I am as conscious as any other Senator rising to speak of the fact that the Minister only got a rest last night after 48 hours. He came to the Seanad yesterday, after 23 hours continuous discussion in the Dáil on this measure before us. There is hardly any argument that he has not heard before on the items contained in this Bill. I do not claim to be original and for that reason, I shall concentrate on the economic background to the budget, which obviously must have influenced the Minister's and the Government's thinking in framing it and which has dominated this debate from the beginning. The detailed examination of the Bill can remain until the Committee Stage.
I should like to look at the economic background for two reasons. Firstly, because of the extraordinary introduction to the Opposition's case by Senator Lenihan, which I shall deal with later. Secondly, because I want to direct some critical remarks towards the Central Bank and, in particular, to its annual report for 1973-74.
No matter which side of the House we belong to, we must accept—and I am sure the Opposition must accept the point in private, if they will not admit to it in public—that since the Second World War there has not been a more difficult international economic situation. This has been caused by two totally different yet converging tendencies. In the first place there has been inflation caused by world food shortages and an exploding demand for commodities; in the second place by the more recent upheaval in oil and energy prices. It is true that one preceded the other by a period of about two years. There is hardly a commodity or a food in which the world trades for which prices are not now about 200 per cent to 300 per cent higher than they were in the corresponding period last year. These have had their impact on the domestic prices within every single economy throughout the world. AsThe Economist remarked during the past few weeks, inflation within many economies literally depends upon a very ancient aspect in the affairs of man, namely, whether or not there will be a good or a bad harvest this year. One can almost share Mr. Breznev's anxiety that there should be a good Russian harvest. If there is not, that is going to have its impact here in Ireland in terms of imported inflation such is the degree of interdependence of world economy today.
Secondly, there is the question of the sudden and sharp reversal in terms of trade between ourselves and the oil-producing countries and this represents a significant shift in the balance of advantage towards them. It not only reflects a transfer of resources from us to them, but it also means a deterioration in the balance of payments situation of every economy which depends on the importation of oil as a source of energy. In addition to the detrimental effect of the balance of payments it, of course, had its own impact on the inflationary spiral because oil is not only to be regarded as a source of energy. As a source of energy it finds its way into the costs of production of practically every manufacturing industry, whether that industry uses electricity or oil. It is also a raw material in the sense that it is used as the base product for fertilisers which, therefore, affects food prices, and it also affects the plastics industry for which it is a basic raw material.
There is no point in laying at the Government's feet responsibility for a feeling of instability. There is instability everywhere in the world today. The thing to do in this situation is to keep one's head. It is the task of governments, particularly in the western economies, to maintain a sense of proportion, to recognise the problem for what it is, not to panic and to carry their peoples through a very difficult time. We must give an opportunity to the world economy to settle back into a more stable system of trading relations. They are not going to be the same trading relations as existed 18 months ago; they will be different. They will lie more in terms of advantage of the Third and the developing countries.
In some ways that is not a bad thing but we have to pay the price of this change and the price we have to pay is a certain lowering in our own standard of living and the continuation of inflation for some time.
As I have said, we must permit world trading relationships to settle into a new pattern. In my view that will take about four or five years. For that reason I would argue most vehemently against any course of action that would seek to redress, in too short a period, the undoubted shock we have received in terms of trade and the impact that has had on our balance of payments.
I take the point of the Central Bank that it would be imprudent to ignore in the long run this deterioration in the terms of trade, and of its impact upon the balance of payments. But I would equally argue that it would be totally imprudent to try to remedy the situation within 12 months or 18 months. The shock that would be administered to the domestic economy would be too severe and too sudden. It would be fatal if the monetary policy and the budgetary policy, of this country, and of other developed economies, were all employed together at the one time in an attempt to deal with inflation, and, if at the same time, they were also trying to deal with balance of payments deficits by cut backs in public and private expenditures. If that happens then they will most assuredly export to each other, not products or services, but unemployment. The Central Bank makes the point in their report that if one single major economy were to take upon itself the task of countering the inflationary spiral then, perhaps, the smaller dependent secondary economies such as ourselves might have a more rosy economic future. They mentioned the case of the United States as perhaps being the leader. That is a good argument but it should not apply, even by implication, to us.
One is also conscious of the fact that we are part of the European Community and within that Community the major economy, Germany, even though it is governed by a party with which we have fraternal associations, is at the moment pursuing, in my view, the wrong economic policy even internally, and certainly for the rest of Europe. Our degree of interdependence with the EEC means that the rate of economic progress in the UK, France, Italy, and, particularly, in Germany will determine our own rate of economic progress. The Germans have, for the reason of maintaining, as they see it, inflation at an acceptable level which to them is about 7½ per cent, deflated their own economy and this is having a detrimental effect on the rest of us. This fact bears out the warning I have just given against panic deflation of the world's governments.
The current temptation is to resort to demand control as an instrument of monetary policy in the belief that demand control can effect inflation. I do not think that policy is valid at the moment. I do not think there is any economist as I said before, in relation to the budget and other economic matters, who can adequately explain at the moment what is causing inflation. Reference to the current issue of the world's theoretically premier economic journal, would show that there is an exchange of notes in theEconomic Journal between leading economists as to the nature of hyper-inflation and great evidence of confusion amongst them as to what constitutes its basis. For that reason it would be wrong to resort to what were previously prescribed as classical remedies for inflation, in particular, demand control and the use of the budget as a means of regulating aggregate demand.
The Central Bank criticises the budget of last year, and the previous year, for deficit spending and, by implication, they are admonishing a warning by advising the Government against the repetition of such a policy next year in the belief that keeping a budget in surplus or in equilibrium will have a counter inflationary effect.
It is interesting to note that the chief economic adviser to the Treasury in Britain is arguing the opposite before the House of Commons Estimate Committee and saying that in his view they do not know for certain what is happening. He has said that it may be, perhaps, that the Phillips Curve, upon which much economic policy has been based, has not only gone out of operation but has reversed itself into mirror image and that therefore, Government policy, based upon it, may be doing the opposite to what the policy makers intend it to do. That is why there is a danger of using old prescriptions for what is a new problem.
Apart from inflation we have also to deal with the question of the balance of payments because the budget plays an important role in adding to aggregate demand which, in our case, adds to the balance of payments deficit because of our high propensity to import. Hence the Central Bank's aversion to Budget deficits. We have to make the distinction, which is now being made, but which was not made by Senator Lenihan, between the oil deficit and the non-oil deficit. We cannot look at the total deficit in the balance of payments and say that because last year it was £60 million or £70 million for a particular country and because this year it is £200 million therefore that country is going on the financial rocks, if in the meantime, the oil bill for that country has gone up by £120 million or £130 million.
There is no developed economy that has not suffered this particular trend in its balance of payments. What we, and the western economies have to do is to try to recycle the amount of extra money we are now expending on the same volume of oil imports, through deals with the Arabs, if they are willing to play that game and if they are willing to recognise that their own self-interest lies in that direction. It is assuredly not in their self-interest to permit the western economies to come tumbling down because of monetary constraints imposed by their unilateral price increase for oil and energy products.
It was wrong for Senator Lenihan, the Fianna Fáil Party, and the economic commentators who agree with them, to try to develop a sense of panic because of the increase in the balance of payments which is primarily brought about by the increase in the price of energy and which is also brought about by the increase in industrial products which are also consequential upon the increase in energy. If for this year we are to have from £250 million to £300 million deficit we are doing well when one considers that of that deficit the oil deficit could account for approximately £100 million to £150 million.
That money represents a shift in resources to the oil producing nations, particularly the Arabs and it is money out of our pockets. In my view we must do two things to offset this loss of demand. We must not pursue a policy of panic in relation to the balance of payments deficit, and, secondly, we must in the short run insist that that money is replaced in the domestic economy so as to maintain our own living standards. I know that it is impossible in the long run to ignore the fact that this shift in resources has occurred and will persist. But until such time as the public becomes conscious and aware of this particular fact any government and any democracy runs the danger of imposing, too quickly, the effects of this shift in the trade of oil and energy. If we do not ease gradually into this new situation our standard of living will fall too precipitately with serious political side effects. That £100 million to £150 million can only be replaced by external borrowing and it must be replaced otherwise internal aggregate demand will fall and what is of more importance to me, jobs will disappear.
I disagree therefore with the Central Bank in their criticism of the Government's policy on foreign borrowing. What is the alternative to foreign borrowing at the moment except a diminution in demand and an increase in unemployment? An increase in unemployment for whom? For the economists of the Central Bank or for the other exponents of orthodox conservative economic thinking who usually hold secure jobs; or unemployment for people who work in manufacturing and service industries, the working class people? That is for whom the unemployment is prescribed as a remedy when one talks about these logical categories of "inflation", "balance of payments deficits",et cetera.
The prescription is contained in page 9 of the Central Bank Report. It is an interesting one. I quote:
Those interests who, in an unqualified way,
——It is an interesting shaft at one's opponent that he speaks in an unqualified way——
advocate expansion of public expenditure, foreign borrowing and bank credit in the immediate interests of economic growth and employment would do well to keep in mind that an expansionary policy can lead only to disaster if it is pursued to the point of accelerating the relative increase in domestic costs and prices——
The Central Bank have a responsibility to spell out for us what they mean by disaster and to quantify it and to place the parameters upon Government policy in terms of inflation and balance of payments deficit, and to balance that off in an equation with increase in unemployment. The Central Bank stated that inflation can be tackled in a certain way and it is always interesting that inflation is to be tackled in a way which leads to unemployment. But the first priority of economic policy, and the budget and this Bill, which is a means of giving expression to that policy, must be to protect and sustain employment. It is that priority which is expressed in the Government's 14-points, a programme upon which this Government is founded. At the moment the choice is between inflation and employment, and inflation and unemployment.
This is a stark choice. It is madness to think that we, as a small open economy, can control inflation by an incomes policy, demand restriction and unemployment because no matter what we do as an economy we will have imported inflation which will be unacceptable in terms of what went before in terms of price increases.
The Central Bank advert to the fact that 50 per cent of our inflation last year was caused by domestic factors. The bank have traditionally attacked, and, because of what they represent will continue to attack, incomes as a main cause for inflation. We should remember, that we in this House, and in the other House, were brought in by the Minister for Labour to give effect to a Bill with limited income increases in the banking industry last year, and that the Minister has had to refer to the Labour Court an agreement recently made by the banking industry with their own employees as possibly being outside the scope of the national wage agreement. Could I suggest to the Central Bank, as the people who see themselves as controlling the banking industry, that they would put their own house in order before they direct their critical shafts elsewhere?
It is argued by them that external inflation counts for only 50 per cent of total inflation and that we are responsible for 50 per cent of domestic inflation. Yet the Central Bank do make the point, and do not appear to follow it through logically, that there is at the moment in our wage demands an anticipation of inflation that is about to happen. In other words if one begins to import inflation then wage and salary earners anticipate that this will continue to happen and they will add that element into their own wage demands. Therefore, while it eventually works its way into the economy as a domestic element of inflation, it is in the first place triggered off and caused by external inflation. It is madness to think that workers and salary earners are not going to behave in this fashion.
One recipe of the Central Bank for controlling inflation is given on page 10 of their report, and they use a model built by the National Institute of Economic and Social Research in Britain. It runs as follows:
... if import prices were to increase from now on by 10 per cent per annum, and productivity by 4 per cent, but wages and salaries, after the expiry of the current National Pay Agreement, were to rise only at the same rate each quarter as prices had risen in the previous quarter, the rate of price inflation in Ireland could be reduced to less than 7 per cent for 1976.
That is a very attractive formula. I heard it before when Fianna Fáil were in Government and we were in Opposition. What does it mean precisely? It means a standstill in the living standards of wage and salary earners since prices are to pace wage increases. It means that the 4 per cent productivity increase is to be used by other sectors of the economy and there is to be no increase in the real incomes for the working class people.
What about profits, dividends, professional fees and other earnings? There is to be no limitation on them. This, of course, is the old problem of dealing with an incomes policy, which inevitably degenerates into a wage and salaries policy, in other words control of people who can be dealt with because their incomes are known and therefore controllable.
What the Central Bank are saying here is that the benefits of productivity are not to be shared equally throughout the economy and so there will be a shift in the distribution of wealth within the domestic economy to the disadvantage of salary and wage earners. This is not acceptable. I do not believe it would be acceptable to the Labour movement and it is not on politically and it would be an unwise adventure, an unwise excursion for any Government into the realms of statutory incomes policy along the lines therein indicated. We have just seen what has happened in the UK and of the fate of a Government who attempted a statutory policy and the fate of the economy where the attempt was carried out.
Inflation is indeed a major political as well as an economic problem. I take the point of the Central Bank that in certain respects it is a threat even to democracy because it upsets the balance of aspirations and of what is achievable. It sets up social stress and strains. It is a danger and the Government do not need to be reminded of its seriousness. It is fair to state that for example the Government's policy of price control is having an effect, and that since the Government took office, we have reached a position of some improvement in the international league tables.
I am quoting from OECD sources using the OECD Main Economic Indicators for June, 1972, 1973 and 1974 and the Central Statistics Office. By reference to the international rate of price increases we were the fourth highest out of 22 in 1972 and for the last year of Fianna Fáil Government we were the third highest out of 23. For our first full year in office we were eighth out of 23. These are the independent sources given by OECD and the CSO. I admit this is not an acceptable rate compared to what one had before, but at least Government policy is having this discernible effect on the rate of price inflation and is an indication of their determination to ameliorate its worst effects.
In view of what Senator Dolan stated about the use by the Government of the impact of oil upon the economy as a source of inflation and that we were using it as an excuse for inaction, it is instructive to turn to the table on page 18 of the Central Bank report, to which he had the same access as I had. There one can read the analysis of the consumer price index and compare the second quarter of 1973 with the second quarter of 1974. One can take the elements of the consumer price index that are directly referrable to increased energy costs. In the first case fuel and light, and in the second case, transport. Both of those elements accounted for only 8 per cent of the CPI in the second quarter of 1973 but they had gone up to a combined 31 per cent in the second quarter of 1974, an increase of 400 per cent in their contribution to the total price rise. In the same period, food had dropped from 55 per cent of the total price increase down to 22 per cent. This is a startling indication of the impact, quantified here by the Central Bank, which increased energy costs have had upon domestic prices; so startling, in fact, that the Central Bank have referred to it, not only by way of table but also by way of commentary in the section dealing with the national economy, beginning on page 17. The fact is that the increased cost of oil is fuelling inflation at an alarming rate. Public life and public debate on the issue of inflation would be well served if we all used fact rather than fantasy as is the wont of the Fianna Fáil Opposition.
Budgetary policy, in relation to the economy this year, was correct. Growth, which means increased employment, was the correct objective. Growth that can be directly translated into employment must be paramount but we have to take account of the unique world economic situation at the moment. I recognise in the Opposition party men who at least had the honesty to recognise this danger in private, if not the courage to admit to it publicly.
I wish to refer to the OECD Economic Outlook, July, 1974, published on the 24th of this month, which will put the situation into some perspective, particularly in the light of Senator Lenihan's extraordinary contribution, at the beginning of this debate. According to the OECD. I am quoting from tables on pages 9 and 10 of their report, the United States economy is expected in the present year not to show a positive growth rate, not even a modest 1 or 2 per cent, not even a standstill but is expected to decline by a ½ per cent.
The economy which has been the centrepiece, and the cause of much admiration amongst economists and policy makers, that of Japan, having shown a growth rate last year of over 10 per cent, is expected, in the current year, to show a decline of 1½ per cent. More ominously still, the economy upon which so much of our own growth depends, the United Kingdom, shows a forecasted decrease of 2 per cent. The whole of the OECD is expected to grow by no more than 1 per cent. This is a particularly gloomy economic outlook for the western world, the developed economies of the world. If one takes out of that the component of the EEC economies, one finds that for them there is an expected total growth rate of 2½ per cent. That places in proper perspective the expectations for the Irish economy under the budgetary policy of this Government. I am not quoting from the Minister or any domestic source but from the OECD. They give here the expected growth rate of 3½ per cent for the Irish economy—one of the highest in the western world.
It is that forecast for this present year, which I might concede is even a little too high which was ignored by the Opposition——