This Finance Bill now under discussion is a very elaborate and complicated Bill. It must be the longest Finance Bill that we have ever had before us with its 98 sections and 11 schedules. Yet, in spite of this complexity and, certainly, the complexity of some of the sections, which baffle my imagination at any rate, it does in many ways fail to meet the real needs of the country.
The Taoiseach in his introductory speech listed three main national problems with which the budget intended to deal. Two of these are the very directly related problems of unemployment and the rise in gross national product and national income. The two go together. This budget, particularly with respect to the capital programme which the Government had the wisdom to take over unchanged from the previous Government, should do something to help in these respects. The budget, in other ways, may reduce the possibility of increasing the cost-of-living and increasing the number at work. Other aspects of the budget may counteract some of the good which has been done.
The greatest single failure in the budget is the third aim mentioned by the Taoiseach, the problem of inflation. He mentions this as a problem which needs to be dealt with but that is the last reference to it. That is not surprising because this is, in most respects, a completely inflationary budget. A large number of its provisions would seem to have been almost guaranteed, almost intended, to increase the dangers of inflation in our conditions.
However, there are matters which one can welcome, in particular, the social welfare charges. We all welcome these and are happy that it has been possible in 1973 to carry these out. They should do a great deal to help the poorer sections of the population. I suppose it is hardly necessary to mention again—it has been mentioned very often both in the other House and here—that these social welfare improvements were first mentioned to the public well over a year ago during the referendum campaign before our entry into the European Economic Communities.
It is amusing to listen to Senators opposite, Members of the Labour Party, welcoming these welfare changes when one considers that over a period of months many of them, perhaps all of them, were urging the people of Ireland not to join the EEC. It is directly as a result of our entry into the EEC that these changes have become possible.
The Minister for Finance in introducing the budget in the Dáil appreciated, as a good politician, that he was faced with the problem that it is not very easy to claim these considerable social welfare improvements as an achievement of his own, or of this present Coalition Government, in view of the fact that Fianna Fáil and Fine Gael, over a year ago, had pointed out to the electorate in the referendum campaign that these benefits would be available on our entry into the EEC. The Minister sought to avoid this problem by saying in his budget speech, as he put it in his colourful way, that the so-called EEC savings had been sunk without trace in a sea of inflation. Later on, in the debate in the Dáil on 13th June, column 405 of the Official Report, he produced the colourful information that "the Fianna Fáil Party had made off with £29 million, misapplied and misspent, before this Government took office".
One has visions of a great train robbery on a gigantic scale. Of course, the trouble with the Minister for Finance's off-the-cuff pronouncements of this kind is that they do not always tally with what he has, and reads out, from his Civil Service brief. We had this £29 million which Fianna Fáil misapplied, misspent and made off with before there ever was an election. Yet we find in his budget speech, at column 1244 of the official Report, having listed the various savings on the agricultural estimates as a result of our entry into the EEC, he said:
In sum, taking account of the items I have mentioned, the net Exchequer gain on the current budget in 1973-74 from EEC membership is estimated to be of the order of £29 million.
This £29 million, which had been misapplied and misspent by Fianna Fáil, reappears in his official brief which he read out in the course of his budget statement.
Nonetheless, we certainly welcome the appearance in the budget of these social welfare changes as we also welcome the rather limited reliefs in death duties, reliefs which were considerably lessened in their usefulness by the unwise decision to double the succession and legacy duties. There are also in the budget a number of changes, mostly very minor, in tax law. I have already mentioned some of these sections of a quite incredible complexity.
Amidst all of this verbiage in this very long Bill, there are, alas, only minor improvements in income tax allowances, and no change at all in basic rates. Most of the remainder of the Bill lists, section after section, and part after part, at unprecedented length, increased taxes. We had the increased taxes on VAT which I will deal with later, bringing in £5 million extra to the Government in a full year; taxes on alcohol, tobacco and on almost everything relating to motor cars. These taxes relate, not merely to cars but to driving licences, and a new tax is to be levied the first time a car is taxed. There are also increased fees for driving tests.
We had very stiff increases, not in the budget but as part of the budgetary programme, in post office and telephone charges. In the last couple of days, as a sort of supplementary budget for the benefit of the Irish public, we had this extraordinary business of the CIE rises. As Senator Browne has already pointed out, we had the extraordinary situation of the Government, instead of as one would expect, accepting the recommendations of the National Prices Commission or even cutting down on the rises allowed by them, rejecting them in order to instruct CIE to impose higher increases on the Irish public than the Commission had seen fit to recommend.
The greatest single flaw in the budget is that it does nothing whatever to deal with inflation. The Minister, in his budget speech, gave this as one of the main aims of the budget. The Taoiseach has referred to inflation as a problem which must be dealt with, and yet the budget does nothing to deal with it and in many ways adds greatly to the inflation danger in the coming 12 months.
It is a difficult task for us in Ireland to deal with inflation. For one thing, as a very open society and open economy, no Government can do anything to deal with increased prices of goods imported from abroad. We must balance, in our economic circumstances, the drive for more jobs and for economic expansion generally. We must keep a delicate balance between this need and the danger of increasing inflation still further.
The budget increase in capital spending succeeds in preserving this balance. Quite obviously, the increase in spending on a wide variety of capital schemes is calculated to increase inflation. It puts more money into circulation and will obviously increase imports and put pressures on prices. The Government were justified in preserving the capital programme which they inherited because the inflationary effects of this programme, and there will be inflationary effects, would seem to be justified by the extra jobs and incomes which will be provided.
The planned deficit of £40 million in this budget is another matter. What will be the effect of this decision by the Government to unbalance the budget to the enormous extent of £40 million in this year? The first obvious effect one can think of is that it will cost about £4 million each year for many years to come simply to service the debt we are incurring as a result of this budget, incurring not in order to build houses, or hospitals, or roads, or public facilities of any kind, but to balance the budget by borrowing £40 million. This £4 million if used in another way could have done a great deal to improve still further the position of the old age pensioner or other social welfare classes.
More important than the actual cost of servicing the debt, which will not end this year but will continue for years to come as a result of the deficit for 1973-74, will be the increase in the Government's already considerable financial problems. In this budget the Government have rightly increased very much spending on the capital programme. Finding the money for this will be difficult. It can be obtained to a limited extent from the banks or through public loans, but it seems probable that a considerable amount will have to be borrowed abroad. This is by far the most expensive way in which one can borrow since there is no consequential gain to the Government, as there is if they borrow at home, from income tax on the interest. It will add greatly to the Government's problems in borrowing money this year and will also add to the banks' problems in providing the finance.
We already have the situation where the banks during the past few months have been cutting down in every possible way on credit. We have a considerable credit squeeze on the way and in this respect I do wish our banking system could order their business in a more coherent way. We had a sitution up to last February when, apparently under instructions from the Central Bank, bank managers were writing to their customers asking if they would like more money. Quite suddenly there is a shift of gear and everything goes into reverse; bank managers say they have no money even for obviously useful productive purposes. They say the amounts they can produce are very limited and they insist clients pay back overdrafts, et cetera. It appears likely that, as a result of the problems which will exist in financing the State programme under this budget, the amount of finance available to the public will be even less than it has been during the past few months and this deficit will quite unnecessarily complicate that problem still further.
A planned deficit on an annual budget is not necessarily a bad thing. There are clearly circumstances in which such a deficit can be useful. Last year, when a much smaller deficit was decided upon by the former Government, the circumstances were such that it was a wise move. There was a big need for increased employment to increase the rate of expansion of incomes. This year the necessity is somewhat less. Real incomes are likely to increase considerably more this year and unemployment is falling; while the situation is obviously by no means satisfactory, it is improving and, therefore, the need for a deficit is less than it was last year. Whatever about the rights and wrongs of a planned deficit in the budget—and there are certain circumstances when it can be useful—there is no excuse at all for a Government unbalancing their budget for purely political reasons.
One gets a strong impression that in this budget there was no question of deciding upon a £40 million deficit for any genuine economic reason. One feels that, when the Government had assembled the various things they felt had to be done arising out of election promises—election promises which in many respects were very unwise— counted the cost of these, and collected together all the innumerable forms of new taxation listed in this budget and totted all the figures, they discovered they were £40 million short, so they decided upon a planned deficit. There is no excuse in any circumstances for running a deficit for political reasons. All Governments wish to be able to give benefits but, at the same time, are afraid to impose taxation needed to pay for them.
One also gets the impression from some of the remarks of Ministers during recent weeks that they hope the deficit will end up at less than £40 million. They appear to be relying, or counting, on a continued and perhaps an increasing rate of inflation which automatically will cut down this deficit. They could be right in that as, apart from the other inflationary aspects of the budget, the deficit will certainly contribute to increased inflation.
The most inflationary single aspect of the budget clearly is the changes made in VAT. These were totally misconceived and were the result of reckless and extremely foolish election promises. Inflation is the most serious single economic problem we have to face. It is not simply that prices are rising at the rate of around 12 per cent each year because, to some extent, people can be cushioned against that; social welfare classes can have their social welfare payments increased as, indeed, they have been. The workers will ensure that in the next wage round their wages are increased sufficiently to cover the increased cost of living. Farmers will be able to keep abreast, but there are those who are retired or living on fixed incomes who cannot catch up on inflation. The greatest single danger in the present situation is that, once you get to a certain point, it becomes almost impossible to reverse the course of inflation; it has now reached the unprecedented rate of 12 per cent a year and the entire economic progress of the country, on which so much is being spent and into which so much effort is being put, may be endangered if we do not do something about the inflationary situation.
That is why these changes in VAT have been so unwise. The taking of VAT off food was an election promise by the Coalition Government which in itself was tied in with the promise referred to by Senator Browne and other Senators that prices would be stabilised, with the hint that they might fall. Time will tell whether food prices will fall in September when the VAT of 5.26 per cent is taken off food. Whether they fall or not it will be very, very difficult to police all the thousands upon thousands of shops throughout the country to make sure that, here and there, there are not ill-disposed shopkeepers who may not give the 5 per cent, or who may give only part of the 5 per cent back to the public. Whatever about that, it is more than likely that continuing inflation will in the end leave the public paying just as much as before.
Between February and May this year food prices, according to official figures, rose by 5.2 per cent. In three months they rose by more than the notional 5 per cent by which it is hoped they may fall as a result of the VAT changes in September. One thing is certain: whether or not food prices fall in September, all other prices will rise. It is very doubtful if the rises can be kept down to the amounts of increased VAT. The whole situation may cause something in the nature of a price explosion.
The Minister for Industry and Commerce has promised that he will have inspectors out to see that the 5 per cent fall in food prices takes place, but the problem is not a matter of merely checking food prices. Prices of every single commodity in every single shop and supermarket in the country will have to be policed because, on the one hand, you have to see that the price of food comes down and, on the other hand, that the price of everything else does not go up by more than the increased level of VAT. It seems to be an utterly impossible task and I cannot conceive how, where you have increases of a penny or twopence on a pound here and a pound there on all these commodities, they can possibly be controlled. The whole exercise is an almost guaranteed way of increasing the trend of inflation.
This promise to take VAT off food was misconceived in many ways. It was misconceived, as I have mentioned, because of the impossibility of ensuring that it will work out in the way its sponsors might hope. It was misconceived also because, while food is essential and you cannot live without eating, it is obvious that no household lives only on food. There is a very large number of other commodities which are also essential such as shoes, clothing, food and light, and all the hundred and one items that any household has to buy in any week. You would think in talking about food as a vital necessity that we were talking about some kind of survival kit that one might need if one were stranded on a South Sea island. We are not talking about a starving man in the middle of a desert. We are talking about ordinary Irish households. We are talking about the things that the ordinary man and woman in the street buy each day and each week for themselves and for their families.
There are certain types of households who spend a particularly high proportion of their incomes on food. There are people on social welfare, there are people with very large families, who have to spend the greater part of their income on foodstuffs. but one would have thought that the sensible way to approach this would be for the Government to cushion these classes against increases in the cost of food. Instead of trying to achieve this result, a result which might save a person on social welfare perhaps 40p a week in lower food prices, in this extraordinarily complicated way which is affecting the prices up or down—and more often up than down —of every single commodity, one would have thought that it would have been much easier and more sensible to cushion those who have to spend a high proportion of their incomes on food against rising prices.
While at the lowest rate of VAT many items are just as essential as food, such as, shoes, clothing, fuel and electricity, some of the so-called less essential items which are taxed now at 19.5 per cent are really just as vital and necessary as any others. What household can live without furniture, furnishings, cleaning materials, electrical equipment, hardware, holiday and sporting equipment? These are the kind of items ordinary people buy that are no longer in the luxury class. Even the so-called luxury goods are now charged at 36.75 per cent. What are these luxury goods? Basically, they are radios, television sets and motor cars.
I wonder if there is a household in the country that has not got a radio. I think it is very unlikely. Yet we are told this is a luxury with the implication that only the very wealthy buy one. I do not know what proportion of households has not got a television set, but I know that we now provide free television licences for old age pensioners. They are not the very wealthy but they will have to pay 36.75 per cent on any television set they buy. Can it be said that motor cars are a nonessential item which only the very wealthy own? It seems to me that, both in town and country, a very high proportion of people who are by no means wealthy have to buy a motor car and they will now have to pay 36.75 per cent.
In his budget speech the Minister for Finance, as reported at column 1261 of the Official Report, said in relation to these changes in VAT at the three different rates:
It has been decided to keep the increase as low as possible on the rate applicable to basic commodities and to increase to a greater extent the rates on other, less essential, items.
That sounds all right as a policy, but it is precisely what he has not done. The lowest rate, which was 5.26 per cent on the supposedly more basic commodities, has been increased to 6.75 per cent, an increase of 28.3 per cent. In other words, for every £100 that the Government take in in tax on these commodities, the increase will be 28.3 per cent. Taking the middle group, who are less basic according to the Minister but not in the so-called luxury class, the rates go up from 16.37 per cent to 19.5 per cent. That is a fraction under 20 per cent of an increase. Then the so-called luxury items, such as radio sets and televisions, go up from 30.26 per cent to 36.75 per cent, a rise of 21.4 per cent. In other words, the tax rise imposed by the Government is considerably higher on the basic more essential items than it is on the less basic more luxury items. The reason for this is clear because, since for more money is spent on these basic items than on the more luxury items, there is more money to be got in taxes out of them.
However, it is the exact opposite of what the Minister said he was doing. We now find the situation where the tax is being taken off food—prices may or may not go down but one hopes they will—but on the other items, which are for practical purposes just as essential as food to the ordinary household, a much higher increase in tax has been imposed than has been imposed on any of the others.
The total net effect of the changes in VAT is that the Government in a full year will get £5 million extra from consumers. In spite of the fact that that £5 million extra each year is to come from consumers on foot of VAT, the Minister has been able to claim—and no doubt as far as statistics go he is correct—that this will have the interesting result of a ½ per cent fall in the cost of living index. One wonders how that could be. It would seem to show quite clearly that the whole basis of the index is out of date. Since the index was originally prepared some ten years ago living standards have risen so much that items which were then counted as luxuries—such as motor cars—and which therefore were weighted very low in the cost of living index scales have now become a much higher proportion of household expenditure.
Nonetheless, if the Minister wishes to claim a technical fall of ½ per cent in the cost of living, he is welcome to it. The net result is that the Irish consumers are to pay £5 million extra a year. That is what really worries them more than the actual figure of the cost of living index. Even if it were to cause a ½ per cent fall in the cost of living, it seems ridiculous to cause so much difficulty and confusion, to create so many inflationary dangers for the entire community, for the sake of such an unimportant change. Except for food, the prices of everything in the country will be increased next September. Problems are being created quite unnecessarily for the trading community in having four rates of VAT where formerly there were only three. VAT is a complicated enough tax as it is but it is being made still more complicated, and unnecessarily so, by these changes.
There is a further problem created by this very unwise decision to take VAT off food. That is in our relations with the EEC. In regard to VAT, it is absolutely vital that there should be some degree of harmonisation in the nine countries of the EEC. Harmonisation is a great "in" word in community circles. One sometimes feels that the members of the Commission of the EEC must stay awake at nights wondering what next they can harmonise. One feels that some of their harmonisation proposals are a case of conformity gone mad, that they go to enormous lengths to produce documents of extraordinary complexity, create great problems for economic interests in the various countries, simply in order to have a situation in which they can say: "Isn't this grand now, motor car windscreens or designs for mopeds"—whatever it happens to be—"are the same now in the nine countries. That is another piece of harmonisation done."
The harmonisation of VAT is really, genuinely, an important and obviously vital thing to bring about. The whole concept of the Common Market as such is that you could start at one end of the Common Market and travel with goods through all the various national boundaries without having to be stopped by customs officials or fill up complicated documents and go through all the complicated ramifications which international trade so often requires. It is obvious that so long as you have these very big inequalities, or indeed any inequalities at all, between the rates of VAT and the methods of levying VAT in the different countries, it will still be necessary to maintain fleets of customs officials at the borders. I think I am correct in saying that since the EEC was formed instead of decreasing, the number of customs officials has increased. While there have been, in various ways, simplifications in the process of, say, bringing a lorry load of goods from France into Holland, at the same time because of these different rates of VAT there are still very great complications and there will remain very great complications until some degree of harmonisation has been carried out.
It should therefore be the aim of the Government, bearing in mind that ultimately we do not know when—it may be quite soon or it may not be for a bit longer—we will have to align our VAT rates with those of the other eight countries of the EEC. One would have thought that the Government would endeavour to see that whatever changes they made in VAT they did not, at any rate, bring us still further away from our continental colleagues. This is precisely what they have done.
The prevailing view in the original six countries of the EEC was that VAT should be an all-embracing tax, that it should include everything including food. The only two countries with zero rate food are now Britain and Ireland. We were both, a month or so ago, given a special but purely temporary permission to do this provided it was done before 1st January next, which of course is being done here. It was a temporary permission as the Minister admitted in his budget speech. At column 1262, Volume 265 of the Official Report, he said:
In joining the EEC we took upon ourselves certain commitments regarding the harmonisation of value-added taxes in the Community. As yet, however, the degree of harmonisation achieved by the EEC is not such as to preclude substantial differences in the rates and structure of VAT applied in the member states, and accordingly, in making the changes just announced, we are not in conflict with present Community legislation.
The pace and degree of the movement towards a Community-wide unification of the structure of the tax and, later still, towards a narrowing of the differences between the various national rates of tax are matters for discussion and agreement between the member States.
The Minister, in other words, admits that we are not in conflict with present Community legislation, there being a clear implication that we could be in conflict with future legislation. There is a kind of what could be described as a hope expressed at the end of that quotation that since, after all, these are matters for agreement between the various countries we could always refuse to change. I suppose we could have our power of veto if it came to the crunch. I think we would be extremely unwise to exercise such power on a matter of this kind.
We have all these extraordinary complications and dangers brought in by this decision to zero rate food without any real prospect that we will be able to maintain this situation for more than a relatively few years.
There is a further problem again related to the EEC. As I understand it, from the year 1975 on we will be expected, along with all the other countries of the EEC, to pay a maximum of 1 per cent of VAT to the funds of the EEC. This is not 1 per cent of the actual money raised on VAT. It is a complicated calculation which is to be on the whole tax base. We have this situation that something like £16 million a year of VAT is being taken off food. We would still be liable to pay 1 per cent of the retail price of all foods to the EEC. Therefore, something like £4 million a year will be liable to be paid by us to the EEC on food which we will not be taxing. This will be a further imposition on the Irish taxpayer. There will be a curious situation. Food is zero rated and still we will have to pay 1 per cent to the EEC. I think I am correct in saying that that will be the position.
The VAT election promise was a foolish one, but at least it was one which was possible to carry out. It will cause terrible complications, further inflation, a great deal of dissatisfaction among consumers, but technically it can be done, as we are doing it in this Finance Bill.
The promise on death duties made by the National Coalition during the election campaign was even more foolish because anyone with any sense could have told them at the time that it was impossible to carry it out in the form outlined. The Coalition made use of the traditional fear of Irish farmers of losing their land. We know that because of our history the Irish farmer, more so than farmers elsewhere in the world, have a horror of losing the family holding. The impact of death duties on Irish farms because of the recent very rapid rises in prices of land was far greater than the actual figures would have suggested. Every time a farmer died and the word went round the neighbourhood that the sons and daughters had to pay from £4,000 to £10,000 in death duties and there was a danger that the holding would have to be sold in order to pay this, a wave of horror went through the farming community. The Coalition, in what can only be described as an unscrupulous manner, took advantage of this natural fear based on the history of the Land War and all the other events which took place in rural Ireland during the past century or so. We need have very little doubt that it was an ineffective promise. We have a statement by the President of the Irish Farmers' Association in relation to death duties which was reported in The Irish Times of July 23rd and I quote:
.... This was, and still is, a burning issue, especially among the farming community. No topic has been so tested in recent times as has the removal of estate duty. Thousands and thousands of people attended meetings all over the country specially arranged to discuss this subject.
With regard to the promise of the Coalition he says:
These commitments, solemly given by the Coalition parties before the (General) Election, clearly influenced the outcome of same.
Having given this promise and having gained, possibly, decisive votes as a result of it, when they got into office and investigated the situation they realised what they should have realised long before: that the promise was simply impossible to carry out in the form outlined.
In this budget there are some reliefs —and they are welcome—in estate duties, but reliefs which do not go very far beyond merely levelling off the natural increase in land prices as a result of the very large increases in values of farmland in recent years. These reliefs will have a temporary affect. At the same time—and this certainly was not promised in their election campaign—they have doubled legacy and succession duties. In the election they specifically referred to death duties on property passed to a widow or to children, but nonetheless general impression was given—not many people, unfortunately, at elections read the small print—that all death duties were to be abolished. About 30 per cent of all farms are in the hands of widows who have no children or of people who are unmarried. These farms tend to be handed on to brothers, cousins or to other remote members of the family and these will be affected by legacy or succession duty or maybe both.
In spite of the reliefs given this year in estate duties—the Minister has put about the suggestion that these are of fundamental importance, that they are the greatest increases ever given—we find that there is something like £13 million taken in a full year in the various forms of death duty. The total saving to the taxpayer will be in the regions of £750,000 or about 6 per cent. With inflation running the way it is and in particular with land prices increasing at the rate they are, if a notional saving is only 6 per cent it is quite clear that the value of the property concerned will rise by far more than 6 per cent in the next year and that, therefore, the Government will end up at the end of this year's financial year with more money rather than with less.
The question of income tax was a very great disappointment to the public as a whole. There have been no changes in income tax allowances except for a very minor concession in relation to working wives. There was a time when the general impression was that only the better off members of the community were affected by income tax, but two influences have now created the situation that everyone is affected by income tax. First, with the increase in incomes people are better off and, therefore, many more people are in the income tax bracket than ever were before; and, secondly, because the allowances to taxpayers have gone nowhere near increasing over the years to keep pace with the fall in the value of money. Therefore, on both these counts everyone is being brought into the net. Mr. Donal Nevin, spokesman for the ICTU, on the day after the budget expressed grave dissatisfaction that there was no improvement in income tax allowances for wage and salary earners other than for the working wife.
I was rather startled to hear Senator Moynihan yesterday attacking Fianna Fáil rather violently for, as he put it, in 16 years never doing anything to increase income tax allowances. I have already mentioned that all Governments, including Fianna Fáil, have been responsible for the situation that over the years these allowances have not in any way kept pace with inflation. Nonetheless, it is fair to point out that last year there were very considerable improvements in income tax allowances. It was by far the greatest single easement of the income tax burden that has ever been put through. The allowance for single people was increased by £50 to £299, for widows by £50 to £324 for a married couple by £70 to £494 and there was a general increase of some £20 in child allowances at a total cost of £11 million. This was a very considerable improvement, and it may be that the memory of this is one of the reasons why there has been so much general disappointment over the complete absence for practical purposes of any changes in the income tax rates this year.
There is the budget concession to working wives, which the Minister for Finance says now means that the relief for a married couple is the same as two single people. This is only so where the joint income is less than £2,000. Once you pass £2,000 with a joint income for husband and wife, where the wife is working the wife or the household loses out. It is simply not correct to say that the situation of a married couple and two single people can be equalised. Nothing at all has been done for the wife does not go out to work, and, after all, this is by far the normal situation in Irish conditions, and you still have the situation that income tax allowances for a married couple are less than those for two single people.
There are many other matters which one could raise on the various sections of the Bill, but I will conclude by expressing pleasure particularly as regards the improvements in social welfare in the Bill, support for the considerable increase in capital spending, and regret at many of the other items this Bill contains.
