I shall refer to these in the order in which they occur.
The explanatory memorandum, which accompanied the text of the Bill as introduced in Dáil Éireann, indicates briefly the purpose of each of the sections. I do not propose to occupy the time of the Seanad by covering this ground again and I will confine myself to a general outline of each of the ten parts of the Bill. A number of amendments were made to the Bill during its passage through Dáil Éireann, including the introduction of four new sections. I propose to draw the attention of the Seanad to the more important of these in the course of my review.
Part I deals with income taxation and contains eleven sections, of which sections 10 and 11 were added on Committee Stage in Dáil Éireann. The first section imposes income tax and sur-tax for the year 1965-66 at the existing rates. Sections 2 and 6 provide reliefs for industry; the former shortens from five years to one year the period for writing-off capital expenditure on scientific research relating to a trade, while the latter extends our existing exports relief in accordance with the recommendations of the National Industrial Economic Council. Section 3 further implements the principle of "one taxpayer, one charge" by providing for separate assessments under Schedules A and B where a property changes hands. Sections 4 and 5 extend the rights of appeal of both the taxpayer and the Revenue and empower an inspector of taxes to admit late appeals in certain circumstances. Sections 7 to 9 are concerned with technical amendments in preparation for consolidation. The remaining two sections in this part, sections 10 and 11, were, as I have mentioned, the result of amendments which I proposed on the Committee Stage of the Bill and which had for their purpose the encouragement of savings. Section 10 increases from £25 to £50 the amount of deposit interest which is disregarded for tax purposes. Section 11 raises from £15 to £50 the limit below which returns of interest are not required from banks and other financial institutions.
Part II of the Bill deals with customs and excise matters. The budget increases in duties on beer, spirits, hydrocarbon oils, tobacco and wine are covered in Sections 12 to 16. Section 17, which was not mentioned in the budget speech, makes it necessary to obtain the consent of the Minister for Industry and Commerce before special duty-free import facilities may be granted for goods for re-export. Section 18 prescribes revised rates of excise duties payable by pawnbrokers following the Pawnbrokers Act, 1964. Section 19, which was the subject of a Financial Resolution at the Committee Stage in Dáil Éireann, is intended to rationalise and simplify our road-tax system by doing away with quarterly road-tax licences for £3 or less.
Part III of the Bill, which deals with death duties, has attracted a good deal of comment, some of which was, perhaps, due to misconception arising from the technical nature of the provisions. I have tried to make it clear that the basic purpose of this part of the Bill is one to which, I think, no one can take exception—that is to ensure that persons of means will make their fair contribution to the revenue from death duties and that they will be prevented from entering into arrangements designed to shift the burden to other sections of the community which are less able to bear it.
Sections 20 to 23 are designed to counter avoidance by way of the transfer of assets to companies, the establishment of discretionary trusts, the purchase of foreign immovable property other than land and the determination of settlements by the purchase by the life tenant of the interest in remainder.
Section 24 deals with the liability of death benefits payable under superannuation schemes. Section 25 is concerned with the aggregation, with the deceased's other assets, of property such as the proceeds of certain insurance policies effected by the deceased under the Married Women's Status Act, 1957. Both of these sections were the subject of severe criticism, both inside and outside the House, in the form in which they were originally introduced. The criticisms were directed, in the main, to the effect which these sections would have had in the case of estates of persons of moderate means. In consideration of the many representations I received and in fulfilment of an undertaking which I gave on Committee Stage in Dáil Éireann, section 24 has been redrafted and section 25A has been introduced as a new section at the Report Stage of the Bill. The purpose of the changes in section 24 is to clarify the position in the case of noncontributory superannuation schemes and of death benefits provided by a company for a director's dependants. The original exemption limit of £5,000 is preserved and a measure of marginal relief is introduced for death benefits slightly above that figure. Section 25A will provide substantial relief in relation to insurance policies indefeasibly vested in a donee more than five years before the death of the assured.
Section 26, in its original form, extended from three years to five years the period prior to death within which gifts inter vivos and property released from trust will be liable to estate duty. It also provided that gifts or releases made three years or more before the passing of the Bill are not affected and it raised the exemption limit for such gifts from £100 to £500. At the Committee Stage of the Bill in Dáil Éireann, I modified these provisions considerably by introducing tapering provisions in the case of deaths occurring in the third, fourth or last year of the five-year period and by providing for marginal relief where the gift exceeds the exemption limit of £500 by a comparatively small amount.
Section 27 makes it clear that the exemption from estate duty applying to gifts in consideration of marriage is to be confined to the parties to the marriage and to issue of the marriage. In my budget speech I referred to abatements of estate duty on benefits to widows and children and to the abolition of legacy and succession duty in certain cases. These reliefs are implemented by sections 28 and 29 respectively, except that on Report Stage in the Dáil I raised the abatements for dependants from £150, as I had originally announced, to £250 in respect of the widow and from £100 to £150 in respect of a child.
Part IV contains only section 30 which deals with stamp duties and provides exemption from capital duty and transfer duty in cases of amalgamation or reconstruction of companies.
All the sections in Part V, which is concerned with corporation profits tax, were referred to in the Budget speech. Section 31 continues for a further three years the temporary exemption from corporation profits tax of certain public utility companies, building societies and the Agricultural Credit Corporation Ltd. The extension of exports relief granted for income tax purposes by section 6 of the Bill is applied for the purposes of corporation profits tax by section 32.
Section 33 provides that the treatment of the profits of a parent company for corporation profits tax purposes under section 14 of the Finance Act, 1944, shall not apply to accounting periods ending after 31 December, 1964. Section 34 extends to corporation profits tax the provisions governing the taxation of profits from lettings of buildings and land, which are contained in Part IX of the Finance Act, 1963.
Part VI of the Bill introduces certain minor changes in relation to turnover tax. Section 35 makes it clear that turnover tax is payable by clubs on receipts from sales to members. Section 36 confirms the liability of persons legally entitled to money from taxable activities, even though they may not have carried on the activities themselves. This section also provides an exemption limit of £150 a month below which registration is not obligatory for certain small concerns, instead of the limits of £250 and £100 in force at present. Retail sales by farmers and fishermen of their own produce will, under the provisions of sections 36 and 37, be liable if the proceeds are in excess of £150 in each of two successive months. The concluding two sections, sections 38 and 39, deal with the taxpayer's right of appeal from decisions of the Revenue Commissioners.
Part VII is concerned with profits from dealing in or developing land. Under the existing provisions, that is under section 6 of the Finance Act, 1935, liability to tax on the proceeds of sale or demise arises only where the land has been acquired with the intention of reselling or developing it. Under this arrangement taxable gains have been escaping taxation since it is virtually impossible for the Revenue to dispute a taxpayer's statement as to what his intentions were. The purpose of the provisions of this part of the Bill, covering sections 40 to 47, is to ensure that if lands are sold or leased after they have been developed, or after arrangements for their development have been made, the profits will be taxable.
Normal sales of agricultural land between farmers are not included and the Bill also provides specific exemption for profits arising on the sale of a person's own residence, notwithstanding certain development. I introduced an amendment at the Committee Stage in Dáil Éireann to ensure that certain developments of farm buildings would not attract liability to tax. A number of additional amendments were introduced on Report State with the intention of improving the efficiency of this part of the Bill in achieving its purpose which, as I have indicated, is broadly to catch profits arising to a person who embarks on a scheme of profit-making involving the development of land.
Part VIII secures that, in accordance with the principle of "one taxpayer, one charge", each member of a partnership will be assessed according to his share of the profits instead of the partnership being regarded as one unit for tax purposes.
The necessity for Part IX of the Bill arises from certain weaknesses in Part IX of the Finance Act, 1963, which deals with the taxation of profits from lettings of buildings and land. Sections 55 to 59 are designed to bring within the tax net receipts by property owners which are in reality of the nature of rent, but which, under the existing general law, would fall to be treated as capital receipts.
Part X of the Bill relates to miscellaneous matters which, with one exception, are dealt with, section by section, in the explanatory memorandum. I might refer in particular to sections 61 and 62 which deal with the extension of the period of double initial allowances and mining relief respectively. Section 62A is a new section which I introduced on the Report Stage in response to representations which I have received. It provides that gifts of money made to the Minister for Finance for purposes for which public moneys are provided, will be deductible in computing the donor's liability to tax.
Section 63 provides for payments on account of income tax or corporation profits tax where the Special Commissioners postpone or adjourn the hearing of an appeal. Section 64 and the Third Schedule deal with repeals and provide for the abolition of the 25 per cent rate of stamp duty on acquisitions of land by non-nationals since the passing of the Land Act, 1965. The remaining sections are self-explanatory.
This is just a brief outline of the objects of this year's Finance Bill. I shall be glad to deal with any points of detail on Committee Stage.
I now propose to speak about the Prices (Amendment) Bill.
In brief, the Bill will insert provisions in the 1958 Act to enable the Government, if they satisfied that the condition of the national economy is such that it is necessary for the time being to maintain prices at a stable level, to make an order empowering the Minister for Industry and Commerce to do any or all of the following things:
(a) to carry out an investigation of all prices of articles of any description and of all charges for the rendering of any service;
(b) to require any person connected with any of these investigations to furnish any relevant information in his possession or any relevant document in his power or control;
(c) to require manufacturers, wholesalers and importers to notify the Minister of any proposed increases in the prices charged by them for their commodities;
(d) to fix the maximum price at which any article of any description may be sold and the maximum charge which may be made for the rendering of any service:
(e) to impose a standstill on prices and charges in relation to all or any prices of all or any articles and in relation to the charges for the rendering of any service;
(f) to appoint an Advisory Body or Bodies, with appropriate powers, to enquire into any prices or charges, or to advise the Minister as to the prices or charges which should be investigated.
Any order made under these provisions will have a maximum life of six months, but it may be renewed.
For the purpose of the investigation of prices and charges, the Minister wishes to be able to use the machinery of Prices Advisory Committees as constituted by the 1958 Act. As that Act cannot be related to a temporary condition of the economy a permanent amending Act is necessary. The Bill, therefore, provides for the setting up of Prices Advisory Committees to investigate any prices or charges; a consequential amendment of the Act is also being carried out by the Bill to extend the scope of orders, fixing maximum prices and charges, which the Minister may make on receipt of Prices Advisory Committees' reports.
To summarise the position, in this Bill the Minister is seeking very flexible powers to be able to make a speedy examination of prices at all levels and to make orders, when necessary, controlling prices at their various levels. The Minister is also seeking powers to establish Prices Advisory Bodies and an extension of the scope of Prices Advisory Committees' inquiries, which is limited in the 1958 Act.
The third Bill I propose to deal with in this speech is the Appropriation Bill, 1965.
This year's Appropriation Bill makes the usual provisions for issues from the Central Fund and appropriations to particular services. The only novel provision is section 4 which relates to foreign borrowings. It had always been assumed that there were no limitations on the currencies in which the State could borrow. In fact, direct State borrowing in dollars was made in New York in 1927 and under the Marshall Aid Agreement in 1949-52. The law officers advised, however, in connection with the Aer Lingus dollar borrowings last December, for which an amendment of the State Guarantees Act, 1954, was necessary, that the State had no power to borrow in a currency other than its own. As the possibility of external borrowing by the Government is mentioned in the Second Programme for Economic Expansion and inquiries are currently being made, it is desirable to ensure that, should the need arise, there would be no lack of statutory authority for such borrowing.
The Finance and Appropriation Bills cover such a wide sweep of Government activity—in relation both to taxation and expenditure—that their introduction together in the Seanad this year provides a good opportunity for a discussion of the economic and financial situation. I have no doubt that Senators will avail themselves of this opportunity.
It is not necessary for me to review the current situation in detail. That was done in the Dáil a fortnight ago by the Taoiseach. I intend to sketch it very broadly, and to refer to the measures taken to deal with it, for the purpose of establishing the right perspective. In particular, without in any way detracting from the need for effective action to correct the adverse trends—indeed this need is obvious and has been generally understood—I want to dispel any notion of a crisis. We are, I hope, a mature society. What we have to do at present is to make adjustments in our economy so that we can continue our advance without running into serious trouble. There is no occasion for panic or sensationalism.
Managing our economic affairs is a much more complex and difficult matter than, say, driving a car is for the individual. Impediments and dangers, unforeseen as well as foreseen, have constantly to be contended with. Never to run any risk at all would imply an over-cautious attitude, which would overtax everyone's patience. Reasonable risks must be run for the sake of developing the economy and increasing employment. When, however, the dangers become too threatening, there has to be some change of course—but this should neither be too late nor too drastic so that we may continue safely on the road rather than be plunged in the ditch.
In comparison with the experience of other countries, many of them more highly developed than we are, Ireland has enjoyed since 1958 a period of sustained economic growth averaging over 4 per cent per annum. The number in employment in industries and services has been raised by some 50,000. The rate of emigration has been halved. The population has begun to increase again. The numbers at secondary school and university have been rising steeply.
In the early years of the First Programme, our economic advance was achieved without incurring a deficit in the balance of payments. In fact, official reserves accumulated as a result of foreign investment in Ireland. We were able to make good progress, independently of external resources, largely because there was unused capacity in Irish industry at that time. Recently, however, economic growth has depended more directly on new investment, and external resources have had to be drawn into use by incurring balance of payments deficits on a rising scale—£13 million in 1962, £22 million in 1963 and £31 million in 1964. These deficits were more than covered by capital inflows, so that the external reserves continued to rise. Apart from £25 million of direct borrowing in 1964 (about one-fourth of the total inflow for that year), the capital inflow was an independent voluntary affair, expressing active external interest in our development potentialities. It was judged right to use this inflow to promote economic growth rather than add to reserves. That it was being so used was indicated by the rise in the ratio of gross capital formation to GNP from 15 per cent in 1960 to almost 21 per cent last year.
At the same time, we were concerned that total demand should not rise so high as to cause unduly large deficits in the balance of payments—deficits which might not be capable of being met continuously from capital inflows and a reasonable use of reserves. The 1964 deficit of £31 million, though more than covered by the unprecedentedly high capital inflow of that year, was well above the average deficit of £16 million contemplated in the Second Programme, which covers the years 1964-1970. Our policy, therefore, for 1965—in line with the recommendations of the OECD—was, as I said in my Budget speech, to try to keep the deficit from rising above £31 million and even to reduce it, if this was compatible with the maintenance of a 4 per cent growth rate.
As things have turned out, this policy objective seems to be incapable of achievement this year. For reasons I shall mention in a moment, we are faced with a much bigger deficit in the balance of payments which must be corrected. Our growth rate will fall below 4 per cent this year but, I should emphasise, there is no risk of growth being stopped; it is expected that we will register an improvement in national production of about 3 per cent. The capital inflow has dropped sharply under the impact of the restrictive measures taken in the United States and Britain. The possibility of direct borrowing on favourable terms in the United States has been upset by a Presidential order removing our immunity from the interest equalisation tax. Our external reserves, which the OECD rightly said could decline somewhat without cause for concern, have in fact fallen from £242 million at end-December last to £208 million at end-June.
What accounts for this adverse change? The answer is a combination of external and internal factors. On the external side, there is the growing international tightness of capital and credit according as the United States and Britain drive on towards reducing their overall balance of payments deficits, while France and some other countries continue to accumulate reserves without making any special arrangements to facilitate foreign lending. A second external factor is the continued operation of the British import surcharge which affects a high proportion of Irish industrial exports. In fact, we rely on expansion of industrial exports as one of the chief points in our development programme; an expansion of 24 per cent was achieved in 1964. We have managed merely to hold the line this year by offsetting part of the surcharge.
Amongst the internal factors we have, first, a purely temporary one— a reduction in exports of live cattle, which, with the mark-time in industrial exports, is responsible for an actual fall in total exports this year. There has been a big increase in cattle stocks but the animals are still too young for export and, as the June trade figures showed, are only now beginning to swell our export figures.
Imports in June amounted to just £31 million, exports to £19 million and the import excess to £12 million. The import excess was £1.6 million less than in June 1964, whereas in the preceding four months it was £6½ million greater on average than in the corresponding months of 1964.
We can draw some comfort from the fact that the import excess in June, although still very high, was the lowest since January. Imports slackened off somewhat as compared with earlier months and were £2 million below the June 1964 level. Exports were still marginally less than the June, 1964 figure but showed a substantial recovery from the depressed level of the early months of this year. While no details are available as yet of the composition of the June trade returns, figures for shipments by sea and air show that cattle contributed to the increase in exports. Shipments amounted to 28,600 head in June, 1965, or 9,000 more than the May, 1965 figure of 19,600. The improvement in cattle shipments has continued in July. In the absence of commodity returns, it is not possible to assess whether manufactured exports in June have begun to resume the momentum which was lost in the earlier months of 1965.
The expected improvement in cattle exports of itself will not be enough to right our trade figures and bring the balance of payments deficit down to tolerable size. The deficit still looks like being in the neighbourhood of £50 million for 1965. At the same time as exports have fallen, imports have risen under the impact of higher incomes, increased credit, and higher public and private expenditure.
This situation is being tackled in a number of ways. A restraint has been imposed on the overall increase in bank credit this year and priority is being reserved for productive purposes. Bank deposit and lending rates are being held at a high level to encourage saving and discourage less essential spending. Further incentives to increase exports have been announced. Public expenditure is being reviewed to bring it as close as possible to the Second Programme figures. Savings incentives have been improved; the Finance Bill doubles the tax exemption for interest on deposits in the savings banks and commercial banks. Hire purchase restrictions have been introduced to check the rise in expenditure on less essential imports. The Government have initiated talks with trade unions and employers' organisations to try to secure a realisation of the need to avoid a further raising of money incomes while the present difficulties are being dealt with. I have already outlined the purposes of the Prices Bill. The possibility of raising some external capital for development needs by direct Government borrowing is being explored. Developments are being closely watched so that, if necessary, further action can be taken to safeguard the long-term interests of the economy and sustain the growth of production and employment.
Clearly, the difficulties of a small country, which relies for a moderate rate of economic development on selling most of its increased production on export markets and on supplementing its savings by recourse to external resources, are accentuated by the present international tendency towards contraction of capital supplies and slackening of the rate of growth of trade and output. In part, this tendency must be ascribed to imperfect economic co-operation—for example, to the extra difficulty created by some countries having to reduce deficits very quickly while others continue to have surpluses and yet operate their economies below capacity. An increase in international liquidity would ease this problem without seriously delaying or discouraging the achievement of long-term balance by the present deficit countries.
However, we have to take the international situation as we find it and do what we can, not merely to correct our balance of payments, but to maintain a high rate of economic progress. Because of our small home market, it is mainly through exports that economic expansion must be sought. It is particularly important at the present time that there should be a vigorous expansion of exports. This depends fundamentally on the cost and quality of our goods and services being competitive. It depends also on our having advantageous terms of access to export markets.
Earlier this week, with the Taoiseach and my colleagues, the Minister for Agriculture and Fisheries and the Minister for Industry and Commerce, I was in London for trade discussions with the British Government. Britain is our principal market and up to now our trade relations with Britain have been governmed by agreements which themselves go back to 1938 but which are based on the preferential system formalised in 1932 at Ottawa. It has become increasingly clear that in recent years this is no longer an adequate basis for our trade relations. World developments have run ahead of the preferential system and nowadays trade relations, particularly in the matter of tariffs and quotas, are either determined multilaterally under the auspices of GATT or regionally in the context of a free trade area, customs union or common market. Indeed, events have so overtaken our trade agreements with Britain that, already in some cases, the members of EFTA enjoy lower tariffs entering Britain than our so-called preferential rate of duty. An important example of this is the duty on man-made fibres which is now lower for, say, Sweden and Denmark than it is for Ireland. The deterioration in our position occurs also in the realm of agriculture where the forms of support given to British producers and the restrictions applied to imports into Britain have resulted in the erosion of benefits we once enjoyed in the British market.
We cannot put the clock back and, indeed, we have recognised, through our application for membership of the EEC, the need to join this new movement towards freer trade in industrial products and improved conditions of trade for agricultural products. Our principal objective still remains that of membership of the EEC in common with Britain. This objective cannot be realised at present. It may be some years before our application can be reactivated.
