Finance Bill, 1981 [Certified Money Bill]: Second Stage.

Question proposed: "That the Bill be now read a Second Time."

The main purpose of this Bill is to give statutory effect to the taxation changes announced in this year's budget. In addition, statutory provisions are being introduced to improve the administration of our taxation system. The Bill provides for improvements in tax allowances, excise duty increases, concessions on farmer taxation and also the incentives for construction of rented residential accommodation, toll roads and bridges and multi-storey car parks which I referred to in my budget statement.

Before I itemise the provisions of the Bill, I would like to outline again the budget strategy which is being implemented by the Government. We have sought a balance between the obligation to reduce the budget deficit and the need to promote employment. It is essential that the deficit be reduced progressively and eliminated. A sudden and sharp reduction in the deficit, however, would have undesirable consequences so our purpose is to phase it down gradually. We have accepted the obligation to bring down the deficit and we are working towards this objective.

At the same time we have launched a programme of capital investment which surpasses all previous efforts to raise the productive capacity of the economy. The 1981 Investment Plan mobilises a total capital investment of more than £1,700 million this year. The emphasis is on strengthening our infrastructural services and this will produce two welcome benefits; in the short term it will provide a substantial boost to employment and, for the longer term, it will provide a firmer foundation for the development of the economy.

The budget strategy, therefore, is designed to support a high level of economic activity while at the same time imposing a greater discipline on our public finances. This is the only rational approach in a situation of severe international recession where we have to absorb a huge increase in energy costs and where several traditional employment opportunities have been lost. The alternatives were to continue spending without regard to the cost or to go to the other extreme and impose a rigid clampdown on public spending. Either of these courses of action would have most undesirable consequences.

Competitiveness at home and in international markets is a key requirement if we are to sustain a high level of growth and make the best possible use of the employment opportunities which are open to us. We have to lower our expectations and settle for a more modest rate of increase in incomes. As a contribution to this the Government have recently increased subsidies on a number of essential foodstuffs, and this will have a big impact on the cost of living index. In turn, the Government expect that this will be reflected in a moderation of income increases in the period ahead. We have the potential to recover much of the advantage in competitiveness that has been lost, provided we continue to improve productivity and adopt a prudent approach towards income increases.

The international economic outlook is now more hopeful than it has been for a considerable period. The general consensus is that there should be a gradual resumption of international growth in the second half of this year. Inflationary pressures are also expected to ease, and this will help to foster confidence and to underpin the economic revival. The EEC Commission expects that unemployment in the Community as a whole will continue to increase. The prospect of growing unemployment is unacceptable to this Government, and this is why we have acted to reinforce, by domestic action, the expected beneficial effect of the international upturn.

Our action has taken the form of a major fiscal stimulus to the economy, and this stimulus is coming through the massive increase in public investment provided for in our Investment Plan to which I have already referred. As a result, the EEC Commission predicts that our growth rate this year will be about 2 per cent which will be the second highest in the Community. It will also be higher than that forecast for the OECD area as a whole. We confidently expect that accompanying this growth the rate of employment creation will accelerate in the coming months.

Recent economic indicators show that the upturn in our economy is already well under way and that investment is increasing, the rise in the numbers unemployed has been halted and the numbers of short-time workers continue to fall. This is consistent with the very encouraging recent performance of industrial output. The volume of output of manufacturing industry, seasonally adjusted, rose by 11½ per cent in January and February, a faster rate of advance than in any other two month period since 1975. There are, therefore, solid grounds for optimism but, as I have already emphasised, we must be prepared to modify our expectations and accept that we do not have an entitlement to an uninterrupted improvement in living standards.

I now turn to the individual sections of the Bill. Section 1 provides for increases in the general and age exemption limits announced in the budget. The general exemption limit is increased from £1,700 to £2,000 for single and widowed persons and from £3,400 to £4,000 for married couples. The exemption limit is raised from £2,000 to £2,300 for single and widowed persons aged 65 years or more but under 75 years and from £4,000 to £4,600 for married couples in this category. Revised exemption limits of £2,800 for single and widowed persons and £5,600 for married couples will apply for those aged 75 years or over.

Section 2 and 3 also confirm budget proposals. They contain provisions for increases in the special PAYE allowance, the 35 per cent rate band, the one parent family allowance and a number of allowances for handicapped persons.

Section 4 ensures that certificates from officials of the Revenue Commissioners will be admissable as prima facie evidence in legal proceedings for the recovery of penalties under the PAYE Regulations and section 5 provides a statutory basis for apportioning marginal relief where a married couple elect for separate assessment.

Section 6 relates to the new mortgage subsidy scheme for first-time house purchases. Its purpose is to ensure that the subsidy plus income tax relief will not exceed the amount of the annual loan repayments.

Section 7 confirms that, in certain circumstances, tax must be deducted at the standard rate from payments made to sub-contractors by a person who is not a builder but whose business involves the manufacture, treatment or extraction of construction materials. This is to clarify the definition of construction and associated activities for the purposes of the sub-contractor legislation. The section also counters an avoidance device.

In section 8 the scheme of residence-related relief is extended for a further year and in section 9 the time limits for claiming specified reliefs are extended from one to two years.

Chapter II of the Bill provides for changes in the taxation of farming profits announced in the budget. During the course of my budget speech I said that technical discussions were taking place between farming organisations and the Revenue Commissioners on the question of income averaging for assessment purposes for farmers. Agreement on the details of such a system has since been reached and provision is now being made for its statutory implementation. In addition, I propose to provide for the tax exemption of the farming profits of charities.

Section 10 provides for an optional scheme of income averaging for full-time farmers. Under this scheme, tax liability in any year will be assessed on the average of profits for the previous three years. Once a farmer elects for averaging he will be assessed on that basis for a minimum of three years. After that period he may change at any stage but tax assessments for the two years preceding the final year of averaging will be subject to review.

Section 11 exempts from income tax the farming profits of charities with effect from the year 1974/75. Charities engaged in farming have generally been unable to show that they satisfy the existing conditions for exemption of trading profits of charities. I now propose that charities be exempted from tax on their farming profits where such profits are used solely for the purposes of the charity. This means that there will be no liability to tax in the normal course on farming profits of institutions such as schools and hospitals and religious communities.

The system for the payment of income tax by full-time farmers in two instalments which was introduced for 1980/81 is extended for a further year under section 12. The first instalment of tax for 1981/82 is payable on 1 October 1981, and the second on 1 January 1982.

Section 13 removes the restriction on stock relief for farmers under which relief is granted on the excess of stock over 10 per cent of farming profits. Increases in stock values will now be completely free of tax. Section 14, in Chapter III of this Bill, discontinues the resource tax with effect from 6 April 1981.

Chapter IV relates to corporation tax. In section 15 there are arrangements for bringing forward by three months the date for payment of the second instalment of corporation tax as proposed in the budget. I wish to emphasise again that there is no suggestion of any increase in tax. The change is designed simply to bring the timing of tax payments by companies more into line with the arrangements for other traders generally.

Section 16 is of a technical nature and it requires companies, when making returns of profits to the Revenue Commissioners, to include details of distributions received from other companies. This is necessary for the proper administration of the legislation on closely controlled companies and the 10 per cent rate of corporation tax for manufacturing industry,

Section 17 provides for an extension of the 10 per cent scheme to certain named activities. These are fish farming, cultivation of mushrooms, ship repairs, certain design and planning services and service operations at Shannon airport. In order to comply with EEC requirements, certain restrictions are provided for in the case of Shannon service companies.

The contents of Chapter V deal with a variety of different and mainly technical matters common to both income tax and corporation tax. Section 18 exempts from tax, payments out of the Employers' Temporary Subvention Fund which was set up last year under the terms of the national understanding. Section 19 closes a loophole in relation to tax-exemption of income from patented Irish inventions to ensure that, as was the intention of the original legislation, only inventions on which the underlying work is carried out in the state will qualify.

In section 20 provision is made for continuation of stock relief for a further year. Section 21 corrects an anomoly in relation to distributions out of income granted export sales relief, while section 22 ensures that as regards the tax charge on loans by closely-controlled companies to their participators, such companies do not obtain unduly favourable interest treatment where they default on payment.

Chapter VI introduces the measures, outlined in my budget statement, to encourage greater private sector investment in capital development. In order to have the immediate effect of stimulating new activity these allowances took effect as from the day after budget day. The allowances are framed so as to provide investment opportunities for the private sector and at the same time represent reasonable value for the State. They will run for a three-year period.

There is a Government commitment in the national understanding for arrangements to encourage rented housing and comprehensive re-development by private property funds in major urban areas. In line with this commitment I announced in my budget statement that a special new allowance of 100 per cent would be introduced in respect of expenditure of construction of moderate-cost rented residential accommodation.

This allowance, which is provided for under section 23, and which will be setoff against rental income, will be available in relation to houses and flats within the size limits specified in the Bill and for which a certificate of reasonable cost or a certificate of reasonable value has been granted by the Minister for the Environment. The maximum size limits are 125 square metres in respect of a house and 75 square metres in respect of a flat. The amount of expenditure allowable includes actual construction cost and site development, though not site acquisition costs.

Section 24 makes the allowance available in respect of expenditure on the conversion of certain existing property into two or more residential units. There is considerable interest in these tax incentives and I am confident that they will open the way for a big expansion of the rented accommodation sector and will make a most useful contribution to our housing programme.

Provision is also made for a positive incentive for the private sector in relation to the provision of multi-storey carparks, toll roads and bridges. Section 25 provides for a 50 per cent initial allowance and a 4 per cent annual allowance on expenditure on the construction of a multi-storey car-park. This allowance will be available under the normal rules, included in the Tax Acts, relating to industrial buildings allowances. For the purposes of the allowance a multi-storey car-park must be wholly in use for the provision of car parking facilities for the general public.

Section 26 provides for an allowance of 50 per cent in respect of capital expenditure incurred by a private sector interest as part of an agreement with a road authority for the provision of a toll-road or bridge. The allowance will be offset against the income accruing to the investor from such an agreement.

At present, the 50 per cent initial allowance in respect of industrial buildings is available only to persons leasing such buildings direct to industrialists. Section 27 extends this allowance to persons leasing such buildings to State-sponsored industrial promotion agencies for on-leasing by them to industrial occupants. The expansion of this allowance will, I believe, facilitate private sector investment in the provision of advance factories for industrial use.

On Report Stage of the Bill in Dáil Éireann two new sections — sections 28 and 29 — were introduced. These sections, which are incorporated in Chapter VII of the Bill, are designed to counter tax avoidance schemes in the land development area. As I explained in the Dáil, these schemes involve the operation of several artificial transactions between connected companies which are designed to deprive the Exchequer of the tax properly attributable to the profits derived from these developments.

The schemes are becoming more common and, if not stopped, they will result in a loss of many millions of pounds to the Exchequer. The Revenue Commissioners estimate that schemes either already in operation or in the course of preparation would, if successful, involve a tax loss of the order of £30 million. The measures now being introduced to curb this practice will apply in respect of accounting periods ending on or after 6 April 1981.

Part II of the Bill is concerned with customs and excise matters. Sections 30 to 36 confirm the budget increases in the excise duties on alcohol, tobacco products, hydrocarbon oils and television sets. Some further changes are also included in these sections.

I announced in the budget that I proposed to extend the excise duty on table waters to squashes and cordials, and this change is being made in section 37. The original intention was that the rate of duty would be linked to the dilution ratio. In the event this proved impracticable and, on Committee Stage of the Bill in Dáil Éireann, I introduced an amendment to provide that the ordinary rate of duty on table waters should apply to squashes and cordials generally irrespective of the dilution factor.

The present section also increases the rebate rate to manufacturers of table waters. The present rebate is 12.4 pence of the first 20,000 gallons and 6.2 pence on the next 80,000 gallons. It is proposed that, with effect from 1 March, a rate of 16 pence a gallon will apply to the first 40,000 gallons of production, and eight pence a gallon will apply to the next 80,000 gallons of production. This change will be of particular benefit to the smaller manufacturers.

Section 38 reduces the refreshment house licence from £50 to £10, with effect from 1 April. I am introducing this change in response to requests from small guesthouse owners who are anxious to have the opportunity to serve wine to their guests and who claim that the existing licensing requirements for this purpose are too expensive. Section 39 confirms an order whereby a small rebate of duty on beer was made in 1980 to brewers whose output for the home market did not exceed 175,000 standard barrels of beer in the preceeding year.

Section 40 and 41 are concerned with certain duties on motor vehicles. The budget day Financial Resolution increasing the annual registration charge on cars of 16 horse-power and under from £10 to £20 is confirmed. This increase is limited, however, to £16.50 in the case of taxis.

Part III of the Bill contains a number of value-added tax provisions. Section 43 applies the low building rate of 3 per cent backdated to the commencement of VAT to prefabricated structures such as garden sheds. In practice these structures have generally been charged at the 3 per cent rate rather than the standard 25 per cent rate, and the proposed new provision will confirm this.

Section 46 in Part IV of the Bill deals with the liability to capital acquisitions tax in the case of certain marriage settlements and provides that a grandchild will be deemed to be the child of the disponer in such instances, thereby obtaining a much higher tax threshold. I am introducing this concession in response to requests from the farming and legal bodies who submitted to me that the existing tax provisions impose an undue hardship in some marriage settlement cases.

Part V of the Bill is concerned with stamp duties and provides for the continuation of three stamp duty measures which were implemented by Government Orders in 1980. There is provision for changes in the legislation relating to conveyances made by way of sub-purchases in order to prevent the avoidance of duty by the abuse of certain reliefs.

The conditions for the granting of stamp duty exemption for new grant-type houses are amended in order to take account of changes in housing legislation, and the stamp duty increase on cheques from one penny to three pence is being confirmed.

The last part of the Bill, Part VI, contains a number of miscellaneous provisions.

This Bill encompasses a considerable number of changes which provide for a more equitable and more efficient system of taxation. I commend the Bill to the House.

I am unable to accept the Minister's commendation. I do not know how it is possible to reconcile some of the language in the Minister's speech with the facts as they are authoritatively prescribed or set forth. The Minister says there are solid grounds for optimism. The Central Bank in their report say:

Economic prospects for 1981 suggest that growth will be slow, unemployment will continue to rise for most of the year and inflation will remain at a high level. The balance-of-payments deficit, a cause of great concern for the last two years, will widen still further and probably amount to one-eighth of Gross National Product.

The Minister says, with regard to employment, that the rise in the numbers unemployed has been halted and the numbers of short-time workers continue to fall.

The Economic and Social Research Institute say the increase in unemployment that has occurred since January 1980 has been very large. Seasonally corrected, unemployment has continued to rise without interruption. There has also been a very big increase in systematic short-time working — the majority of which is concentrated in manufacturing industry. The poor growth expected this year would not suggest any reduction in unemployment on average. The Minister says it is essential that the deficit be progressively reduced and eliminated. In the Economic and Social Research Institute account of the year 1980, the current deficit is given at £547 million. Earlier in May the Minister said it was essential that the deficit be progressively reduced and eliminated, but the Economic and Social Research Institute say the deficit of £547 million is forecast to increase to £755 million. The Economic and Social Research Institute have no ambition to get re-elected. Neither have the Central Bank.

The Minister discovers grounds for optimism. The Taoiseach addressing the nation on 9 January last year said:

But taking us all together, we have been living at a rate which is simply not justified by the amount of goods and services we are producing. To make up the difference, we have been borrowing enormous amounts of money, borrowing at a rate which just cannot continue. A few simple figures will make this very clear.

He gave these simple figures. In 1979 the shortfall was £520 million and we had to borrow in that year over £1,000 million. That amount is equal to one-seventh of our entire national output for the year. He said it was far too high a rate and could not possibly continue. It continued and increased and, instead of eliminating the borrowings, we are going into a year in which prospective borrowing is going to increase very significantly. The Exchequer borrowing for 1979 was at £1,009 million or 14 per cent of gross national product. In 1980 the manifesto which was issued to precede the document which, no doubt, will be issued this week or next, told us in that year the proportion of the gross national product that would be borrowed would be 8 per cent. The actual figure as determined in relation to that year by the institute was not 8 per cent but almost twice it, 14.7 per cent. In respect of this year, in which the Minister tells us that the deficit must be progressively reduced and eliminated, it is proposed to borrow £1,735 million or 17.2 per cent of the gross national product.

The Minister for Finance who preceded the present Minister for Finance, the second of the three Ministers for Finance we have had so far told us that he was going to curb the deficit. He was going to resist increases in Estimates and severely restrict them. We know the result. The really terrible feature of our situation is that the Minister for Finance, in a Government which has been selected by the people with a massive majority, has totally failed in his duty. He has completely failed to control the public finances. Anything that is going to be issued on behalf of the Government in relation to this election programme has got to be found to be as discreditable as the document which led to their election.

I find it strange — indeed worrying — that the first thing one has to do today, in debating the Government's financial policy, is to try to reassure oneself that the Minister for Finance and the Taoiseach recognise in a practical way that a grave problem exists which urgently needs to be remedied.

Three years ago, in the 1978 budget debate, the then Minister for Finance described the state of the public finances as "shocking". As a matter of deliberate policy, however, and when the economic circumstances were inappropriate, he significantly increased public expenditure and borrowing, promising that this was only a temporary feature of the Government's strategy and that total borrowing would be greatly reduced in 1979 and 1980. To this end the deficit on current account would be "drastically reduced". Neither the then Minister nor his successors fulfilled this promise. Quite the contrary. Things drifted from bad to worse: the current deficit of £209 million for 1977 was enlarged to £397 million for 1978 but, instead of being reduced, shot up further to well over £500 million in both 1979 and 1980. With all due caution, I have no hesitation in saying that the 1981 deficit will substantially exceed the present Minister's budget figure of £515 million.

Lest this be misunderstood as political criticism, may I make it clear that it is not only this Government that is to blame. The result of all the mistaken or wrongly-timed policies of the past decade, since deficit financing of current expenditure was first set up here as respectable, can be summed up by saying that, while it took 50 years for the State debt to top £1,000 million, it has been multiplied eight times in as few years. If nothing is done — and even if growth improves and inflation abates somewhat — the national debt is likely to double again by 1985, with perhaps one-third of the prospective £18 billion debt of that year being owed to foreigners.

Repeatedly, promises of reform have been made but not kept. The intentions stated in successive budget speeches have not been realised. Deficits which were to have been drastically reduced have, in fact, been increased. The extra taxation or the cut in services which, according to each of the last three budget speeches, was to have been made to pay for any unplanned increases in public service pay has never taken place. What is one to think of a system of financial control which makes a song and dance about budgetary arithmetic and then turns a blind eye to an upsurge of expenditure or a slippage of revenue? The words in this year's budget speech about the "initial progress made this year towards bringing our finances into balance" have a hollow ring. Can the Minister provide any evidence of the progress achieved towards his declared purpose that "the deficit be progressively reduced or eliminated"?

I am sure that others besides me were led to believe that much of the extra money devoted to public capital purposes this year was to be found by reducing the current deficit. The Investment Plan 1981 declared it to be an essential part of Government strategy that "current public expenditure be restrained in order to provide the necessary resources for the capital expenditure indicated in the Plan." In the event, current public expenditure, even as budgeted for, shows an increase of 17 per cent on last year's total — including supplementaries — and the current budget deficit stays at, at least, the same high level — probably, indeed, much higher. The necessary resources for the projected 36 per cent increase in public capital expenditure have to come entirely from extra borrowing.

It would seem that the Government have virtually given up hope of reform and have either turned away from the mess or are pretending it does not exist. One may search in vain for any reference to the current budget deficit in the Taoiseach's latest Ard-Fheis speech, and at the IMI Conference in Killarney he gave the impression that public borrowing was for productive purposes and entirely justifiable in present conditions. This obviously does not apply to the many hundreds of millions which are being borrowed to meet everyday expenses, a misuse of our borrowing potential which is inexcusable in a country still so much in need of development and so short of jobs.

The mirror-image of Government borrowing — the balance of payments deficit, now about 13 per cent of GNP — is being described as "manageable", which, in my view, it certainly is not. I regard it as grossly excessive and unsustainable and likely, if allowed to persist, to bring down the international value of our currency.

Those who are concerned about these adverse trends and want to see a sound basis for the nation's economic and social progress re-established are being denigranted as "prophets of doom and gloom". I resist being placed in this category. My positive interest in national development needs no advertising. If I am critical of what is wrong, I am also constructive in pointing the way to renewed progress. Incidentally, I am not unduly perturbed — just annoyed — at being so often portrayed in the media as the ungrateful dog that bites the hand that fed him. The magnanimous man who nominated me to this House knew he was not putting in a ‘yes' man but one who would consider it his duty to speak his mind on matters within his competence.

So, let me devote the rest of my remarks to an attempt to outline a reform programme which would be to the country's benefit and would help to safeguard national independence and respectability.

I shall first repeat the brief summary of our position which I gave recently in Killarney. We are a country in which inflation, unemployment and the external deficit are all very high. The Keynesian way out — even if theoretically valid and practically effective in such an open economy — is closed to us by the size of our external deficit and foreign borrowings. Drastic cutting of current public expenditure is not possible because of the weight of pay, social welfare and debt interest in the total. It would, in any case, risk accentuating the unemployment problem and the recession. This is not to say, of course, that additions to current expenditure should not be much more strictly controlled. Monetary policy is thwarted by the Government's massive injections of new borrowed money into the system to meet its needs — the Central Bank can influence only one-third of the money supply. In these circumstances, everything depends on realism on the incomes front.

If we could secure this realism — if, as a former general secretary of the Labour Party, Brendan Halligan, advocated in Killarney, income increases were henceforth determined by what our exporting sector could afford — then a reform programme for the next four years with the following objectives would meet our needs: a programme to phase out public borrowing for everyday purposes, to increase public and private investment for productive purposes and to get better value for such investment.

The overload of deficits — internal and external — must be lightened as world conditions improve. Some improvement is expected by the EEC but it may not last long. Unless we are competitive enough to take advantage of it, we will be in a poor position to face the exigencies of rapid technological change and new trends in world production and trade. Unless, however, we keep moving up the scale in terms of quality, design and the amount of value added in the production process, we shall find it very hard even to maintain saleable output and jobs. We need to increase both at unprecedented rates if we are ever to achieve full employment; indeed, a doubling of the 1973-80 rate of increase in manufacturing output would be needed for this purpose. As I said the other day in Louvain: "The only way to be ready for the turn of the world economic tide is to be more competitive and, by selling more goods and services, to create more self-sustaining jobs and raise real standards. Granted purposeful and responsible leadership, a reasonable measure of common purpose and social cohesion, and a peaceful environment, much could, I believe, be accomplished by our growing and younger population, now better educated and more versatile than ever before."

I was greatly heartened by Brendan Halligan's courageous recognition at Killarney of the vital link between an export-related rate of pay increase and the expansion of sales, output and jobs. To be fair, he set this in the context of other reforms, as indeed I do too, though with less faith, in my case, in a State Development Corporation or in the utility of the illusory device of food subsidies.

The reform programme I am suggesting is based on the adoption henceforth of realistic rates of pay increase. We must be brought to realise that with a population growing at the rate of 1½ per cent per annum, with energy cost increases lessening the purchasing power of our exports, and with only slow and erratic growth in prospect in the world outside, our expectations of improvements in real standards per head will have to be modified. The Minister emphasised this in his speech this evening. Expectations are still based on the exciting but alas transient economic buoyancy of the sixties. They were unjustifiably inflamed in 1977. The most difficult but also the most urgent policy problem is how to secure a smooth and effective adaptation of expectations and motivations to the new realities of life. Adaptation is unavoidable, but we must try our best to ensure that it is not disruptive and wasteful. Education, persuasion, truth, social fairness and leadership all have a part to play in this.

As I see it, our present standards rest precariously on the import of resources in excess of what we earn by our current production. Admittedly, not all the balance of payments deficit goes to support our living standards — some of it genuinely adds to productive investment — but the total deficit is much too high to be sustained. If we assume that to reduce it within a few years to, say, £300-400 million would be a prudent objective consistent with productive use of the imported resources, this means that at the moment, with a deficit of 13 per cent of GNP as against a prudent 3 per cent or so, we are living about 10 per cent beyond our means. The individual standards we are already enjoying would need to be filled in and made good by new current production over some years to come before we could say that we were earning those standards and could begin to have them improved. Given that 1½ per cent of every year's increase in national output is now required to match the population increase, it is clear that a substantial rate of GNP increase would be needed to make good our present per capita standards and reduce our excessive reliance on imported resources financed by foreign borrowing.

The logic of this seems inescapable. It is not a ‘hairshirt' policy that I am advocating but rather a recognition that we shall have to make do with our present range of shirts until a reform programme related to incomes and public finances re-establishes a sound basis for economic and social advance.

Even if oil starts to flow in large quantities in a few years' time, we will still need to sell our products and services to maintain and increase jobs. We will still need to be competitive. Apart from this, I wonder have we as yet any good reason to expect an oil bonanza on a scale sufficient both to replace our total imports of oil and provide export earnings to cover the capital charges on oil development? I ask this question because even a bonanza on this scale would still leave us at present with a substantial balance of payments deficit — £300-400 million. And we must remember that balance of payments deficits tend to grow according as economic activity quickens.

The current budget deficit is a serious blot on our public finances. Getting rid of it by degrees requires resolute and sustained action on both the expenditure and the revenue side of the account. The curbing of the expenditure trend depends above all on moderation, realism, on the incomes front. On the revenue, or taxation, side I would repeat two points I have made before. As a person in the ‘better-off' category, I have expressed myself as having been uncomfortable in recent years in pocketing tax and rates reliefs which had to be financed by borrowing. I would rather Santa Claus passed me by. I have also referred to the miserable upshot of all the changes over the past decade in taxes on accumulated wealth — namely, that the revenue now collected from this general source is only a fraction of what the old death duties would be yielding. I would be against discouraging unduly the building up of capital but the inheritance taxes seem too liberal — at least outside farming — and I would be inclined to claw back more of this windfall from posterity and let them work to earn their own living standards.

A few words on the need to get better value for investment. Public expenditure of a capital nature is now running at over £1,800 million a year. No one denies that it is timely and wise to build up our infrastructure with a view to raising productivity and competitiveness in advance of the expected upturn in world trade. These are vital needs of the economy. But when we have to borrow so much from abroad for this purpose, putting a heavy charge on future production, it is essential that we get more value for our outlay than hitherto — that we apply scarce and dear resources more effectively in both the public and the private sectors. Professor Kieran Kennedy has drawn attention to the serious drop since 1973 in the productivity of investment of all kinds in the State. As he says, "Investment alone is not a panacea: there must be equal insistence on the quality of investment and the conditions necessary for its effective use." There must also, in my view, be more saving of energy and more efficient use of other inputs.

I hope to see the new interest in "privatisation" of infrastructural investment lead not just to financial participation by the private sector but to the widespread introduction of more efficient ways of carrying out public capital works. Noticing, as we all do, the greater zeal and efficiency with which people work in small groups on their own account, I look forward to more experimentation in the organisation of work. It may be worthwhile to simulate in industry and in various public sector areas, such as forestry, road building, cable laying and so on, a contract system in which co-operative groups, with their own or leased equipment, would be responsible for providing a specified product or service at an agreed price and time and had themselves the opportunity, through their own productivity, of gaining and sharing a premium profit. Whether this be the best approach or not, it is obvious that we urgently need to find ways of increasing interest and application at desk and work place, of relating effort and reward more closely, and of reducing the alarming loss due to absenteeism.

The low level of productivity in many areas indicates how great is our unrealised potential. If our management and work systems, our plant efficiency and industrial relations were geared to making up this productivity leeway, we could quickly re-establish a solvent and sound basis for progress in real incomes and living standards. The rate at which these can improve depends entirely on the rate of increase in output per head.

To sum up, for me the indispensable instrument of reform both of the public finances and of the economy is greater pay realism in the sense of reward related to productivity in the market sector of the economy. Expectations have been unduly inflamed by vistas of high economic growth. The harsh truth has been ignored — the failure of real income per head to increase more than marginally since 1973, when allowance is made for the rise in population and the fall in the purchasing power of exports over imports. The over-size deficit in the balance of payments indicates that the community is living beyond its present means and must for some time rely on new growth merely to make good its present living standards. Pay is so big a component of public expenditure and of production costs that without realism in this area no improvement is possible in the public finances, in the rate of inflation, in national competitiveness or in net employment.

However, with realism on the pay front, a tight restraining hand on current public expenditure, some extra taxation, and measures to make investment outlay more productive we could look forward to a progressive reduction in the deficits both in the current budget and external payments, better value in terms of new assets and jobs for a lower total of foreign borrowing, and a return to health and growth in the national economy. Our boat would not be waterlogged when the world economic tide starts rising again.

Senator Whitaker and I over the last few years have crossed swords on fundamental policy as far as our economic policy is concerned. Tonight he has certainly come out in no uncertain terms and given us a final hard serve and the question is, can we return the ball?

Undue emphasis on the accounting approach to managing our economy is not what is needed at this point in time. Because economics, as a subject, is not amenable to instant checks on whether theories are right or wrong, we must wait for history to show. I am certainly willing to take the risk that at this point the balancing of the books approach, the accounting approach, is not what is needed. All anyone needs to do is go around and look at the country and at the people, at the effects on them of education, at their spirit and you can see that this nation is going somewhere fast. Our people have recognised the value of education and of the development of technological expertise and its application in modern industry, and this is happening.

In 1967-1969, when I was involved in the setting up of the regional technical colleges, if I had then listened to what people were saying, we would not then have made the investment in those colleges — I have said this before in the House and I must build on my own experience. One has to recognise the need and not necessarily the demand. Our present need is to build up world market share while the rest of the world staggers along, goes through a bit of a chicane, economically, and comes out of it and begins to grow again. All the signs are there that the other countries the United States, Japan and Germany — the main steam-engines of the world economy — are beginning to roll again. We need not necessarily have a 3 per cent balance of payment ratio or a 5 per cent borrowing ratio to enable us to take off with it.

I am not saying that we should continue with these high levels of borrowing, or with the high levels of balance of payments deficit. It is a question of timing and of nerves. Certainly anything that I have read about people who pulled back at a certain time in the past when there was an advancing population coupled with employment problems manifested that those who preached the doctrine of balancing and accounting approaches have been proved to be wrong. That is my view on the fundamental aspects.

There are many aspects of what Senator Whitaker has said with which I would agree. The notion of a more rational incomes policy I could not agree with more, and I have been preaching that for years. I agree with what Brendan Halligan bravely said in Killarney, that the unprotected sector of our economy should be the guideline for income increases. I said over the years that income increases should go hand in hand with the increases in added value in our economy, particularly in the manufacturing sector. It is one thing to say that and another thing to live in an economy where free collective bargaining is the principle and you are open to the stronger elements in the bargaining process winning out and setting the standards, and that has happened. The answer that comes up in that regard is that we should not raise expectations too high.

What should we tell the man who, in SPS International in Shannon, runs an automatic lathe and produces the same number of screws as his counterpart in Germany, Japan or Puerto Rico — that he should not aspire to be paid the same purchasing power as the man in Japan or in Germany? Should we say that, or should we deliberately say we will damp down everything so they will not have those kind of expectations? With the increasing world communications they recognise and need these very same individuals who run the same machines whose expectations are based on what they deserve in purchasing power for their labour input and their skill input. It does not just come from Government only. It comes from an educated population who recognise what is going on in the world and have expectations which are a function of their own comparative assessment of what others get in the world. Damping down these expectations is not the business we are in. We are in the business of lifting people up, of recognising the power of modern technology, of recognising that our economy depends on the development of our manufacturing industry in line with the increasing productivity of our agricultural sector. This is the sort of thing we have been trying to do over the past four years.

As one of the people who was deeply involved in developing the manifesto which launched the present Government in 1977, I stand behind its principles. It has nothing to do with undue raising of expectations. As I said in the House some weeks ago, the principles on which our policy were based were enunciated in September 1976 in a 35 page document and were not brought out as a list of hand-outs to raise the expectations of the country. They were based on solid, worked out, economic principles. We are building our position in world market share and are borrowing at the moment to do it. That is the way I see it. I do not like to see borrowings being used to finance the current budget deficit and to the extent that that exists, I am completely at one with Senator Whitaker. I would like to see our GNP growing faster every year than our population is growing. That is the basis of the policy and in terms of timing it is the right policy at the moment. As a fellow member of the National Economic and Social Council I would agree entirely with the Senator if that went on too long. This council have made recommendations to the Government on cutting back gradually those deficits and it is a matter of time.

On the question of incomes policy, which I believe is behind it all, cost push increases are what basically cause our inflation. In a small, open economy such as ours we have to be price takers as far as external trading is concerned. Why not have a simple formula? One which I gave in Killarney in 1975 was that our income increases should not exceed the average of our competing European neighbours, excluding the UK. That is a simple form and if it could be sold to the trade union movement, if that could be sold nationally, then everything would come right. How one does that is a political matter and we must keep on persuading the system to adopt a rational procedure, a moderate procedure of that kind. To say that we should keep our income increases in line with the productivity of the unprotected sector is to use economic words. The alternative is a firm format, that each year the income increases in this country should not exceed the average of the income increases of the previous year in other European countries. If we can adopt that, we would get our economy in line very quickly. I am against balance just for the sake of balance at this point in time.

An Leas-Chathaoirleach

The Minister to conclude.

First of all, I want to thank the Senators who contributed to the Second Stage debate on the Finance Bill. I have some points to make in reply to those raised by the Senators.

Firstly, Senator FitzGerald expressed reservations on the prospects for our economy. I say to him that there are clear signs that the worst of the recession is finally over and the economy is definitely on the upturn. I referred in my speech to the latest figures for industrial exports. I referred to consumer demand in the other House last night and I said that, in two successive quarters, cement sales had shown a substantial increase. This has always been regarded as a significant barometer in regard to our second great industry, the building industry. We are all aware of the uplift in agricultural output. We are aware, also, of the tremendous increase in inquiries in the tourism industry. Yes, I can assure the House that the indicators are all favourable at the present time. The rate of unemployment increase has been slowing down and there are grounds for optimism here also.

In considering our employment performance, Senator FitzGerald referred rather lightly and glibly to a certain document called the manifesto. Let me remind Senator FitzGerald that we during our term of office, from April 1977 to April 1980, encountered a substantial growth in the labour force never previously recorded in this country — 80,000 of an increase. Let me also remind him that in the period 1973 to 1977 the comparable increase over four years, as against the three that I referred to, was 14,000. That indicates the success of Fianna Fáil policies in that manifesto and, indeed, in the positive actions taken by this Government. Employment increased by 80,000 in those three years and I believe that this was a remarkable achievement by any standards. I am also confident that this momentum can be sustained.

I gave figures in the other House last night that IDA job approvals will rise this year to the record level of 40,000. Last year the target was 30,000. That target was very substantially exceeded, going to 36,000 — nearly 37,000. This is positive progress. The investment plan that I referred to earlier will have a major impact on employment. Within the plan itself, it will create about 10,000 direct jobs and, of course, there is the spin-off in the supply services in allied industries. That does not cover the money within that plan to provide or promote further industrial development.

In relation to borrowing, I have consistently explained the Government's concern and determination to reduce our dependence on borrowing. We recognise, too, that it must be reduced. We have moved in this direction in this year's budget and propose to continue this policy. Most sensible commentators will agree that to do this immediately would have very serious and damaging effects. particularly on our employment situation. As Senator Whitaker said, our young population is growing at a great rate.

We cannot afford a policy on borrowing which does not have regard to the need to sustain economic activity and employment. If we were to take drastic steps to reduce our reliance we would probably start off a recession worse than anything experienced in the mid-seventies or in recent years. Senator FitzGerald doubts that we can achieve the targets set in the budget, but the figures for the first quarter of the year were on target and the pattern of receipts and issues for the quarter were in line with expectations.

Senator Whitaker has also expressed concern about public finance. He quoted from statements in 1978 about reducing our dependence on borrowing. In fairness it should be said that we had no reason in 1978 to anticipate a recession of the magnitude of the world recession that was to come, a recession which was so much worse than anything experienced in the mid-seventies. We could not have foreseen either that the price of oil would increase at an unprecedented rate. I may just say that the 1980 figure for the cost of our oil imports was about double the 1978 figure. I do not think that anybody, no matter how farseeing, could have anticipated that. When comments such as these are made, account should be taken particularly of the magnitude of the increase to which I refer. In that respect the Government by their longterm policies have been endeavouring in every possible way, as has been explained so often by my colleague, the Minister for Energy, to reduce our over-dependence on imported oil.

Senator Whitaker inquired what progress had been made to bring discipline to bear on our public finances. I have already indicated that we are moving in the right direction and have highlighted the Government's concern about this. We have severely pruned the Estimates for current expenditure, and have been criticised for so doing. We have, on the other hand, taken a deliberate decision to expand productive investment, a decision I will defend and say is a wise one, with our growing population, at a time of world recession. We are increasing the investment this year by substantially more than 30 per cent. I believe that this is the correct policy and the one which we should pursue. It will pay worthwhile dividends in the longer-term, strengthen the basis structure of our economy, improve our exporting capacity, provide the extra and badly-needed infrastructure that for too long successive Governments in this country did not improve. I refer particularly to telecommunications, road network and energy. There are, of course, the very important social needs of houses, schools, hospitals and so on.

I am also convinced that Governments in the past should have looked more closely during periods of recession at improving and strengthening our infrastructure. The better that infrastructure, the more it will attract the investment necessary in industrial development. We have been extremely successful there, but we can even be more successful if our infrastructure is improved. The value of productive investment cannot be overestimated.

I agree with Senator Whitaker's assertion that competitiveness is of crucial importance. We must be more competitive in price, quality and design. I agree with the Senator that expectations of rising living standards must be modified. The Senator outlined what he described as a reform programme for the next three years but time does not allow me to go into these proposals in detail. I certainly endorse his proposals which are in line with the Government policy for the medium term.

In relation to the balance of payments and the problems facing us, I want to point out that all countries in the EMS are facing a similar situation. Germany, which has had a payments surplus for so long and has long been cited to us as the ideal, is expected to be in substantial deficit for the second year in succession. If countries with balance of payments deficits were completely to eliminate them immediately the consequences would inevitably be a further serious world recession. We, like other countries, must correct our balance of payments deficit, but must do it gradually. This is, of course, the course being pursued by the Government.

I am aware that time does not allow me to go into greater detail on this Second Stage of this Finance Bill. However, I can assure the Senators who raised points to some of which I have replied, others which I have not covered, that this Government are on the right course. I believe that the very positive indicators to which I refer, of improved growth and activity and a new vigour will become increasingly evident. As a result of this Government's policies we have come more successfully than most of our European partners through a very deep recession and we, as a nation, can gain extra benefit from that upturn when it takes place later this year, as is expected internationally. Our growth rate this year will be in excess of 2 per cent. Consider that against the EEC average growth rate of ½ per cent. I believe our policies are the right ones to handle the present situation.

Question put and agreed to.

An Leas-Chathaoirleach

Next Stage?

I understand that the other side of the House does not wish to take Committee Stage until next week. I would like to point out that the Bill must be signed not later than Thursday, 28 May. So I could only agree to that on the basis that there would be agreement to take all Stages next Wednesday and agreement to a Motion for Earlier Signature.

Committee Stage ordered for Wednesday, 27 May 1981.
The Seanad adjourned at 8.30 p.m. until 10.30 a.m. on Thursday, 21 May 1981.