I should like, first of all, to thank Senators who welcomed me here in my capacity as Minister for Finance. Secondly, I should like to say, without appearing in any way to be condescending, that the debate on this Bill was impressive from all sides of the House. Perhaps, I may be forgiven for mentioning the thoughtful and able speech made by Senator Alexis FitzGerald. I was particularly impressed by it and by many of the other speeches. There were, of course, one or two exceptions, as there always are, notably Senator O'Higgins who in some kind of Rip Van Winkle style seemed to be trying to fight the last election here again on this Bill.
The main theme of the contributions, indeed the main theme of my own introductory speech, related to inflation and a prices and incomes policy. I propose to deal with that in some detail and in the course of doing so I hope to be able to answer the question I was asked at the close of the debate about what action has been taken to deal with it. There were some other points raised which I shall try to dispose of first.
Senator Owens asked if the arrangement proposed for farmers under a value added tax would mean they were excluded from sales tax. The arrangement envisaged for farmers under the added value system is designed to exclude them from the requirement of keeping accounts for the purpose of that tax. They will pay tax on what they put into production such as seeds, fertilisers and so on. But as with existing taxes, wholesale and turnover tax, the added value tax will be borne ultimately by the consumer. This is so in respect of any sales tax and it will also be the case in relation to the added value tax.
Some Senators referred to excessive price increases because of the addition to the turnover tax in the Budget. It was said that the line taken by some shopkeepers who had previously been carrying the 2½ per cent was that they were unable to carry the additional 2½ per cent and were now adding on 5 per cent. Senator Boland dealt with this very adequately. In fact, it was one of the few things he said which I agreed with. He pointed out that there is no such thing as carrying turnover tax. The shopkeeper has to pay the tax. He has to build it into the price he charges but if any shopkeeper has added 5 per cent to his prices consequent on the Budget increase, he is not entitled to do so. Any cases of that kind if reported to the Department of Industry and Commerce are dealt with quickly.
Senator Cranitch asked if an income tax allowance can be given where a son or daughter is attending an institute of higher education and the parents' income is just over the limit qualifying for a university grant at the moment. I do not know if what I am about to say answers his question but I presume the Senator is aware that income tax allowances are given in respect of all students attending a full time course in an institute of education.
Senator Prendergast talked about trade imbalance. He mentioned a number of countries and quoted figures, to show the lack of balance in our trade with them. The majority of countries with which we trade have a favourable trade balance with us. We would like to remedy this but the really important thing from our point of view is the overall balance of trade which gives a different picture. I do not want to go into details of that at present. Suffice it to say that while there are no grounds for complacency, there has been an improvement this year as against last year.
If the improvement continues, barring a prolonged British dock strike and allowing for the bank strike and the cement strike, the trend seems to indicate that there is a good chance we might reduce our balance of payments deficit to £50 million. I mentioned this when replying to the Budget debate in the Dáil as being the target we had set. If we reach that target this year, while there will not be any grounds for complacency there will be no grounds for alarm.
When the British import levy was imposed we made a special effort to get our exporters to diversity their exports away from the British market. We introduced various special measures and assistance to help to bring this about. It is paying off to some extent. Speaking from memory— I think the figures are right but I do not want anyone to take them as having full official authority behind them—since the British import deposit scheme was introduced our exports to non-British markets have been increased by 20 per cent. There is plenty of room for them to go further but this is a fairly substantial increase in a relatively short time. When we purchase from a country with which we have a poor balance of trade it is usually because that country has things we need which we cannot get cheaper anywhere else. It is not always so but it is generally the case. We have statutory authority in relation to certain eastern European countries to impose an embargo on trade in the absence of a proper balance. Even where we have this power when we go to exercise it we find the effect of it is that we are going to damage people here who are importing raw materials or consumer goods not available in this country and not available as cheaply anywhere else. Unless we can force that country to step up its purchases from us we are not gaining very much. In many cases our purchases are so small compared with the size of their markets that the leverage we have is not very great.
I want to compliment Senator Horgan who, having criticised the imposition of the additional turnover tax in the Budget, made an effort to suggest alternatives as to how this may have been done. I compliment him for attempting to do that but I cannot compliment the Senator on the suggestions he made because they are just not workable. The Senator referred to the fact that I, in speaking on Second Stage, said that nobody had produced acceptable alternatives and he questioned the word "acceptable" and asked, "acceptable to whom?" Obviously, they must be acceptable to the public in general and this is one test. Another test is that they must be acceptable in the sense of producing the revenue needed, which was £20 million in this case.
The Senator suggested certain alternatives which are not acceptable, first, because they would not yield anything like the money required and, secondly, because some of them are not practicable. One of the other Senators seemed to dispute the statement I made that to achieve the same amount of revenue one would have to increase income tax by 1s 9d in the £. In this connection I should like to quote from page 17 of the printed edition of the Budget Statement which explains some of the reasons for a reduction rather than an increase in income tax which was, in fact, effected by this Budget. I quote:
Income tax is paid by a comparatively small section of the community. Furthermore, it has changed significantly in character in recent years and can now represent a considerable burden on a wide variety of small incomes. Its weight falls on many individuals with incomes which are below the level in real purchasing power at which an income tax should normally apply. Nor does the argument which has been advanced for an increase in direct taxation on this occasion for its disinflationary effects really stand up to close examination.
Because of our system of PAYE, for most taxpayers the impact of an increase in income tax is immediately felt in the pay packet and consequently is little different in its effect on pay claims from a corresponding amount of indirect taxation. In the Budget speech last year I pointed out that direct taxes tend to discourage effort and to have widespread disincentive effect but that significant changes in our direct taxation structure could only be undertaken in the context of a comprehensive recasting of the general pattern of taxation. I am taking a considerable step in this direction this year.
I am fully satisfied, that, whatever our difficulties, some relief must be given this year to income tax payers and especially to those with small incomes upon whom it bears very heavily. The reliefs which I shall now mention have been framed as carefully as possible towards this end.
Some of the basic assumptions in Senator Horgan's alternative proposals did not take account of the facts mentioned there. The Senator referred to a capital gains tax, as did other Senators, as one line of approach. Many people do not realise that, in effect, we operate a capital gains tax in certain areas. Any dealings in development of land which is done as a business—and I understand what this could mean if one did it even once—become liable to taxation. Secondly, dealings in stocks, shares and securities in the hands of persons whose business is dealing in such property are also taxable. I think the interpretation in that case is a little less stringent than in the case of land but it is still fairly stringent. The Commission on Income Taxation examined this question of a capital gains tax very carefully and came to the conclusion that they had no option but to recommend against its introduction in this country in view of the grave disadvantages associated with it, in particular because of the disincentive effect it could have on savings, investment and economic growth. In my view the primary aim of economic policy must be growth. This must be consonant with the economy being kept on an even keel. Subject to that, the primary end in our circumstances must be growth. We must have as our primary aim the achievement of growth—in our circumstances where we have not got full employment and still have emigration. It might be a different situation if we had achieved that, but in our present circumstances a general capital gains tax would not be conducive to growth.
There is another and compelling reason why there is not much point in introducing it and why it would not help to provide £20 million. The capital gains tax in Britain yields less than 1 per cent of the total taxation. In this country it would yield relatively much less because we have far fewer people relatively who are well off and make capital gains than they have in Britain. The yield here would be relatively much smaller than that. In addition to the capital gains tax which I have mentioned, Senators will recall that there is also a duty of 10 per cent on the building of speculative office blocks and, indeed, the incidence of death duties to some extent is a capital gains tax.
I want to refer briefly to two points made by Senator Killilea with regard to the Sugar Company and to the suggestion that they should engage in the manufacture of farm machinery. The Senator knows that they engage in that operation to some extent. I agree entirely with him that our imports of farm machinery are very disappointing in a country which is so strongly agricultural.
For that reason some time ago, as Minister for Industry and Commerce, I called a number of the main people concerned together and told them of my concern in this regard and that I wanted to see, as fast as possible, getting together the establishment of a worthwhile farm machinery industry in this country which I thought would serve not only our home market but could develop substantial markets abroad. Progress is being made. The Sugar Company took charge and their representative is chairman of a group. They are in contact with the Minister for Industry and Commerce at present and efforts are being made to get such an industry going on a proper basis as fast as possible.
With regard to the reference made to the small industries scheme for western areas, I am sorry that it seems to have escaped the notice of most Senators that an announcement was made. Very briefly, the position was that heretofore, and as yet for location outside the undeveloped areas, the maximum figure for an industry to qualify by way of capital for a small industries grant was £60,000. For the western region this has now been extended to £100,000. Another test was that they did not employ more than 30 people. For the western region that has been increased to 50 people. This is basically what the announcement was.
Senator Bourke expressed the opinion, which I think some other Senators subscribed to, that the increase in social welfare benefits in the Budget did no more than offset the increase in prices of essentials arising from the turnover tax increase. The current year's increase in the non-contributory old age pension, for example, was about 13? per cent. This is more than enough to outweigh the price rise for the current year. When we go further back, between August, 1961, and August, 1970, the increase in the non-contributory old age pension will be 180 per cent while the price rise over this period will have been about 60 per cent. Or, if you take August, 1965, to August, 1970, the rise in the old age pension will be about 80 per cent over the same period while prices will have risen about 33 per cent. So while it is true, of course, that increases in prices, particularly the prices of food and essential commodities, do affect social welfare recipients and do erode increases given to them, nevertheless, it is not true to suggest that the increases given have only kept pace with the increased cost of living or, as some people have suggested, have not kept pace. Those people are affected, and God knows we would all like to see them paid more, but at least we ought to see that their real position, their position in real money terms, has improved.
One Senator asked for details of the savings scheme which is referred to in the Bill. I would suggest that that might, perhaps, be better dealt with in detail on Committee Stage, and I will do so when we come to it.
If I might turn to what I think is the main theme of this debate, the question of inflation and an incomes and prices policy and, indeed, the general policy to deal with inflation, there are some figures which I think have been quoted in this debate and are being quoted generally recently but they bear repetition because they mark out in the clearest possible way, with what are almost neon lights, what is happening to our economy. These statistics relate to productivity, to the unit costs of what we produce. In 1969, last year, our productivity in manufacturing industry rose by about 1 per cent. At the same time, weekly earnings increased by 11½ per cent, with the result that unit wage costs rose by about 10½ per cent. That is a rate that was more than double what happened in British industry in 1969, and, indeed, in a number of other countries with which we are competing, the increase in unit wage costs was very much less than in Britain. If we can realise the significance of that, of what happened in 1969, this is the root of all we have heard in this debate and elsewhere of what has been happening to our exports, about the dangers of what may happen in the future, about the threat to the employment of our workers, and it illustrates very clearly one of the enormous economic disadvantages of inflation. There is no estimate available at the moment of the trend of productivity and earnings in the first quarter of 1970 but the indications are that the deterioration in competitiveness which set in in 1969 continued in the first quarter of 1970.
Let me say, with regard to inflation generally and in particular to the references made by Senator Dunne quoting from something said by the Taoiseach yesterday about inflation having gone on for the past 30 years, that this is true, of course. It is my own belief that a certain amount of inflation is inevitable and is very possibly desirable, particularly in an economy where one is trying to achieve growth. I think it is desirable but, whether it is or not, it is inevitable. I should like Senators to understand that what we have been faced with in the past couple of years is not merely a small creeping inflation.
It is inflation at such an accelerating rate that it poses for us one of the most serious problems we could face. If it were allowed to go unchecked the rate of inflation would increase year by year and, ultimately, month by month; it could even come down to day by day, and of course, all that we have achieved in the past would simply disappear and the most widespread hardship and misery would spread throughout the community. But those who would suffer most, those who have suffered most already from what has happened, are the poor and the old and the ill and the weak sections of the community. The Budget endeavoured to try to do something to redress the balance in favour of those people, but we cannot contemplate—none of us can contemplate—with equanimity a situation in which this is going to continue, and continue at an increasing rate.
Exception was taken by Senator Owens and Senator Dunne to a statement which I made when speaking at the beginning of this debate on the grounds that it appeared to single out wage and salary increases as being the cause of inflation. I think these Senators will agree—and, indeed, I think Senator Dunne said as much—that that was not precisely what I said but that it was the implication of what I said. I want to establish, first of all, that when I referred to income increases those included income increases of all kinds. Senator Dunne is right in saying that I laid more emphasis on wage and salary increases. I did so for good reason. As he rightly pointed out, there are a number of factors involved in inflation, and certainly wage and salary increases are not the only ones, but I do not think that we ought to fool ourselves as we have fooled ourselves in the past.
I think that the time has come when we have to be realistic and honest about this. Let us say what the trouble appears to be, and that is that they are a major factor in it. While this may not be as obvious as it should be, there are certain aspects of that which I hope will demonstrate the truth of what I am saying. If we take what has been happening, all this is tied in with the fact that if you have increases in costs of any kind, whether wages, salaries, profits or anything else in Ireland, there are increases in prices. Let us take first the situation about prices. Consumer prices rose by 4.7 per cent in 1968 and by 7½ per cent in 1969. The increase in the first two quarters of 1970 was 7 per cent over the corresponding period of 1969. For 1970 as a whole it is expected that the increase will not be less than in 1969.
Now it is true that taxation contributed to some extent to these price increases, but what I want to put to the House is this, that increased taxation, in large part, has been made necessary to cover the costs of pay increases in the public sector. In line with this burden on the economy at large it has also been made necessary to provide additional State support for agriculture according as non-agricultural income rose. The Government have accepted the obligation—this cannot be disputed by anybody—to try to ensure as far as they can that the gap between agricultural and non-agricultural incomes should not be widened, and, indeed, to go further and try to achieve some kind of equilibrium.
Directly arising out of price increases comes the question of increased pay for the public service, and this covers an awful lot of people—and increased contributions to agriculture to try, as I have said, to redress the imbalance between agricultural and non-agricultural incomes to some extent. This is a direct link between price increases and taxation which may not be very clear.
This gets us back to what is causing price increases. Some may say that it is a chicken and egg situation, that it is price increases that cause increased wage and salary demands, or that it is wage and salary demands that cause increased prices. I think that is to say, as some Senators have said, that the Government have failed to control prices and that this has led to demands for increased salaries and wages, is really to fool oneself. It is ignoring the basic causes of price increases.
The truth of the matter is that price controls exercised by the Government operate in relation to manufacturing industry very stringently. I know from personal experience as Minister for Industry and Commerce that in quite a number of cases the margin of profit of some Irish manufacturers is dangerously low. When I say "dangerously low" I mean those industries are in danger, because of inroads on their markets or for other reasons, of having to close down and of putting their workers out of employment. As Minister for Industry and Commerce, I was frequently faced with the dilemma of either allowing a price increase or of refusing it altogether or of reducing it, at the risk of causing that firm to close down and put its employees out of work.
I am making this point because it is frequently thought, or appears to be thought, that most industrialists are making enormous profits. I can say that none of the Irish industrialists serving the home market—they were the things with which I was concerned—is making enormous profits. Some of them are making satisfactory or even handsome profits but many are making dangerously low profits.
We can only exercise control in relation to unjustified price increases. If we try to control price increases which are justified, we can do it for a short time, but, ultimately, if we persist, we will close down the firm concerned. We, therefore, have to get back to the basic cause. This, as far as the vast majority are concerned, is increasing costs to industrialists, and the bulk of those increased costs arise out of wage and salary claims.
There is one aspect of this that is mathematically certain and obvious and yet seems to be forgotten. It is that if you increase your production by 6 per cent and if you increase your wages by 10 per cent, the value of that increase to the recipient is not 10 per cent but 6 per cent; and to the extent that you go over your increase in productivity, automatically the adjustment is made and you will find it works out every time, that the margin which is above productivity disappears, usually by way of price increases.
I must say I welcomed Senator Dunne's contribution, particularly in regard to incomes and prices, which I will come to in a moment. I realise that he and the vast majority of his colleagues in the trade union movement are reasonable, rational men who know what is happening. Indeed, this was underlined recently by the President of the Irish Congress of Trade Unions when he said:
I am perfectly willing to accept reduced increases in basic wages provided, but only provided, I can be assured of an increase in real wages.
Therein lies the truth of where we should be going. We know from our experience some years ago that some years when there were modest increases in wages and salaries they were real increases and there was no cost inflation. We increased our productivity, we became more competitive, we sold more abroad, we created more jobs and those who were working were better off. But because somewhere along the line we lost out on this and tried to go too far ahead, we got into a spiral at such an accelerating rate that it is leading us to perdition unless we do something about it.
This leads to another point made by Senator Dunne, whose contribution, as I have said, I welcome. I was aware of the position arising out of the annual conference of the Irish Congress of Trade Unions but I think the clarification of the position by a man in Senator Dunne's job was very welcome. He made it clear that as far as the trade union movement is concerned nothing could be further from the truth than to say they have rejected an incomes and prices policy. On the contrary, they have made it clear that they are anxious to have such a policy and have supported the idea, having expressed reservations about the proposals put forward.
Senator Dunne also made a very important point which I wish to underline. It is that the employer-labour conference exists, that it is working and that it can do a great deal of the job that must be done to get an incomes-prices policy off the ground. There are aspects of the NIEC proposals which are important, particularly in view of the fact that they envisage an examination of wages and salaries in the same context as an examination of prices and profits. This is an aspect of an incomes policy which is essential. It may be that the employer-labour conference operating on its own would not be able to do that, but I wish to make it quite clear that, as far as the Government and I are concerned, while we realise the value of the NIEC, and moved immediately to try to implement the recommendations, we realise that the machinery is not the important thing. The important thing is the achievement of a workable incomes and prices policy.
If the machinery proposed is found not to be acceptable, other machinery can be devised but the important thing is that we get such an incomes and prices policy in operation. It is very important—in fact, it is crucial—that it should happen quickly because the next few months are vital in this area. There are substantial wage agreements coming to hand and unless it can be ensured that the approach to the agreements to be concluded is in line with what is required by everybody in the country and particularly by the workers concerned, that is, an attack on inflation, we are going to be in the most serious trouble in the future.
Senator Dunne and, as I say, the vast majority of his colleagues in the trade union movement are very conscious of the fact that the interests of their members are threatened. I want to suggest that the time has come when an approach on the basis of "It may be right on one side but all I know is that prices are going up and I must be compensated for this" will not do any more because each one of us has seen for himself or herself what the consequences are. The value of money is decreasing. Workers think they are getting an increase but they find they are not. People on fixed incomes and, in some cases, social welfare recipients are suffering considerable hardship as a result of what is happening. This brings me to the question of what can be done about the situation. I must say that I agree fully with almost every word that was said by Senator Dunne in his contribution on this and I should like to say also that this whole question of the problem of housing and the problem of the cost of land for housing to which he referred is one that is receiving urgent consideration by the Government at the present time.
I want to put a proposition to Senator Dunne although I agree with virtually everything he said. He said that he would advise with all the forces at his command that the Government should not embark on or contemplate an enforced or an attempted enforced control of wages and incomes by way of legislation. I want to make it clear that the Government certainly do not contemplate lightly any such action. No government would. Senator Dunne said this operates only in countries which have ideologies that are an anathema to us. He is right in that but it operates in another situation also. It operates in free and democratic societies where a country is at war or in grave emergency. I want to suggest that the inflationary situation in this country is now such that we can regard ourselves as being in a battle for survival which all must wage. We might almost regard ourselves as being at war because the consequences for this country are as bad as if we were fighting a war that we were going to lose. It affects every man, woman and child in the country. I suggest that in this battle those who are working against the national interests—and there are such people although there are not very many—should be identified and exposed. This can be done only if the rest of the community, that is the vast majority of the community, will indicate clearly that they have had enough of inflation and that they have had enough of people using brute force to jack up their position to the detriment of everybody else.