Seanad Éireann debate -
Wednesday, 18 Nov 1981

Vol. 96 No. 8

Finance (No. 2) Bill, 1981 [ Certified Money Bill ]: Second Stage.

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

Minister of State at the Department of Finance (Mr. B. Desmond)

The principal purpose of the Bill is to give effect to the taxation changes which were announced in the supplementary budget of 21 July. A number of other minor tax measures are also incorporated in the Bill.

There has been considerable debate on the merits of the supplementary budget. Some critics would maintain that there has been an undue reliance on indirect taxation; others would argue that we might have taken a more austere line in reducing public expenditure. There is unanimous agreement, however, among informed commentators on the need for a budget in July. It was evident not merely to those who are familiar with the management of the public finances, but even to the average person in the street, that something had gone seriously wrong. There appeared to be no longer an effective control on public spending with the consequence that we were facing in 1981 an excess of about £500 million on the budget estimate of last January for current spending.

This is the background against which the decision was taken to introduce a supplementary budget. The evidence in relation to the £500 million under-estimation in the budget is quite clear in the large number of Supplementary Estimates put through the Dáil in recent months, particularly in the past two or three weeks. The decision had nothing to do with simplistic allegations of a drift towards a solely monetarist approach. In view of the appalling increase in the gap between spending and revenue, the only responsible course was to act quickly in order to avoid the worst effects of a lack of budget control. We knew, when coming into office, that we were inheriting a difficult budget problem and that the position was much worse than we had been given to believe in January. We did not know, however, that the situation had been allowed to deteriorate to such an extent.

The supplementary budget has not solved our problems; it is no more than a first step in the right direction. We are still faced with a deficit for 1981 in the region of £800 million. For 1982, the opening position looks like being considerably worse despite the fact that the measures taken in July will reduce by about £450 million the gap between spending and revenue. Next year the cost of meeting our debt commitments will be nearly £400 million more than this year. I would like Senators to take careful note of this statistic because it illustrates the magnitude of the problem caused by accumulating debt. If we were to do no more than balance this increase by higher taxation, we would have to impose some extremely severe increases in taxation. This continuing spiral of debt funding is a drain on our resources and there can be no doubt that in the longer term it severely handicaps our efforts to improve the economy and increase the employment opportunities which we so urgently need.

Let there be no doubt about it — we could not afford to wait any longer to take corrective action. The slide in the public finances in the first six months of this year had been far worse than anything we had experienced previously. We were moving almost inevitably towards a situation when really harsh policies would be necessary to protect our economic independence. Between 1970 and 1980 Government debt increased eightfold from £1,000 million to £8,000 million. Foreign borrowing accounted for an increasing proportion of this debt. At end-1980 our foreign debt was over £2,200 million, compared with only £362 million as late as 1974, and by mid-1981 it had almost reached £3,000 million — up 35 per cent in six months. As a result, the cost of servicing debt is absorbing an ever-increasing share of our tax revenue. Another consequence of this trend is that overspending has encouraged the economy to develop on an artificial and ultimately unsustainable basis. It has led to excess spending on goods and services that we could do without, and much of this spending has been on imports to the benefit of foreign economies.

Most of the other member countries in the EEC will be near to having a balanced budget this year but two of them, Belgium and Italy, regard their position as very serious because they face deficits in central Government spending of the order of 5 per cent to 6 per cent of their GDP. Our prospective 1981 deficit is 8 per cent of our GDP. Belgium and Italy have seen fit to take corrective action and have been informed by the EEC Commission that they cannot afford to support such high deficits. We too have been advised by international institutions such as the EEC and the OECD that we should in particular aim to stop borrowing for current spending with all possible speed. This advice has been given after due consideration of our position and it would be unwise to ignore it.

Our balance of payments deficit is also a source of concern to the Government. The rapid growth in imports, indirectly caused by the Government deficit, has led to a balance of payments deficit, now likely to be more than £1,400 million or 14 per cent of GDP in 1981. The practice of borrowing more and more money to pay our way from day-to-day must be eliminated. This is an essential precondition for economic success. The supplementary budget introduced in July has made a useful start in this direction. We must build on this, as rapidly as we reasonably can, and provide a blueprint for a more stable future.

That is the general background. Even after the difficult measures we have taken, we are faced with a budget deficit of about £1,100 million. That is a rather daunting figure. That is also the scenario for the budget deliberations currently in train.

I now turn to the individual provisions of the Bill. Part I of the Bill deals with customs and excise provisions. Sections 2 to 7 confirm the budget increases in the excise duties on alcohol, tobacco products and hydrocarbon oils. In the budget statement in July it was emphasised that increases in these duties were unavoidable if we were to redress the difficult financial situation and to help pay for the concessions announced in the budget.

Section 8 confirms the road tax measures announced in the budget. Provision is made for the re-imposition of road tax on cars not exceeding 16 horse-power and on motor cycles at the rates which applied prior to August 1977 and for an increase in the rate of road tax on cars exceeding 16 horse-power from £6 per horse-power to £8 per horse-power. The abolition of the annual registration charges of £20 in respect of cars not exceeding 16 horse-power and £5 in respect of motor cycles, and the reduction in the initial registration charge in respect of these vehicles to the 1977 levels are also provided for. These charges came into effect on 1 September last and are expected to yield £8 million in 1981 and £27.5 million in 1982. The abolition of the road tax in 1977 resulted in a loss of badly-needed tax revenue and a narrowing of the tax base. We all know the background to that decision.

Section 9 deals with a technical matter. It revokes an order adjusting the structure of the rate of excise duty on cigarettes imposed in the July budget. The adjustment ensured that there would be no change in the amount of excise duty on cigarettes as a consequence of the increase in the rate of VAT from 10 per cent to 15 per cent on 1 September. The order is no longer necessary as the provisions are now incorporated in section 4 of the Bill.

Part II of the Bill contains the value-added tax provisions. In summary, the Bill confirms the July budget resolution on VAT and also provides for a number of important new concessions. The first of these relieving measures is covered by section 11 of the Bill which gives effect to the increase in the annual turnover registration thresholds mentioned in the budget statement in July and intended as an incentive to small business. Under the new limits now being provided for, a trader whose business consists entirely, or almost entirely, of the sale of taxable goods will not have to register unless his annual turnover is likely to exceed £30,000 and other traders will not have to register unless their annual turnover is likely to exceed £15,000. The new £30,000 limit compares with existing ceilings of £18,000 and £9,000 and the figure of £15,000 covers the category heretofore catered for by a threshold of £3,000. The increases are very substantial. They simplify the present system since they reduce the number of thresholds to two and are expressed in annual terms and they largely restore and in some cases improve to a considerable extent, even in real terms, the levels set originally in 1972. The new levels should allow as many as 500 traders to discontinue registration for VAT purposes and of course will remove the necessity to do so for many traders not at present registered. The cost in 1982 is expected to be somewhat less than £¾ million.

The section also contains, in subsection (d), a technical provision to ensure that immovable goods supplied by one taxable person to another, where both are registered together as a group for VAT purposes, will not thereby be relieved of any VAT otherwise properly chargeable on such a transaction.

Sections 12 and 13 give effect to the VAT changes announced in the July Budget. These were the increase in the lower rate of VAT from 10 per cent to 15 per cent, the compensating increase in the flat-rate addition from 1 per cent to 1½ per cent for unregistered farmers and the extension of the 3 per cent effective rate for building to agricultural contracting services. In case there should be any misunderstanding on this point, I should like to emphasise that under these arrangements the farming community as a whole will not have to bear a net increase in their VAT burden. This is ensured by the increase in the flat-rate addition which is in proportion to the increase in the lower rate and by the special provision for agricultural contractors which will cost upwards of £1 million in 1982. The reduction in the rate of VAT applying to the specified contracting services should be particularly valuable in helping to retain these services in rural areas.

Section 14 provides for another relieving measure, namely, the deferment, in respect of the taxable period 1 September to 31 December 1981 of the VAT increase on tourist services supplied to tour operators, travel agents or car hire firms for the benefit of visitors from outside the State in those cases where prices were settled prior to 1 January 1981. The provision when enacted will allow, for a further four months, the completion of important, long-standing contractual arrangements involving visitors from outside the State without increase of VAT.

The concession was considered necessary in order to allow the industry to fulfil these commitments without incurring extra costs which in many cases, would be difficult to pass on to the consumer. This arrangement will apply retrospectively to 1 September and the value of the concession to the industry is estimated at up to £500,000. It is hoped that this measure will be taken as reflecting the Government's confidence in the underlying soundness of the tourist industry in this difficult trading period.

Section 15 is a purely transitional measure covering the position of traders at present registered for VAT and who may be affected by the increase in the thresholds now proposed in section 11.

In Part III of the Bill there are two stamp duty sections. Section 16 imposes a special £5 million levy on the banking sector. The base for the levy will be the current and deposit accounts of each bank, subject to certain adjustments and a stamp duty will be charged on this base to obtain the required amount. The duty is to be paid to the Revenue Commissioners within 14 days of the passing of the Bill.

Section 17 introduces a new stamp duty of £5 per annum on credit cards and certain charge cards, which will complement the existing duty on cheques which was recently increased. Supplementary cards issued to individuals will not be liable. This duty will operate from early next year.

Section 18 in Part IV is a technical provision dealing with the application of section 54 of the Finance Act, 1970 which empowers the Minister for Finance to raise money for the Exchequer by means of the creation and issue of securities. Section 18 confirms that a loan agreement is a security for this purpose. It also clarifies the position in regard to expenses in relation to Government financing operations other than the issue of securities — for example, leasing or similar agreements for the provision of some capital items in the Public Capital Programme.

I have given a resumé of the provisions in the Bill. For the most part it is concerned with the taxation changes announced in the supplementary budget. Further legislation will be introduced in the near future to provide for an income tax credit system and for the weekly payment of £9.60 to the spouse working in the home.

Before concluding, I would like to return again briefly to the situation which has led to the introduction of a second Finance Bill this year. The taxation changes, which are incorporated in this Bill, are designed to increase tax revenue and thus help to maintain within reasonable limits the huge burden of State borrowing. There is another simplistic view abroad in some political circles that a policy of reducing our dependence on borrowing is an anti-employment policy. On the contrary this policy must be followed if we hope to sustain a growing number of worthwhile jobs. If we squander money on day-to-day spending we have to cope with the problem of a rapidly increasing debt which will diminish the opportunities for investment. Here I refer to productive capital investment which would be the basic issue. Let us be in no doubt about this. We have to make a choice between higher living standards and higher employment. The harsh reality is that living standards of most citizens have been moving ahead in recent years at a rate that the country simply cannot afford. The sad consequences of this have been a considerable loss of competitiveness in the marketplace, a burden of national debt that is crippling the economy and lost job opportunities for the growing numbers out of work.

In the past week we have given a practical demonstration of our determination to provide employment with the introduction in the Dáil of the Youth Employment Agency Bill. This, I am confident, can have a dramatic impact on our efforts to provide jobs for our growing young population. Employment has to be our greatest priority and this new initiative provides us with a basis for a radical change for the better in providing job opportunities.

It is wishful thinking to suggest that an upturn in the world economy will lift us out of difficulties without a contribution from ourselves. Of course, we must sustain a very high level of investment and this inevitably requires borrowing. It is unfair, however, to create the impression that all our borrowing is being used to create more wealth for the nation when in fact a large proportion of it is needed simply to meet our day-to-day expenses. We have to reverse the trend whereby we have been spending our way out of every problem, without any thought to the longer-term problems accumulating as a result. Otherwise we cannot provide a basis for durable economic growth.

Fundamentally our economy is sound and we have the potential to provide greater prosperity for all our people as time goes on. There are now grounds for hope that the worse of the present world recession is over and we must be ready to take full advantage of the employment opportunities that an upswing in the world economy will provide for us. But we must be reasonable in administering our affairs if we hope to gain the maximum benefit. We have to exercise the same degree of responsibility as other countries in regard to the management of our finances.

I commend the Bill to the House.

Mr. E. Ryan

Before speaking on the Bill I would like to welcome the Minister of State to this House. It is not his first appearance here but it is his first appearance in this capacity and I would like to welcome him back.

The Finance Bill is a Bill to raise money to deal with our financial situation and to reduce the deficit which the Minister for Finance put some time earlier in the Dáil at approximately £160 million. It is fair to say that the introduction of this Bill was not merely to deal with the financial situation. This is not the full explanation of why it was introduced. A supplementary budget was brought in shortly after the general election, after the alleged discovery that finances were in a bad way. The Government wanted to impress on the public how badly Fianna Fáil had governed, how bad the finances were, and this discovery was made.

This can be described as a ludicrous piece of play-acting because, during the election campaign both Fine Gael and Labour had, on numerous occasions, described the finances as being in a bad way. They had told the public that the state of the finances of the country was very serious, that Fianna Fáil had made a mess. They asked for support to be put into power so that they could clear up this situation. Following that and following a very cursory look at the books when they came into power, they suddenly exclaimed that the finances were in a mess, as though they had not been saying this all the time, as though they had not asked for the support of the electorate in order to deal with the situation that now, they suddenly seemed to say, had taken them by surprise.

The finances were not in a mess before the election. But due to inflation, world recession, oil prices and a number of circumstances, almost all of which were outside the control of the Government at the time, certainly the position was a serious one and Fianna Fáil made no secret of that fact. Fianna Fáil, when in office, said that we had a serious financial position and they told the country in their programme during the election what they proposed to do about that serious situation.

In regard to this inspection of the books, does anyone really believe that Fine Gael and Labour did not know what the financial position was before the election? As I pointed out, they had already told the country that that was so. If they read the papers and comments of the economic and financial institutions during the previous six weeks they must certainly have realised that the financial position was serious. If they had not sufficient expertise within their own parties to assess the position and to know almost exactly what the position was then they had no right to take on the responsibilities of Government.

So this melodramatic inspection of the books and the discovery that the finances were in a mess was really a rather ludicrous bit of play-acting. The principal purpose of this bit of play-acting was to enable the Government to initiate a campaign of criticism against Fianna Fáil but, more important than that, to explain why they would not be able to do many of the things which they told the electorate they would do. They are now able to say that they would like to have done a great many things which they promised during the election campaign but because of the finances position which they had suddenly discovered they would not now be able to do many of the things which they had either specifically or by implication told the public they would do.

During the general election campaign Fine Gael and Labour expressed their concern about inflation, about unemployment, about finances. They said that their principal objective, if they were returned to office, would be to ensure that inflation was brought down, that unemployment would be brought down and that the finances would be put in order. What is the position five months later? Inflation is up by approximately 5 per cent and further proposals that are in the pipeline are likely to put inflation up by a further 5 per cent. Fianna Fáil cannot be blamed for this. This is something which the Government have deliberately brought on themselves and on the people of this country.

It is not merely a matter of a 5 per cent increase in inflation; it is not that that is the end of the matter. The ramifications of this will continue and will increase and affect all sectors of the community and create innumerable problems. It will affect employment, industry, agriculture and exports. In fact it has already done so in many respects and there is no doubt that this is going to get worse as time goes on.

Unemployment was, again, one of the principal concerns of the parties who took office last June. Unemployment has increased at an alarming rate since that time and, again, most of the experts, most of the economists unanimously say that far from unemployment being got under control that it is going to become even worse in the coming year. Again, this must be placed directly at the feet of the Government. It is their responsibility. They brought it on to a considerable extent by their activities during the last four or five months. But they seem to be helpless and almost paralysed in dealing with this situation. Inflation and unemployment are persistent. They are becoming not better but worse. In so far as the Government are attempting to justify the situation — and, to give them their due, they are not really doing very much to attempt to justify it — they are doing so on the plea that certain financial steps have to be taken, that they have to get the finances in order. It may not be true or fair to describe this attitude as monetarism or Thatcherism but it is certainly getting perilously close to it.

What is the position in regard to our finances? There have been some extra taxes and there have been some savings. Now, after what can be described as not much more than a gesture in this respect, the Government are running into difficulties. The Government are beginning to realise how difficult it is to make savings. They are beginning to have to face up to the reality which existed when the previous Government were there — the difficulties of making savings without affecting in a very serious way the people of this country. The questions are: what Departments should suffer, what section of the people should suffer? Should there be savings in social welfare, savings in regard to agriculture, in regard to education, in regard to health, because every saving will affect somebody and the Government are now up against the reality of having to decide who is going to suffer if they are to continue to make savings in the various Government Departments. It may be that savings will have to be made and will be made, but it must be realised that it is a very hard thing to do. The Government will perhaps now realise why it was easy to criticise the previous Government but very, very difficult to take the steps that seemed to be so easy at that time.

This can be done only by savings or by imposing new taxes. What are the options open to the Government? What are the options other than the savings which I have described and the savings which will undoubtedly bring hardship of one kind or another on many sections of the community? The Government can increase direct taxation or indirect taxation, or they can increase their borrowings. The Government are pledged not to increase borrowings; they are pledged to bring down borrowings. They originally said they would reduce the current account deficit, phase it out over four years. In fact this was almost exactly the same as what Fianna Fáil undertook to do when they were in office. But even now, in regard to that phasing out over four years, it is being rumoured that the Government do not think they will be able to live up to that undertaking. So we will have current budget deficits for more than four years into the future.

There is no doubt that that kind of borrowing in particular, or borrowing of any kind, has reached a stage when some slackening, some slowing down must take place but, in particular, that it must be eliminated as soon as possible in regard to the current budget. But the parties in Government are certainly in no position to criticise the previous Government in regard to deficit budgeting for non-capital purposes because up to the year 1973 borrowing for this purpose was unknown and had never been done by Fianna Fáil Governments in the previous 20 or 30 years. It was only in the period of Coalition Government from 1973 to 1977 that this kind of borrowing for non-capital purposes was introduced and was increased to a very alarming extent during those four years. So certainly the present Government cannot criticise Fianna Fáil for continuing this during the years from 1977 to the present.

In regard to indirect taxation, this of course will lead to cost of living increases and inflation. In fact it has already done so. How far the Government are going to go in regard to indirect taxation is impossible to say at the moment, but it looks as though they are going to go a great deal further in this respect in the budget that is to be introduced in the new year. The other means of raising taxation is in regard to direct taxation. But the Government have committed themselves in this respect. They have committed themselves to reducing direct taxation and reducing the rate of taxation as far as it affects the vast majority of the people here, and they are doing so by reason of a promise which they gave in the general election, a promise that, in retrospect, was a most unfortunate one.

In the last few months they have been asked and advised by most of the reputable economists and financial and economic institutions in the country, to abandon that undertaking or at least to defer it for a considerable time. But they seem determined to go ahead with it. If they go ahead with it, it will mean an increase in indirect taxation and all the ramifications which go with it which will cause an increase in the cost of living and an increase in inflation.

Consistency is not a characteristic of the Government. There are too many factions within it to enable them to be consistent. But for one reason or another, this certainly has not been their strong point. But this commitment to a 25 per cent tax rate, to reducing rather than increasing direct taxation and to allowing the results which will flow from it, is completely inconsistent with everything else that the Government have been saying — in regard to their policy, in regard to what they hope to do with regard to the finances of this country.

Added to this is the other election gimmick of giving £9.60 to housewives. Administratively, this will cost a great deal. Whether it will involve extra taxation too is not quite clear. The Government have not made it clear exactly what they propose to do in regard to housewives whose husbands are not earning sufficient to enable the amount to be taken from their taxation. The Government have not made their position clear about this. But if there is to be extra taxation then in my view it will be equally inconsistent with their general approach and aspirations in regard to the finances of the country. Because of its origins and motives this is not a Bill which will command any respect from this side of the House. I am not convinced that what is being achieved in this Bill could not have been achieved equally well in the budget which will be introduced in the new year. The difference of course is that almost everything that is being done in this Bill, all the unpopular things, can be blamed on the last Government whereas the Government would have to take responsibility themselves for things which will be done in the next budget. That is the principal reason that this supplementary budget was brought in. In these circumstances the Bill will not have the support of this side of the House.

Mr. S. O'Leary

I find myself in some difficulty because no measure coming before this House could have my support to a greater extent than a measure of this kind. There could be no more suitable opportunity to speak on the realities of political and economic life and their interdependence in this country. But to be faced on the other side of the House by a man who in the short time I have known him has treated me excellently and has never sought to interrupt me in a negative way makes my job particularly difficult because I find what he has to say and the attitude of the party he represents reprehensible and totally at variance with the common good of the country. Therefore anything I have to say with regard to what he has said, or with regard to what has been said in another place, or with regard to the general policy of the previous Government, should certainly not be taken in a personal way. It is an area about which I feel very strongly.

We can engage in the political activity of deciding on whether or not this Bill was brought in for the purpose of putting the blame for the position of the country's finances on the last Government. I do not believe that was the reason for the introduction of the Bill. But if it were the reason for the introduction of the Bill, it would be a valid reason, because never in the history of this State has there been a Government who have so abused and misused their power and left the financial affairs of the country in as a big a mess. It is right that the people of the country should be given the opportunity of passing their judgment on the way in which that Government carried out their housekeeping. From a political point of view it is a pity that it would be totally impossible economically to repair the damage caused by the previous Government by a measure which would be introduced at one fell swoop. So careless has been the way in which the affairs of the nation have been looked after for the past few years by the last Government, and so great are the deficits which they have built up, that even they themselves recognise that they would require to be phased out over a number of years. Far from overstating the seriousness of the position of our public finances, the financial measures introduced in this Bill seriously underestimate the gravity of our financial position.

There is no way in which a measure could be brought in which would adequately and accurately reflect the real position of our finances because if we did such a thing we would bring the economic life of this nation to a halt. It is therefore reasonable, as Senator Ryan has done, to look at this Bill in the economic context of the state of the country both as it was in July when the financial measures which form the basis of this Bill were introduced and today after they have been introduced. We should not underestimate the serious problems which remain. This is merely a small start. I would also like to say that the responsibility for that goes far beyond the last Government, far beyond the last number of Governments; it goes right into society and into the way in which the ethos of our society has grown up and the way in which we have ordered the business of our democracy.

It is absolutely true that the basis of the problem which the Government faced on taking office was the size of the current budget deficit. I will be making a number of references throughout my contribution to various economic statistics, and to make the matter more intelligible, I have drawn all the economic statistics from one source, that is from Report No. 62 of the National Economic and Social Council. Its title is "Economic and Social Policy 1981", and it was received by every Member of this House. The opening deficit at the start of the year — and when I speak of the deficit I am speaking of the current deficit — was £547 million. It cannot be questioned seriously that the amount of that deficit had grown by the time the Government changed office to the extent that if corrective action had not been taken it would have amounted to at least £947 million, an increase of £400 million. Even with the corrective action it will amount to some £789 million. Various examples have come to light of the way in which the finances of this nation were irresponsibly presented to the people at the time of the last budget. For instance, it has come to light that the Estimate for the Department of Justice, presented to the nation by the last Government as a basis for their 1981 budget in January, did not include sufficient money to pay the members of the Garda Síochána at the existing rates of pay. I am not speaking about additional members of the Garda Síochána or agreed additional pay increases. The Vote was deliberately reduced, falsifying the figures, so that the deficit could be represented as smaller than it actually was going to be. It has come to light also that in the Vote for the Department of Defence sufficient money was not provided in that Vote to pay the members of the armed forces at the rates of pay then operating. Again, this was falsification of the Estimates which were presented to this country in the early months of 1981.

The House might be interested in page 104 of the NESC report. Table 22 of that very fine report indicates the extent of the official foreign indebtedness of the State in the period 1977 to 1980. The foreign indebtedness, having been relatively stable in 1977-78 at £1,400 million approximately, had increased in 1980 to over £3,000 million. It is also interesting and relevant to what Senator Ryan and I have already said concerning falsification of the departmental Estimates and the effect that that had on the public finances. I quote from page 2 of that same report:

An aspect of fiscal policies during 1979 and 1980 has been the increasing scale of error in budgetary forecasts. Estimates in the budget statements of 1979 and 1980 suggested that the Exchequer borrowing requirement would amount to 10.5 per cent in both years, while the actual outturns were 14.0 per cent and 14.6 per cent of GNP, respectively. The actual current budget deficit in 1979 was 80 per cent greater than forecast in the 1979 Budget, while the 1980 outturn was 50 per cent greater than the forecast in the 1980 Budget.

On the basis of the information which has been made available to us from official publications and information available in the NESC document, I have calculated that the current 1981 budget deficit would have been 91 per cent higher had this corrective action not been taken.

It is good fun if you are involved in politics to hit your opponents over the head but this problem is much too serious to be considered merely a party political matter. It goes to the heart of our democracy. We must agree among ourselves on our objective to provide a stable society in which every citizen has the opportunity to have a satisfactory living for himself or herself and when we are told, by people who are qualified in that field, that our borrowing is out of control then unless we can conclusively argue and prove our case we can only accept and take seriously their recommendation.

Tables 9 and 12 of the NESC report which give the position of the Irish economy in terms of international competitiveness, show that our inflation rate over the period of office of the last Government has deteriorated compared with that of our EEC partners by approximately 14 per cent. The House might ask what relevance has that? The relevance, of course, is that those sections of our community who are dependent for their income on the rate of inflation, not of this country but of our partners in the EEC, primarily the farming community, are affected by a fiscal policy which gives rise to a rate of inflation which is out of line with the rest of the European Economic Community. This fiscal policy can best be described as the total inability of the previous Government, particularly from the time of the change of Taoiseach, to say no to anybody on anything, or to manage prudently the finances of the nation.

In considering this Bill we should recognise that fundamental changes have taken place in our society over the last few years as a result of the irresponsibility of the previous Government. Table 18 of this report shows how the fiscal policy of the previous Government has affected the various sectors. Consider the cost of maintaining an employee in the public sector between 1975 and 1980. Between 1975 and 1976 there was no difference and then there was a slight decrease, in real terms, in 1977. From 1978 to 1980 it got completely out of control and gave rise to our colossal deficit. Based on constant 1975 prices, but taking into account the rate of inflation, if the public sector pay was rising at the same rate as the pay of the rest of the community, the figure should remain constant at 100 but in successive years from 1975 to 1980 it went from 100 to 100.1, to 98.9, to 106.1, to 113.4 and, in 1980 to 126.4. In other words, an increase of 26.4 per cent in real terms in public sector pay during that time. During that period the family farm income had gone from 100 at various times up to 116 and to 122 and, eventually, in 1980 down to 72.2. The real family farm income has been slashed by a quarter, while the real public sector pay had been increased by a quarter.

That position came about, not because anyone in the public sector was getting rich, but because of a total lack of ability on the part of the previous Government to say no to anybody on anything, particularly anybody in the public sector. That gave rise to this horrendous deficit to which I have referred already. The problem tackled by this Bill starts off with a deficit which we inherited and which, in spite of what Senator Ryan said, was in excess of anything which we imagined or spoke about publicly during the general election — and I was intimately involved in that campaign. Senator Ryan says that that serious financial position and the question of borrowing to pay our current bills were adverted to by Fianna Fáil during the election. My memory of it, however, is that the former Taoiseach specifically misled the nation by saying that the borrowing was for productive purposes, forgetting to point out that a significant portion of the borrowing was not for productive purpose but for the current deficit.

The deficit problem must be tackled, as must the question of our competitiveness. In order to do that it may be necessary to increase the notional rate of inflation or the real rate of inflation in the initial period. If we fail to get our public finances in order the size of inflation increases which we are storing up for ourselves will be so significant that ordinary people will be crippled in years to come. It is also important that we consider general Government strategy, as this represents only part of that strategy. Senator Ryan referred to the various other suggestions and policies of the Government which, no doubt, he will get an opportunity of discussing in due course.

In this Bill, by reason of the fact that there is a certain levy on banks, a levy with which I agree, there is a recognition that something has gone very seriously wrong in regard to the question of the volume of money which we collect under the heading of capital taxes and a very serious state of affairs has come about. In this case it is not only as a result of the activities of the last Government but as a result of the activities of all Governments over the last ten years. Up to 1973-74 — and this is entirely relevant to our current budget deficit — we had only one capital tax and that was death duties. That raised about £13.2 million, or about 2½ per cent of our tax revenue. That was replaced by three different taxes — the wealth tax which has since been abolished, the capital gains tax and the capital acquisitions tax. The total yield from these taxes is only £14.4 million, or one half of 1 per cent of our revenue.

We would be failing in our duty if we did not place on record that a significant contribution from those who have capital in this country, in a planned and helpful manner, will be necessary in the elimination of the deficit to which Senator Ryan referred. It will not be possible to eliminate that deficit purely by increasing indirect taxation. It certainly is important that our borrowings be brought under control. All sections of the community will have to make their contribution to that. It is in their own self-interest that those with capital would see that they have a significant contribution to make, because they have a vested interest in the preservation of our present social order. The preservation of that social order is dependent on our being able to control the inflationary spiral to which we have been subjected. Our inflationary spiral will not be brought under control until we move towards bringing our current deficit under control and in this Finance Bill the Government have sought to do that. In doing so, they should have the support of this House.

There seem to be two trends of view in the Opposition Party on the current position of the Government. You have the doves, with whom I would identify Senator Ryan, saying that the current budget deficit is too high and must be eliminated gradually over a period of time and you have the other people who pretend that there is no problem there at all — and the Leader of that party is in that position. By reason of that pretence, they then make the illogical jump and say that borrowing should continue, as this is a strong and prosperous country and our credit rating is high.

There has been much debate over the last few months about whether we are or are not a prosperous country, whether our credit rating is high or low. Our credit rating, of course, reflects the type of society which we are and we are one of the most privileged and richest countries in the world. That is a fact, but we should not be misled into believing that our problems are any less real because of that fact. Our problems are no less real than the problems of Bangladesh which would be among the poorest countries in the world. They are just different because while a country like Bangladesh might have considerable difficulty in borrowing on the international money market, we might not have that difficulty. It is precisely because the international monetary people would think that we would have the capacity to repay that they would lend us the money. They would also expect of this country a standard of behaviour totally different from the behaviour they would expect from a less developed country.

It is true to say that our capacity to repay is very much greater but our expectations are very much greater as well and our capacity to repay in drops of blood at a later date, by reducing standards of living, is limited by reason of the fact that our people are unwilling to accept a reduction in their standard of living. We could repay all our borrowed money without any difficulty provided we were willing to accept the standards of living of some of the less fortunate countries of the world, but that is not realistic. The problem is that if we continue to borrow we will in the future have a serious problem repaying that money while maintaining our standard of living. The problem will not be repaying it. The problem will be repaying it while maintaining our standard of living.

It is not a question of whether Ireland is rich or poor. Ireland is a rich country, one of the richest in the world, but the expectations of our people, which have been fuelled by successive general elections, are also high and the whole body politic and the people involved in the body politic have a responsibility in that regard, a responsibility we should take seriously.

The Government are to be commended for tackling the problem. Senator Ryan says that there are differences within the Cabinet with regard to the way the budget is to be reduced. I do not know how he obtained that information but I would be amazed if members of the Cabinet did not each consider, just like members of the public, that cutbacks should be made, but not in their area. The general view is that, certainly, we should bring our finances under control but that this should not affect us.

What is taking place at the moment, vis-á-vis pressure groups urging the Government to change the policy contained in this Bill and also other policies which are of a cost-saving nature, is important not only for the political future of the party of which I am a member and of the political party with which we are in coalition, but also in regard to the fundamental stability of our society. The lessons of the last two years must be learned and requests, which in themselves are reasonable but which add intolerably to the burden on the remainder of society, must not be allowed to continue or be conceded. It is important that our backbone be stiffened in this regard and that we would not indulge again in the eighties in that form of politics which disgraced this country in the seventies — what I call the politics of promise.

No Government stand indicated to a greater extent than the last Government for the way in which they mismanaged the public finances and raised our rate of inflation beyond that of the remainder of the EEC. They were irresponsible in the way they encouraged an increase in consumer spending, thereby increasing the growth in the adverse balance of payments. No Government since the foundation of the State has been irresponsible to anything like the same extent as the last Government. This Bill represents an attempt by this Government to tell the people, in a simple way, that they did not get the full facts for the last few years, that the last Government were not telling them the truth, that deliberate changes in budgets and the public capital projections were made so as to reduce the deficit artificially and lull people into a false sense of security. If they are not aware of those facts we must use this opportunity to make them aware of them.

We must develop a suitable strategy for the future. That strategy must start by at least stopping the growth of the current budget deficit. In so far as this measure seeks to do that, even though it is only a first step, it should have the support not only of Members on this side but all Members of the House who may have differences of opinion about the next stage of our economic strategy. No serious economist has suggested that what was done was wrong in any way and no serious, cohesive argument has been presented, in this House or in the other House, against the actual measures contained in this Bill, except to say they were not suitable, without indicating what measures the Opposition would have considered suitable, had they been returned to power.

I would certainly support this Bill as being the first step in the creation, firstly, of a public awareness of the seriousness of our problem and, secondly, in the changing of the attitudes of all those involved in economic activity, particularly those who are undertaxed at the moment — they are the people who are dealing in capital wealth rather than revenue wealth. In so far as this Bill makes a small start, it is to be recommended for that particular aspect. In general, I express my party's support of this measure as being the minimum which is required in view of the disgraceful performance of the previous Government in misleading this country as to the true state of the nation's finances.

Mr. B. Ryan

There is so much to be said about the state of our economy. I am always amazed when eminent politicians turn to economists as their ultimate source of solid advice and opinion. Five or six years ago one eminent group of economic forecasters at the beginning of a year forecast a particular growth rate on the assumption that there would be what they called income moderation. The same group, at the end of the year, produced the result that the economic growth was actually greater than what had been expected. The reason they gave was the increase in money incomes over and above what they would have regarded as moderated. So at one end of the year they were saying we would have a particular growth rate if we cut back our incomes and at the other end we had a higher growth rate because we did not follow their advice. Ever since, I have been sceptical. I am always sceptical about the idea of objectivity in any so-called science.

I heard another prominent economist talking about the problem of our budget deficit. As always, he tackled our social expenditure as the major area of waste. He mentioned particularly expenditure on the health services, indicating the five or six-fold increase in health expenditure over the last ten years. He then proceeded to say, with all his authority as an objective economist, that we were no more healthy, and obviously expected to be taken as seriously on that second opinion as on the first, that expenditure had gone up.

Economists are always very careful to shy away from things like expenditure on prisons. God knows how much we spent on prisons over the last ten years but our crime rate has not gone down. Economists who advise us politicians and the Government about public expenditure always find a reason to detach themselves from those controversial issues. It might get you into trouble with the public if you suggested that you were wasting money on prisons; and into trouble with the law and order lobby who tend to concentrate strongly on the upper economic classes and the upper income brackets and who might be prepared to believe that the poor were skiving off the health services but could never believe that our prisons did not need to be multiplied six-fold.

Economists who claim to be objective tend to be influenced, just like the rest of us, by their background, their experiences and their influences on them. I do not attach too much importance to the so-called plea of economists to be objective. They are no more objective than the rest of us. I find it very difficult to accept that plea in any economic argument. We have an extremely large deficit between current income and current expenditure. As one who was not involved in politics during the last general election I am inclined to accept on the one hand that the Government at the time were spending money like rain, which in Ireland comes every second day, and you do not have to worry about it because it will always arrive. The putative Government, at least the major part of it, while it wrung its hands in great pain at the state of the finances, did not hesitate to offer more of the same in an attempt to get into power, but I do not blame them.

The basis of our whole system and philosophy is the myth of a continued guaranteed increase in material goods, because the fundamental, underlying assumption of the growth strategies for our economy over the last ten years has been that material incentives are necessary to get people to work harder to produce more and that this particular incentive must be directed in a specific way towards the entrepreneurial class. They must have incentives to produce, incentives to work, to develop new ideas, to extend and to expand. That is based on the assumption of continuing expanding material growth.

It is very hard to reconcile that with an appeal to ordinary people, who do not have access to these great incentives, to temper their expectations. There is a fundamental contradiction in the economic philosophy of succeeding Governments which is that you appeal to the patriotism of the ordinary working man but you must appeal to the pocket of those who invest money and those who develop new ideas. I have never understood this contradiction in economic philosophy. It seems we are saying that we cannot control one crowd, so we will have to pay them; possibly we can control the other crowd so we will try to appeal to their patriotism. I am not an economist, and I cannot understand the fundamental difference in values between those who control investment decisions, those who control wealth and property and those who are at the bottom of the economic scale. The average working man has a takehome pay of £107 per week, a massive sum, no doubt. Some people would probably regard it as excessive. They are the people who are asked to bear the economic burden. I do not understand this and perhaps the Minister and his advisers will explain to me where I am going wrong.

I am aware that agricultural production in this country is scandalously low in spite of the fact that we have the fundamental capacity to produce more and to do so more cheaply than anywhere else in Europe, yet there is enormous inefficiency in our agricultural production. Nobody has suggested that we tackle the problem of the abuse of the trust that the farming community have. They hold the land of this country in trust for the community and the abuse of that trust is reflected in the inefficiency of many farms. Only a limited amount of land is available and it is one of our fundamental resources for economic development. Surely our taxation structure, our land ownership laws and fundamentally our constitutional attitude to the ownership of land should reflect the fact that this is our most fundamental resource, that this is where we should base our industrial development. If it cannot be developed efficiently and productively by those who currently have charge of that resource, then the objective of the State ought to be to transfer that resource to those who can manage it properly. While I would be the last to advocate State farming as an alternative to the present system, I do believe that land — and I would quote for anybody who wishes to argue with me the recent Papal Encyclical on the ownership of capital and property and particularly the ownership of productive property and productive assets — is held in trust for the community and nobody has an absolute right to hold on to it if he does not fulfil that trust. There is no way we can have industrial development in this country without a properly developed agricultural base.

The unpublished Telesis report pointed out that the fundamental problem in the food and agricultural sector was the inefficiency and unreliability of the basic production unit. That is the major area in which this country ought to be growing. It does not require foreign investment on any great scale; it does not require major amounts of imports; it requires people to operate an existing resource efficiently and productively. I do not believe that the present price structure in agriculture is the fundamental cause of the problem. There is a fair amount of evidence that during the good years the unit productivity in agriculture did not increase all that much. The prices went up dramatically but productivity in agriculture did not increase in the same way as productivity in the industrial sector. That is a terrible reflection on the way we have organised and developed the most fundamental and the most basic resource we have.

There is a question about the way grants and incentives, which after all are paid by the taxpayer, are used in the agricultural sector in the sense that they tend to move exclusively towards those who are capable of producing efficiently. I always notice that in the case of incentives to production and so on, which are part of our taxation and budgetary policies, there is none of the selectivity that is usually argued for themself We consistently hear long arguments about the need for selective welfare systems, that we cannot afford universalist welfare systems. When it comes to grants and incentives to production there is never any attempt to apply that particular philosophy of selectivism. It is apparently quite acceptable to give massive grants to those who are perfectly well in a position to produce efficiently. This is particularly true in the agricultural sector.

If we are to talk about the fact that we have a massive budget deficit, we should begin to look at the sorts of grants and supports that are given to agriculture and examine whether those grants are being used as an incentive to increase production or whether they are being used as an incentive to those who are producing reasonably comfortably to live comfortably without bothering to increase their efficiency. There is a question mark there.

On the industrial sector, I understand we spend in the order of £2 million a year on industrial development. There was a very interesting article in The Irish Times during the week about the way some of that money is being spent. The thrust of our industrial development is based on the assumption that the private sector in industrial development must be the major growth area. I have no objection to the private sector. I am not a doctrinaire Marxist or a doctrinaire socialist. I believe there is a role for the private sector, but I believe it is a role for a real entrepreneurial private sector, not a private sector that appears to be afflicted with the welfare mentality that is often attributed to social welfare recipients and which expects grants to work, grants to invest, incentives to produce, incentives to export, incentives to employ, incentives to extend. With the attention and protection which the Irish private sector have I can understand why they do not bother producing. They have no real incentive to produce.

Our industrial development has been spectacular but it has been very inadequate in important areas which would of themselves produce further revenue for the State and would probably contribute something to developing or minimising our budget deficit. I refer to the interlinking of industries. We have a very atomised industrial base, largely because of the almost exclusive concentration until recently on a strategy of attracting foreign investment which was never related to other industries.

For instance, we have in Cork a large range of chemical industries but we do not have a chemical industry per se in Cork. We have a large number of individual chemical industries which have nothing in common and which do not work or inter-link with each other. That is the area in which real localised economic growth ought to be, in the area of inter-linking industries. I understand it is called “horizontal integration”. There is none or little of that in the grant-aided industries introduced by the IDA. They tend to operate in isolation. The research is carried out outside the country. The marketing is controlled from outside the country. We really have no industry if we do not have a home-based marketing organisation. What we have are industries that are making use of our incentives to give much needed employment but it is not really an Irish industrial base. It is an industrial base which could just as easily be anywhere else and which provides nothing more than jobs. I do not want to minimise the role of creating jobs but we need a really integrated industrial sector if we are to have a real base for further economic development. We have spent, either directly through grants or indirectly through the taxation incentives, enormous amounts of money on that industrial development.

Paddy Moriarty when chairman of RTE did a very scathing analysis of the private sector and suggested that we were not getting the performance that their constant clamouring for attention would suggest and that they had been nearly as well cossetted as the much maligned public sector.

We need to be very careful in the analysis of industrial development because if we do not get a particularly well balanced view of what is happening in the industrial sector NET's misfortune will be forever upon us and held up to us as an example of how public sector operations go wrong. The Minister of State had a fair hand in finding out what went wrong with NET.

Another major private corporation in Aughinish has run 150 per cent over budget and has had very bad industrial relations problems which an independent inquiry pointed out were the fault of the management, not the workers. That disappeared from the newspapers in half a day. The ESB have constructed massive capital intensive projects all over this country, all of them on time and all of them within budget. Yet we are always led to believe if we read the newspapers uncarefully that the public sector is inherently inefficient, incapable of meeting targets and beset with industrial relations problems. The situation is far more complex than that.

Similarly in the private sector there is the impression that we are rapidly pricing ourselves off the market at a rate which will have half our industrial sector closed down in 12 months. Many of our industries, particularly the recently introduced IDA grant-aided industries, have productivity per unit of the workforce which is as good as that in any other part of those multinational corporations. Many of these industries are capital intensive and the role of labour costs in affecting their competitiveness is far less significant than people would imagine. In this whole area of the budget deficit, the labour costs, the need to maintain competitiveness and the need to control public sector pay are all interlinked. If we are going to talk about our budgetary problems we should look at them on a much broader basis than putting 10p on somebody's pint. There is a bigger question that should be addressed.

It amazes me that workers should be asked to accept a fairly severe pay restraint in order to stabilise the economy, but the banks apparently can do whatever they wish with interest rates, and it would be unrealistic and naive of me to suggest that they should be asked to display the same sort of patriotism. I have never understood why a non-productive sector like the banking and whole financial sector have to be allowed to work in a market which is exclusively determined by market forces and demands and which effectively means that the return on their investment must meet the rate of inflation plus, but that I or anybody else who is an ordinary working person must show a level of patriotism which means that I must have a wage rate which reflects the inflation rate minus.

I do not understand why patriotism is only something for the ordinary working man or the ordinary Joe Soap in the public service getting £150 a week. Apparently that sort of naive talk about patriotism and commitment to the national welfare is not addressed to organisations that have massive reserves and substantial profits based on high interest rates. I do not understand why we have different laws for the rich and poor.

A simple change in legislation would avoid the need for bridging finance in house purchase and would release £200 million of the banks' scarce capital for more productive and more useful areas of investment. Legislative changes which could ensure that there was no need for bridging finance could be considered if there is a problem of capital. After all, at the base of our whole economic development is the need for capital. Capital is the ultimate and final scarce commodity and it should be used properly.

The level of Government income and expenditure, the level of national income and the aspirations of people fundamentally rest on what we can produce. The fundamental requirement of economic development and growth is production. The quality of our production and the efficiency with which we produce are the final determining factors as to how our economy is going to develop.

There are major questions about the efficiency of the private productive sector. They have never been questioned or challenged and money is being pumped in. I strongly suspect that most of the industries which the IDA have attracted could just as easily have been attracted without the level of expenditure and the level of taxation give-aways that were incurred. We have, and will have for a long time to come, the lowest industrial wage rates in western Europe and a highly skilled and well-educated labour force. That is probably our biggest resource.

What disappointed me most about this Finance Bill and the general thrust of the budget that went with it was that it lacked imagination. There was a sop which was £5 million from the banks, but it effectively relied on indirect taxation to take a step in the direction of correcting the deficit in public finances. I would hate the elimination of the deficit in public finances to become an objective in itself. In much we have heard from the Government in the past months we have almost had a canonisation of this concept of the elimination of the deficit in public finance. I accept that no individual or country can go on living indefinitely beyond its means but linked into the objective of eliminating the deficit in public finances there must be some strategy to suggest that once we have done that we will go somewhere. I get the impression that all we have to do is straighten out this problem of our public finances and everything in the garden will be rosy from then on. I would like to know more of where we are going if or when we get our public finances under control. I am not particularly persuaded that budgetary rectitude year in, year out, forever Amen is necessarily a fine and noble national objective.

I heard the Minister for Finance at one stage propose that a constitutional amendment which would limit the extent to which the current account would fall into deficit would be a good idea. I found it rather awesome. The only country I know which has actually done that is Chile. Apart from their political problems, which are appalling, they have a much higher rate of inflation and unemployment and a much lower level of industrial production than we do. They also have an appalling level of repression. I would not like to see budgetary rectitude become some sort of holy writ.

We are told that changes in direct taxation in mid-year are very difficult. I seem to recall Deputy Richie Ryan doing something to my income tax half-way through the year when there was a severe problem. The problem with indirect taxation is that it penalises the lower paid. The Government may sing for ever about the 5 per cent increase in social welfare, but there are a lot of poor people who do not get social welfare. There are lower paid workers; there is the female industrial labour force which has an average income of not much more than £60 or £70 a week. They have to pay all the indirect price increases and they have got no concessions and no support from this budget. Do I take it when the Government talk about everybody who can afford it having to pay for our previous splurges of excessive expenditure that they include people on incomes of £60 and £70 a week? What about all the people who are on pensions that are not social welfare pensions, particularly those, for instance, who are the dependants of public service pensioners? A guard's widow or a teacher's widow receives about £40 or £50 a week and yet they have been penalised by all these indirect taxes and will get nothing to compensate them. They are paying all the indirect taxes on food and drink. Part of the cost of food is the transport cost and food prices are increased by the increase in excise duty on petrol.

As a non-economist this disappointed me because I could not understand it and also because of the concern I have for lower income groups generally. The Government who said they had a commitment to abolishing poverty naively assumed that giving a 5 per cent increase in social welfare would protect everybody on a low income from the ravages of this huge increase in indirect taxation. Large numbers of people on public service pensions will be penalised by it. Another of the favourite myths that float around is that public service pensioners live in some sort of paradise of index-linked pensions. They do not have index-linked pensions; they have pensions that are linked to the increase in public sector pay. I understand that if the Government have their way that will not be particularly big next year, and public sector pensioners will suffer accordingly. Those two groups, lower paid workers and pensioners who do not have social welfare pensions, are a large section. A large area of the public service did not contribute to a stamp until relatively recently and they are not covered. They are penalised by transfers from the poor to the rich.

I did not address myself to the area of capital taxation because I have heard so many contradictory assessments from objective economists about the stock of capital in this country. What is the total sum of wealth and capital here? I have heard figures which are so widely different that they call into question the whole quality and capacity of economists to advise us about the future of the country. I cannot even talk about capital taxation because I do not know whether any two economists could agree on the total value of capital in this country.

I agreed with the Minister of State when he said in Kilkenny a couple of weeks ago that the problem with wealth tax was not really the fact that people objected to paying it. People object to declaring their wealth, because when they do so the Revenue Commissioners are in a position to attempt to reconcile their income with their wealth. That is the problem with wealth tax. That is why Deputy John Kelly, whom I have been known to criticise on many occasions, said that in his experience as a junior Minister there was no lobby more ferocious, more effective and more determined than the anti-wealth tax lobby to which the previous Coalition Government were subjected.

The trade union movement which represents 500,000 people in this country is sometimes dismissed as a pressure group. I do not believe a group which represents so many working people is a pressure group. It is a major voice of a large section of our society which would otherwise go unheard. It is dismissed as a pressure group in the same way that the tiny minority of 5,000 or so who would have been subject to wealth tax are a pressure group. The latter are unrepresentative and have no voting power but they can apparently coerce and persuade one Government into alleviating a wealth tax and the next Government into abolishing it completely. Now they have apparently scared the living daylights out of this Government as to how they will fulfil a commitment on capital taxation.

This Bill is unimaginative because it confines itself to old ideas and to tried and trusted methods of raising taxation. It is unimaginative because it does not show any consideration for the large sections of poor people who are penalised by it and because it does not really tackle the question of the ownership and control of wealth. It has so far reflected no real willingness on the part of the Government to be imaginative about the use of our own resources and our land. It reflects no real imagination in the area of industrial development in the private and public sectors. Government pronouncements have reflected day-to-day prejudices about the public sector many of which are not sustained by the facts. The Bill reflects no real understanding as yet of the role of marketing and research in the development of the proper industrial base we need. It has a sop of a £5 million levy on the banks which reflects no real attempt to induce that sector to play its proper role in industrial development.

I remind the House and the Minister of State that in countries that are often lauded as models of private enterprise, such as South Korea, Taiwan and places like that, the banks are given a target by the State and told "These are the industrial sectors in which we expect you to invest your money." In this country such an undertaking would be regarded as a scandalous interference in the rights of the private sector. In the models of private sector development in Asia that is exactly what is done, and done consistently. I do not understand why the banks have such lobbying power that we can do nothing about their excessive profits.

If there is a scarcity of capital the law should be changed to abolish the need for bridging loans. On the banks' own assessment that would make £200 million available for investment. They do not want to put this money into industrial investment, because it is much safer to give it out in bridging loans which are guaranteed loans at a maximum rate of return. I suggest that a change in legislation could deal with it.

My final point is that the Government should rely less on the so-called objectivity of economists.

Mr. Carroll

I join in the welcome to the Minister. I would have wished that we could have talked with him on a less controversial subject. Much has been said about the budget and many views have been expressed about it. Advice of all sorts has been tendered by people like myself and others who are involved in the consequences of a budget by any Government.

A general view has been expressed by the trade union movement and I have indentified publicly with that view and I want to repeat that identification here this afternoon. The effects of the budget, far from improving the economic situation, seem likely to worsen it as a consequence of the deflationary policies on which the budget seems to be based. The cutbacks in the public investment programme forecast in the budget must inevitably lead to a slow down in economic activity affecting not alone the public sector but also the private sector. There can be no other result but loss of employment and loss of production at a time when this nation can ill afford it.

It is worthy of note that our trade union movement, through the medium of the Irish Congress of Trade Unions, in common with the trade union movements throughout Europe — they are all represented in the European Trade Union Confederation — have emphatically rejected policies of employment reduction as providing a correct or an acceptable solution to the problems of recession. We have to avoid echoing in our present circumstances the erroneous over-restrictive policies adopted in 1957 in respect of the public capital programmes. As we know these led to enormous waste of capital and production. That observation applies with equal force to the restrictive approach in the current budget statement as related to health services and education. In these two areas we are actually touching on the very foundation on which future economic, social and even political development should be based.

In addition to those restrictive policies, the disproportionate reduction in workers' real income, which is objectionable in itself, will act upon the economy by reducing employment as a result of falling demand. If people have not enough money to buy necessities something suffers. If they have not enough money to buy luxuries certainly something suffers. Obviously when you reduce the capacity to buy you reduce the opportunity to consume and as a consequence the home market, which in large measure is dependent on demand for its products, has to suffer, and inevitably that means short-time working or unemployment.

The Minister and Senator Ryan mentioned the public sector, and other Ministers have been talking about this subject over the past couple of months. I am very concerned at the attacks on the public sector which seem to call into question its role in our community. Many of the comments are unfounded and ill informed criticisms of the level of pay in the public sector. The public has to be reminded that the public sector is not a collection of faceless people. It covers the men and women who teach our children, the nurses and the other staff who look after our health needs, the Garda, those who provide local and community and public transport services, those who provide electricity services and so on, and those who look after the very important area of public administration, including those who provide essential services by way of guidance and otherwise to agriculture and to industry, and not forgetting those who keep our roads, rivers, forests and seas or coastal waters in adequate trim.

Statements by Government Ministers or by other spokesmen on the cost of the public sector without reference to the essential nature of the services provided and the fact that public sector pay is already determined through long established procedures, including conciliation and independent arbitration and the Labour Court, are not very helpful.

We have also to remember that the level and style of the public service we have are in response to the demands of the people and influenced in some measure by the adequacy and the advice and the promises of politicans. If we provide a certain level of service needing backup, staffing and manning, it is rather a strange situation when those who bring that about as a reaction to a need then begin to quibble at the cost. I accept that the question of cost has to be very carefully examined but it should not be done at a time of recession to try to curb the demands of workers that their pay keep pace with the rising cost of living. The fact that statements of that kind are made — and indeed too many of them have been made in recent times — constitutes an affront to the public sector itself and it certainly does not reflect very well on all of us as citizens who have demanded the scope and volume and style of the services being provided. Indeed, in many cases we would all argue, depending on our own interests, that many of the services we are enjoying or suffering need to be overhauled and improved in one way or another.

I stress also that the trade union movement of which I am a representative and with whose views indeed I have identified has condemned the indications in the budget statement that severe cuts in public services and threatened interference with public sector pay procedure were not calculated to do harm to the whole code of industrial relations practised, and indeed to good relations between employers and workers. I believe that much of the unwarranted criticism made of the public sector and the references made to the need to moderate pay in the public sector and so on have created tension in that sector which does not help when we need to get the loyalty and the dedication and the application from public servants which is their wont. I am not suggesting that any public servant has held back in any way, but I think it is important that we should desist from creating tensions in an area where there are other problems to be attended to without people being unnecessarily upset or worried. The blanket declaration by the Minister for Finance that all public sector employers would be requested formally to invoke clause 6 of the agreement on pay embodied in the recent National Understanding, to my mind discriminated definitely against workers in the public sector. It certainly was not acceptable to those workers or to their trade union representatives. I understand that there has been some slight change in thinking on the part of the Government and that the trade union movement initially may have either misunderstood or too rigidly interpreted what the Minister had said. I hope that that is the case and that we are not facing this terribly rigid approach to the determination of wage levels within the public sector on the basis of agreements which have held fast down the years.

Many of these claims, and indeed the question of pay moderation of itself, arise from the impact of the tax changes in the last budget as well as the impact of increasing prices during the currency of the last National Understanding. I accept without question that it was not alone the supplementary budget that brought problems in its wake. The problems were already mounting and there had been much discussion on the falling purchasing power of workers' wages.

Nevertheless, it is a fact that the greatest portion of the indirect tax increases — I gather they amount to about £300 million a year — would be derived from goods pruchased by workers and their families. Obviously that means a fall in living standards. If it is to cost workers and their families an additional £300 million or £400 million to purchase the same volume of goods and services as they were purchasing before, something else has to suffer, and inevitably it means a reduction in living standards.

At the same time, as has been said by other speakers, no attempt was made in the budget to introduce greater equity into the tax system. The trivial levy which was imposed on the banks was not even a cosmetic operation: it was a rejection of the PAYE sector, who demanded and argued that banking profits should bear a much fairer share of taxation and that the banks' virtually tax-free status would be ended. I understand that the entire amount to be raised this year by the VAT increases, £28 million, could have been raised by a 3½ per cent levy on the banks' current account balances in place of the derisory £5 million levy proposals which were included in the budget.

The favoured position of the banks is exemplified by what I would term their cynical advice on the morning of the budget that if the Government took action, which they did not do, to prevent one system of tax avoidance on bond holdings, the banks would then be in a position to respond immediately and to get an alternative system to operate to ensure that those who had been caught in the swings would be able to pick it back up on the roundabout.

In the supplementary budget no effort was made to raise revenue by heavier taxation on the wealthy, whether by a surcharge on higher incomes or changes in capital taxation. The excuse the Minister for Finance gave was that it was not possible to have recourse to capital taxes at short notice. Maybe he is right. I do not know enough about the administrative aspects of all this, but it has been suggested to me that a few sections of the Finance Bill were all that would have been necessary to effect changes in the existing capital taxes.

As we know, there was no special impact on luxury spending, and much of that luxury spending, as we know to our cost, is on imported goods. I would venture the opinion that too little has been said by too few about the very large volume of imported goods, including luxury goods, and one of the things I will always complain about is that even on occasions when we get wage increases for workers, too many of the workers themselves are not sufficiently critical of the source of the goods and services which they are enabled to purchase with the slight improvement in purchasing power at a particular point of time. That is one area where all of us have to share responsibility. I think we have fallen down on the task of trying to bring home to our people the need to support Irish goods and services.

It seems that the Minister did not seek to raise any extra revenue by way of direct taxation on the incomes and the wealth of those who recently speculated more than £40 million in a mad scramble to buy shares in an oil company. You will remember this happened around the time of the budget and it was a rather obscene expression of the wealth which a number of people have and which they can use to suit their own purposes, almost with abandon, without worrying about how the one million people who are living on or below the poverty line are to exist over the next few days.

It is that type of brash display of wealth from time to time — it is evident in other areas too — which causes discontent and disquiet and indeed leads the average person to inquire if we really know what it is all about when we are talking to them about being moderate in their demands on the resources of the nation. What does moderation mean to a person who is already so moderate in his whole standard of living that any more moderation drives him or her back down into the lowest levels of wages and purchasing power and creates the additional stress and struggle which in turn can cause ill-health and all sorts of other problems within the family? This in turn can call on the resources of the nation to try to repair one defect through the medium of health services or whatever else.

We seem to be at times unaware of the fact that we are robbing Peter to pay Paul when we are dealing with people. The Minister this afternoon touched on this, and I must welcome his statement about the Youth Employment Agency. I recall that originally it was indicated that funding of this agency, and I am quoting, "would involve a levy of 1 per cent on incomes", and it is important to draw attention to the fact that the Government's programme referred to a 1 per cent charge, and I am quoting "on all incomes". I would like it to be clear here that we are not just talking about a 1 per cent increase on PAYE workers but about all income earners — that we are talking about farmers, about the self-employed, about professional people. They have got to be effectively taxed, and indeed corporate incomes should also be subject to this levy. The Minister might be able to clarify that point for me, because I do not think we could tolerate a situation that a levy of this kind would apply absolutely only to PAYE workers.

Again arising from the supplementary budget, we got the increases in the social welfare benefit payments, but we are talking about 3 per cent and 5 per cent increases. There is not the slightest doubt that everybody would have to accept that these are less than half the increase in the consumer price index between April last, when the previous rates of benefit came into operation, and October of this year when our new rates came into being. Over that period the CPI will have risen by at least 10 per cent, and against that we are talking about increases in social welfare benefits of 3 per cent and 5 per cent. I know that it is a second bite of the cherry in the one year, but the facts are stark as far as social welfare recipients are concerned: they are getting 3 per cent or 5 per cent depending on their condition as against a more than double increase in the cost of living in the same period. It raises a big question for all of us on the type of sacrifices we are prepared to make to ensure that the less privileged among us get a better deal out of society. It is regrettable that the higher increase of 5 per cent did not apply to widows under 66 or to the long-term unemployed.

We can recall that in the presentation of the supplementary budget the Minister for Finance foreshadowed higher PRSI contributions being implemented this year when he spoke of the introduction of hospital charges and increased prescription charges from August. At that time no indication was given of the amount of the PRSI increase or of the health charges. It would seem almost as if we are to be faced with a third budget in the one year as distinct from the budget which we will get in the beginning of next year. That is something that certainly does not contribute to confidence on the part of people who have to go out to earn their keep and try and contribute usefully to the development of the nation if you have this type of insecurity and concern and worry over a period of months. Can we really be critical of the people who stand up and say: "If the politicians of the day are so insecure themselves in their assessment of the situation, should we not as people try to make some provision to protect our own situation."?

That takes me to the question of pay and prices. The effect of the budget and the related decisions, depending on which experts you believe, ranges from 5 per cent up to 8 per cent — all sorts of figures are being mentioned but we will just take that range. That can mean that the inflation rate for 1981 will be in excess of 20 per cent while the increase in the consumer price index between November of last year and this month will be at least 23 per cent. So you do not have to be a mathematician to work out what that means as far as the standard of living of the individual is concerned. It seems crazy, to me anyway, for any Minister or any politician or any academic or economist to think that sharp increases in prices will not be reflected in an equally sharp demand for increases in wages. It has got to be realised that the nature of the tax increases which we have suffered and the inequity of many of them were not a contribution towards the achievement of the hope for moderate pay increases this year.

We would have to acknowledge that events in the last three months in particular have cleared this point for us. There has not been the acceptance by the populace at large that there would be the type of moderation in pay demands, as distinct from pay increases which of course is another matter, which the Government of the day were arguing was necessary, and I agree they were supported in this argument by many people who would normally have a reasonable amount of credibility in public circles, with the exception of three of them who by their approach to the problem brought into disrepute the whole discipline of economics as practised nowadays.

The Minister said then, and I am sure the Minister of State will echo the point, that the Government saw the need to implement a new approach to incomes in the context of the impact of wages costs on the economy at large. The trade union movement and I would agree that in massive changing situations there is need for a reappraisal of the approach to wages. We can all recall that in the old days you sat down around the table, you put a claim in for X shillings or pounds a week and you did the best deal you could and you came out with X minus. We have changed that very unsophisticated approach to the concept of involvement of the trade union movement and the social partners in the whole area of wages and interrelated matters, and this all took us up to the most recent National Understanding in which all the parties subscribed to the need for involvement in the whole process of economic and social development.

The trade union movement has claimed with some merit that its contribution to that was to moderate its demand on society, on the community, for wages, for purchasing power, and the statistics are there in abundance to establish that indeed there was this level of moderation. I have a host of figures which I could quote to support the argument that since 1975 to date the real value of workers' wages has fallen behind the cost of living and that they are still standing still or running like mad on a treadmill, whichever way you want to put it, to try to stand still or to have to stand still. But our real position has not improved, and I was rather surprised to note the Minister saying that, and I quote, "The harsh reality is that living standards of most citizens have been moving ahead in recent years at a rate that this country cannot simply afford."

It may be true that the living standards have been moving ahead for some people, but I repeat that when you examine the statistics which are there, which have been produced by independent sources, they do not establish that since 1975 to date the average working person is enjoying a living standard that would conform with the argument which the Minister has adduced this afternoon. When you bear in mind also — I must confess that he did not say this — that there are more than one million either at or below the poverty line, it makes it a little bit of a joke to talk about living standards when in fact so many people around us and among us have a very low standard of living at present. I shall not quote all these figures because each and every one of us can quote them to suit his own purpose, but I would like to refer to a point which was touched upon by Senator Eoin Ryan. He referred to the question of employment and to the commitment which the previous Government and this Government either had or have in this area. He was commenting critically on the performance of the present Government in that respect. I would have to say that under the outgoing National Understanding the outgoing Government entered into a very positive commitment, and it is so important that I am going to quote it. They said:

The Government undertakes to prepare a comprehensive statement of the proposed measures and the necessary requirements for the achievement of full employment and greater social progress. An initial draft will be produced by the Government around the end of November 1980 and will be discussed between the Government and the Irish Congress of Trade Unions, the employer and industry organisations and representatives of the farming community, in tripartite discussions directly between the Government and the interests mentioned. Following on this consultative process the Government will publish this final statement before the 1981 bud get.

Not alone did we not get the initial draft by the end of November 1980 or by March 1981, but we had not got it by the end of the term of office of the Government nor had we any idea at all of a comprehensive programme of economic and social planning and development.

Against the undertaking which the outgoing Government gave to provide means whereby job losses would be contained and through which there would be job increases, I have figures of what were stated as the objectives of the day and which the present Government had to advise congress in August of this year were not attainable because the mechanisms appropriate to their attainment had not been introduced, or if they were introduced were inadequate for that purpose. Therefore I welcome the point made by the Minister in respect of the youth employment scheme, though I would have some criticism to express about the actual manner in which that scheme will operate. The concept is good if we can get it operating quickly and not go through another exercise of debate and maybe getting to next March or April before it would get under way.

At the same time I would express a welcome for the commitment which the Government have given to consult this week with the interested parties on the question of the progress they are making towards the introducing of a national planning programme or corporation that they had in mind. I would hope that all of us will learn from the experiences of the last ten to 20 years and be much more positive in our approach to economic and social programming than we have been in the past. I would object strongly if this or any Government merely sought to use any of the social partners as a vehicle to express their thinking as to what might or should be done in the planning or programming area and then subsequently say: "Well, did we not consult?" when in fact all they were doing was telling the trade unions, the employers, the farmers, that they all have a role to play in the development of a programme of economic and social development without any Government input.

Having given my opinion of the impact of indirect taxes, I must re-echo what is being said by myself and others outside this House, that the trade union movement is opposed to the whole idea of indirect taxation. We believe the transfer of taxation to the individual, with the consumer having to go out and pay directly and indirectly for goods and services to support developments in the economy, is the wrong way to go about it. Our thinking will not change on that unless a great deal of new evidence is put forward to establish that there is merit in such an approach. I will not talk about monetarism or Thatcherism or any other sort of an "ism" except to say that if in the 1982 budget we get another impact of indirect taxation, whatever might be done between now and then to bring about a rational responsible agreed approach to national wages could well be undermined and set aside. This is something that all of us who are involved in that process and who are concerned about the development of the nation should bear in mind carefully.

I will finish on the note that although up to last week it appeared that because of the substantial rise in the cost of living in the last few months and because of the anticipated rise throughout 1982 there seems to be little possibility of the social partners finding accommodation with each other on the matter of wage increases, it is important that I should welcome the most recent steps which have been taken at Government level to try to bring about a change in that situation. I might be carping a little bit if I say it is a pity what is being done now was not done last week or the week before because the tensions which in turn arose from the failure of the partners to reach agreement might well have been eliminated altogether. I repeat that when you have tension in industrial relations it reflects itself right down to the factory floor, and when you have tension on the factory floor productivity suffers, relationships suffer, both human and industrial.

My parting shot is that it is not good enough that we should be talking just about wage moderation. We should be talking about national responsibility, about what the workers can do by way of greater effort in productivity and so on. We must be more condemnatory of the defeats of management in industry and we must be more demanding of them to discharge their responsibilities than we are in criticising workers. In the last analysis it is management which call the tune: they have influence over the investment programmes, they have influence over the type of industry which we are involved in, over the whole industrial engineering set-up in a factory, over the marketing, the policing of developments in their industries, and it is not good enough that we should expect workers to carry responsibilities when at the same time we are not prepared to give workers the direct say which they have been demanding for a long time in the shaping of industrial policy and economic development. Until we get economic democracy as well as political democracy, although I am not too sure we can have one without the other, a clearer and more positive style of economic democracy, we will always have tension in the work-place. This is why the responsibility rests on the Government and on management and on investors to accept that the worker has a right socially and morally to participate fully not alone in the development of his industry but through that in the actual development of the nation, not just to be a finger-pointing instrument when it suits any one of us for our own particular purpose.

Professor Hillery

In welcoming the Minister of State, Deputy Desmond, to the House I would like warmly to congratulate him on his well-deserved appointment. I wish to confine my brief contribution to some general observations.

The reduction of inflation we are told is the primary aim of Government strategy, so that it will form a basis for increased industrial and agricultural production. This reduction in the inflation rate is to be achieved mainly by a moderate incomes policy. What then does the budget do to help to achieve this strategy? Quite the opposite, I fear. The July budget has added 5 per cent to the cost of living, which in turn has fuelled inflation. It has created a situation in which it is particularly difficult to achieve moderate pay increases. The indirect taxation measures in the budget constitute a severe blow to lower income groups, a point which has been made by Senator Brendan Ryan. Furthermore, there has been a cruel imposition on social welfare recipients. The original intention was that the budget would add 3 per cent to the cost of living. We now know, however, that it has added 5 per cent to inflation.

The Labour Party, in the common programme, said that they would not tolerate more than a 3 per cent rise in inflation to pay for cuts in direct taxes and the £9.60 a week for housewives, and that other taxes would have to be imposed for the remainder of this cost and whatever inroads were to be made into the budget deficit. Independent economic experts have estimated that the impact on inflation of the proposed tax package, if pursued, would add about 8 per cent to the existing inflation rate. The Labour Party obviously have been forced to agree to a strategy whereby inflation will be quickened in the vague hope that the resulting drop in income tax would encourage workers to moderate their wage demands.

Inflation is now running at more than 20 per cent, and the figure up to very recently mentioned for a pay norm has been 6½ per cent. This is unrealistic to say the least. Of course there has been some change in recent days in the Government's stance. The Government are adopting a more realistic approach towards future pay levels in order to go some way towards meeting this very high inflation rate. You cannot explain to the lower income groups, to the hard-pressed parents of a young family on a low income and paying a high interest rate on a mortgage, for example, that they should accept 6½ per cent at a time when inflation is running at 22 per cent.

I want to make one comment in relation to the public sector. Senator Carroll has already elaborated on the position of people in the public sector. It is unfair that they should be made the scapegoats for the current budget deficit. It is a matter of fact that between 1971 and 1981 real incomes in public administration went up by 20 per cent but double that figure was recorded, 40 per cent, in the case of real income increases in manufacturing industry.

What then of social welfare recipients? The pensioners, the widows, the handicapped do not have industrial muscle. Conscious of their vulnerable position, the Fianna Fáil Government in 1980 and 1981 gave increases of 30 per cent to those on social welfare. Now they have received a pittance by way of compensation for the increases in indirect taxation that have been imposed following this budget. Earlier in the debate Senator O'Leary referred to the politics of promise and pointed the finger at the Fianna Fáil administration in this context. It takes some nerve to use that term when we consider the contents of the Fine Gael election manifesto. It was skillfully packaged and sold but it was not, as was claimed, carefully costed.

The administration of the proposed tax collection alone has already come home to roost in that the Minister for Finance has directed that increased staff, as necessary, be allocated for the purpose of the £9.60 measure. The objective of the July budget is to provide a curtain raiser for the 1982 budget to enable some of the promises so freely made in the Fine Gael manifesto to be fulfilled. The income tax package in the manifesto has been severely criticised by respected economic authorities and they have strongly discouraged its implementation.

On a more general level it is true that nationally we are facing formidable problems. European comparisons are made from time to time showing our inflation rate and so on, but we are not comparing like with like, I accept that we have to be sensitive to the inflation levels and production costs in the countries with which we trade. It is a fact however, that almost half the population in this country is under 25, in sharp contrast with most European countries who have either a static or a falling population. The structure of our population means that huge demands are placed on our resources; on housing, education, infrastructure, health and social welfare and of course on the need to create more jobs.

When Fianna Fáil left office, the Exchequer borrowing requirement was at a similar level to that in 1975, about 16½ per cent of GNP. How many of us can recall being told by the then Coalition Government that we were on the edge of the abyss? Fianna Fáil have never claimed that the present level of borrowing is sustainable in the long-term. For my own part, I am very concerned about the level of borrowing. The question is, is this level sustainable in the short term until the present recession eases and growth resumes? Despite appearances to the contrary, the Government have not, as far as this year is concerned significantly reduced either the current budget deficit or the level of borrowing. They are roughly at the same level as they were last June. All this budget has done is to remove the small but important elements of buoyancy and growth which were beginning to appear.

Mr. Staunton

I welcome the opportunity to address myself briefly to the debate on the Second Stage of the Finance Bill relating to the supplementary budget of 21 July of this year. Before doing so, I should like to welcome the Minister of State, Deputy Desmond, to this House. It is the first opportunity I have had to welcome him and congratulate him on his appointment. His appointment is extremely well deserved and I hope it will lead in time to future promotion, to a place at the Cabinet table. I cannot pay him a higher political compliment than that.

This Bill is related to the July supplementary budget which can only be described as a crisis budget. There is a tendency in this debate for some speakers to be critical of the Government for not addressing themselves to broad economic strategies in this Bill. That criticism is a little unfair in the sense that this Bill simply relates to the supplementary budget of last July which was a pro tem measure dealing with an interim situation and not the fundamentals of Government policy. For criticisms to be more balanced in that respect, it might be more appropriate to wait until the budget appears in January of next year, at which time we will begin to see the strategy that is developing.

Apart from the cut and thrust of political debate about manifestos, and so on, it is a little unrealistic to suggest that the Government need not have taken action in July of this year promptly and as quickly as possible. By any definition of financial prudence, financial regularity, we were facing a crisis. We had a budget in January of this year in which various estimates were made of Government expenditure. The reality was running absolutely wild relative to the budgetary provisions of the previous Government to the degree that the budget was either prepared on a fraudulent basis to deceive the people or it was prepared on an entirely incompetent basis. I do not know any other answer. In July estimates in the January budget seemed to be wildly out of line with what was actually happening. The figures available to the Government suggested a looming excess of about £500 million in current spending on the January estimate, a deficit apparently estimated to end up at about £800 million.

With this type of profligate spending to tally unrelated to the budgetary provisions of the previous Government, it is obvious that the public finances were wildly out of control. In that position it would have been grossly irresponsible of the present Government not to have acted in July and not to have introduced the harsh and unpalatable measures which were necessary to correct the situation to a certain extent. It will be difficult enough going into 1982. Of course there will be a deficit. Of course we will have problems. Had this interim action not been taken last July, the extent of the problem would have been horrific and would have created a great many more problems for us.

I take a pessimistic view of our position, I take a pessimistic view of this imbalance in current spending. I take a pessimistic view of a balance of payments in which we are encountering a deficit of about £1,400 million, which is running at about 40 per cent of gross domestic product. We have seen figures quoted of other countries within the EEC which do not come remotely within this level of deficit, that is, if they have a deficit at all. All of the financial statistics are appalling. We have had the extent of Government debt in 1970 running at about £1,000 million—a decade later running at what? Related to the level of inflation between 1970 and 1980, the level of debt in 1980 was running at £8,000 million against £1,000 million in 1970.

Internally debt has significance and debt creates problems for internal borrowing, but foreign borrowing can create a multiplicity of problems having to do with the possibility of an inherent weak currency within our own country and losses through exchange rates, apart altogether from the normal interest such loans bear and the factor of indebtedness to other countries. In 1974 when I was a Dáil Deputy the Minister for Finance of the then Government was berated up and down the country for alleged mismanagement of our affairs. He is a man I hold in very high regard. At that time our foreign debt amounted to £362 million. At the end of 1980—and this is a very telling figure, again proving the necessity for action by the new Government in July—we had a foreign debt level of £2,200 million — up from £362 million in 1974. From the end of 1980 until the middle of 1981, in the short period of six to seven months, our foreign debt rose from £2,200 million to a staggering £3,000 million, an increase of the order I suspect of about 27 per cent, or so.

This shows that the State's finances were getting wildly out of control. Either there was a deliberate concealment of the facts from the Irish public by the Government or there was incompetence. On either score, apart from the cut and thrust of politics, the new Government had to act very quickly to contain this extremely dangerous position for all the people.

This question of deficits and misjudgment of budgets was referred to in page 2 of the NESC Report No. 62 which criticised the former Government for these very reasons. It refers to the fact that in 1979-80 foreign borrowings contributed about one-quarter of the total sums available for investment. It goes on to say:

An aspect of fiscal policies during 1979 and 1980 has been the increasing scale of error in budgetary forecasts. Estimates in the budget statements of 1979 and 1980 suggested that the Exchequer borrowing requirement would amount to 10.5 per cent in both years, while the actual out-turns were 14.0 per cent and 14.6 per cent of GNP, respectively. The actual current budget deficit in 1979 was 80 per cent greater than forecast in the 1979 Budget, while the 1980 outturn was 50 per cent greater than the forecast in the 1980 Budget.

Is it any wonder that we have problems? If the budget of the Minister for Finance is the foundation of every household, every manufacturing company, every company in the service sector and every farmer, and if it is wildly out in its estimates in January, what kind of confidence can the people have in the running of the State's finances? It was for this reason that in July of this year the Government had to act. Indeed had they not done so I believe they would have been gravely remiss in their public duty.

Of course the provisions of this Finance Bill create problems for people, for institutions, for companies, and of course many of the measures being implemented by the Minister are unpal- atable, but by their very nature they have to be unpalatable. This air of unreality I spoke about is still keeping us in cloud cuckooland. Of course we are living beyond our means. Of course living standards are being eroded and the wages of workers are falling behind the cost of living, but they are equally falling behind for the farming community and for a great many other people. This is happening for a great many reasons both national and international. An air of unreality is permeating this debate to a degree.

In the Dáil a number of Opposition spokesmen were critical of the fact that the Government put an embargo on recruitment into the public service. Opposition spokesmen talked about how disappointed school leavers are because there are not the job opportunities there should be in the public service and said we need to create employment. One of the indictments of the last Government arose in the area of job creation. They took credit in government for creating about 25,000 jobs. On analysis it turned out that half of those jobs were created in the public sector at a cost of about £70 million. Where is the reality?

I accept that we have an excellent public service. The more I am involved in public life the more I appreciate the value of the public service but, getting back to numbers, how can a poor country with a level of indebtedness which I have described, with a relatively low tax base, with a small proportion of the population producing and paying for the party, multiply numbers in the public service? Where does the money to meet this wage bill of an additional £70 million a year come from? What is the revenue base to pay for it? Is it increased production? Is it to be got by increased income tax? If not, is it to be got by incurring more debts? The nation's debt has to be serviced.

In the end we cannibalise ourselves through the development of a policy of attempting to create jobs as a palliative, as a temporary measure to keep people quiet. For that reason I completely support this containment which there has got to be in so far as recruitment to the public sector is concerned. One or two of our spokesmen said that the very simple basis of the July budget was to get significant additional revenue to finance payments falling due but not budgeted for. It was as simple as that. There is no other way short of borrowing, and we cannot borrow. There is no way to raise this money other than by taxation, difficult as that may be.

There is, of course, another issue looming, the major issue of the taxation base and the relationship between direct income taxation and indirect taxation. This is a measure to which the Government will have to address itself in the January budget. Obviously working people on a wage and salary basis seek a lower level of income tax. I know the Government will move in that direction and it is only reasonable that they should. It is also reasonable that that loss in revenue will be taken up by means of an indirect taxation system which might be more equitable in that it would have a broader space. That will bring its own problems and it will make for certain difficulties as well.

We also have the very large problem of the defence budget. In terms of the requirements of the Department of Finance here we are dealing with a much smaller Department but, since the escalation of the problems in the North, our normal economic problems have been increased.

Mr. O'Mahony

I should like to join with those Senators who have welcomed the Minister of State at the Department of Finance to this House. He and I have been political colleagues for 14 or 15 years and it gives me great pleasure to see him in his present position. I have no doubt that he will make a major and outstanding contribution to the affairs of State in the period ahead.

I hope it will be possible for us to have a broad ranging debate in the not too distant future, because I am conscious that today's debate is somewhat confined. When it comes to talking about the economy and thinking about its future, it is very difficult to avoid being filled with feelings of deep pessimism and gloom. Anybody with a passing knowledge of the prospects which lie ahead, given the state of the public finances, the balance of payments deficit, and the obvious demands which will be made on the State in the years ahead, both in terms of meeting the employment needs of a rapidly expanding population and in terms of attempting, at least, to meet the requirements of an increasingly sophisticated population for public services of one kind or another, cannot avoid feeling pessimistic.

In this situation there is also a major challenge to those of us who are engaged in the democratic process. In the last two elections political parties chose to avoid economic reality entirely and instead put the economy at serious risk in the interests of short-term political gain. All of us engaged in politics understand that we have to cut corners, that we have to shade the truth here and there to our own advantage when we can. Unless we get to the point where political parties are prepared to face the electorate on the basis of some degree of acceptance of the real economic circumstances, then I am afraid the future for us will be even more pessimistic than it now seems to be.

The 1977 Fianna Fáil manifesto, in terms of its import for the economy, was an outrage. I do not see how it is possible in our circumstances to say there is no need to pay rates, there is no need to pay car taxes, there is no need to have serious capital taxation. I do not think that sort of attitude bears any relationship to reality, and it is no more or no less than to do with short-term political expediency, but the problem is that it puts all of us at risk in the longer run.

I suppose the Seanad is somewhat more removed from the day to day business of politics than the Dáil, but I think the tax package in the Fine Gael programme, which was placed before the electorate this time, while not as serious and not as divorced from reality as the 1977 Fianna Fáil programme, was tending in the same direction. It does not make a great deal of sense to give money to people through reductions in income tax and take it back from them again in indirect taxation with no particular positive benefit to the individuals concerned while, at the same time, increasing inflation by anything up to 5 per cent at a time of already high inflation. That seems to me to be not very sensible. I regret it. I still hope it may be possible to have it phased in. If it is not, c'est la vie, we will live with it. Again, it was an example of the tendency on the part of all of us in politics, I suppose, to bend to what we conceive to be the popular will at any given moment almost irrespective of consequences. The time has come when, even if we wished to continue in that vein in elections from here on in, it will not be possible to do so.

On the state of the economy — and I do not want to wander too far from the business of the public finances and the balance of payments — anybody looking at it must feel that the situation is catastrophically serious. As the Minister said, the current budget deficit is estimated for this year to be of the order of £800 million, having been forecast in January to be of the order of £550 million. This is the eighth or ninth year of current budget deficits at increasing levels of magnitude. The great problem, of course, is that you cannot keep doing this ad infinitum. I do not think there is any objective criterion as to how long you can carry on like this, but we know a certain amount about what has happened because of this policy. Apart from increasing the borrowing requirements, it has fuelled inflation and it has also led to a serious and continuing balance of payments deficit.

On the question of the balance of payments, assuming something like a neutral budget next year, it has been estimated that the deficit for 1982 will rise to £1,450 million, compared with an average of £92 million in the years 1970-75. It is noticeable that it has risen rapidly in recent years, and obviously it is not something we can sustain at that level for much longer. The public sector net foreign liability which other speakers have said will amount to something like £3,500 million at the end of 1981, has risen from £92 million in 1975. I do not know whether we have adverted to the fact that the position at the end of next year will be a great deal worse. I would have thought, on a fairly conservative estimate, that given current borrowing trends the net public sector foreign liability will rise to £5,300 million, or thereabouts, without any great difficulty.

That is extraordinary because, apart from anything else, it is roughly three-and-a-half times greater than our official external reserves. As I said earlier, it seems that a great deal of this borrowing has been used for fairly frivolous expenditure in the circumstances in which we find ourselves. What we are doing, as one economist put it recently, is borrowing Deutschmarks to buy Volkswagens. That does not seem to me to be very sensible as a from of economic policy. The truth is that we are borrowing now from abroad to do almost everything we are doing on the margin. If one wanted to carry the logic of it very far one could say we are now borrowing from abroad to give ourselves reduced income taxes. I do not see any sense in that.

It has been argued consistently, by Fianna Fáil, and not least by the Leader of the Opposition party in the Dáil, that all of this is necessary for investment purposes because we have a rising population, and so on. Half of it in recent years has not gone on investment. Much of the rest of it seems to be going on investment that will not repay itself. The effect of all of these things will not be, as Senator Hillery said before me, to do with trying to buy time to get through the tough years in which we find ourselves so that we can have something serious done by way of infrastructure and so on for a rising population. At best what we are in fact doing is cutting off options for this rising generation because the level of repayment which we will have to face over the next decade will be so great as to effectively reduce drastically and substantially our room to manoeuvre in all kinds of other areas. At worst what is likely to happen is that we will have an enforced adjustment from outside. It has been suggested that this is not likely or will not come on us too quickly. I would have thought that it is not something we should rule out over the next two or three years if things go as they are going now. Without labouring the point, what we are doing in effect is pursuing an economic policy based largely and increasingly on foreign borrowing which is not adding anything of substance to our own future prospects in terms of serious investment and in terms of long-term substainable employment. What we are doing substantially is borrowing to increase the living standards of middle and upper income categories of people and their consumption.

I will just refer briefly to the Bill before us. I understand, and I think it is clear from what I have said that I accept the need for internal adjustment in the public finances. Nobody, whether socialist or otherwise, who is serious and concerned about our future would deny that. The problem is how do we do it. Certainly those of us in the Labour movement are prepared to tighten the belt over time. It is going to happen anyway. We are prepared to do it. We recognise the reality. We recognise that if we do not those people whom we try to represent will not have employment and that the public services which we believe in cannot be developed. We are prepare to tighten the belt. We understand that. However, we are not prepared to tighten the belt if the operation generally is not equitable and seen to be equitable across classes.

The problem with the present Bill is that it is concerned fundamentally with a regressive form of taxation, of revenue raising which, apart from adding to inflation, also affects most seriously those on low incomes. I am not prepared to argue at length about whether other things could have been done at that time. That is finished. But certainly as far as the future is concerned, whatever belt tightening has to be done will, as far at the Labour Party are concerned, have to be concerned with the notion of equity.

I would like to throw in a few ideas about how we might, sticking strictly to the taxation area, come to grips with this thing or begin to make a contribution to the idea of equity in taxation. It seems to me that there is no reason why we should not get £80 or £100 million out of the area of wealth and capital gains taxation rather rapidly. I do not believe in the disincentive effect idea. I think Senator Ryan was right when he said that the problem was not disincentive, but that we provided an opportunity for the Revenue Commissioners to begin to understand the extent of tax avoidance and evasion in the country. So let us have serious capital taxation as something which is not only equitable but can make a significant contribution to the financial crisis in which we find ourselves. It was estimated recently, also in the latest edition of the ESRI document that if we had a taxation which would take out the speculative gains made in building land transactions there could be a gain to the Exchequer of up to £50 million per year. There are various ways in which one deals with the question of speculation in building land. But if we are going to do it on the basis of taxation then apparently there is £50 million there that could and should be collected.

It has been suggested, again in the recent quarterly economic commentary of the ESRI that were we, for example, to have a comprehensive property tax, even at a 1 per cent to 1½ per cent rate, the revenue gains in a year would amount perhaps to £250 million, reducing tax evasion. I know well the degree of commitment of the Minister of State in this regard and there is no reason, if we are serious about it and if we back it up with serious penalties, why we could not raise at least an initial £40 million to £50 million from reducing the level of tax evasion.

The time has come to have a look at tax relief on mortgage interest. Certainly the existing system whereby tax relief is granted on second houses should be eliminated. There is also a serious case to be made for reducing the level of interest relief, if not eliminating it, after a limited number of years of ownership. That would be more than compensated for by the capital appreciation of the property. It seems to me to make some sense.

The banks pay virtually no tax. How do we justify that at a time when we ask low income groups to accept the VAT increases which they had to accept in July and which apparently they will have to accept again in January? It is immoral. It should not be. But this is the reality, and we are in Government and we should do something about it.

There is a wide range of things of this kind which one could cover. Derelict property is being left lying around untaxed and so on. This makes no sense to me. What I am suggesting there is that the Bill before us now is done, it is finished. But from here on those of us in the Labour Party will be looking very seriously at what is going on and we will certainly accede to the notion and understand the notion that order has got to be created in the public finances. But if the order is not generated on the basis of equity we will run into very serious difficulties indeed.

The final point I would like to make is that we have to look at public expenditure more closely in the period ahead. There is considerable waste in public expenditure. I suspect that value for money criteria, if applied, would show very strange results indeed. It is the business of socialists to argue the case for public expenditure, and I certainly do. But it is not my business to argue the case for wastage in public expenditure. So I would suggest that we should look at that area to see in what way we can reduce it, but we should do it on very clear social or economic criteria. We should do it on the basis of (a) protecting expenditure which is concerned with employment, and (b) protecting expenditure which is concerned with redistribution of either incomes or services within society. Why we should not get rid of a whole lot of quangos and so on, to use a more obvious example, I do not know.

I certainly would make the point that something has got to be done. I have no difficulty at all in supporting measures to come to grips with the public finances, with the balance of payments deficit, in the interests of long-term viability in the economy. But I will not do it unless what is being done is equitable across classes and is, second, concerned with protecting or generating employment.

Mr. Fallon

I intend to be very brief on this important matter. I have listened to and I have read the protestations of gloom and the doom. Senator O'Leary made the point that we are a very rich country. Later on in the debate Senator Staunton said we are a poor country. I am not sure what is the position, but I read somewhere that we are the eighteenth richest nation in the world, which is reasonably well up in the league.

Apart from that, there are aspects in the budget which I feel have been unfair to many people, for example, the question of the road tax measures announced in the budget. Provision was made for the reimposition of road tax on cars not exceeding 16 horse power and on motor cycles in the knowledge that already the motorist is paying very dearly indeed for the use of his car. We must remember that nowadays a car is part and parcel of our way of life. There are literally thousands of people who travel from one town to another to work, travelling 20 miles one way and 20 miles back in the evening. This is typical of the Irish situation today. They are paying a very high rate for their petrol. Their insurance premiums have gone up out of all proportion and unless something is done they will continue to escalate. The motor industry itself must be feeling the effects of these impositions by the Government. From the time of the election until now or sometime in September, the average price of a car has gone up by about £1,000. All of that can have a very serious effect on the motor trade generally, not to mention the tourist who must be frightened by the cost of petrol and by the escalation of inflation and so on that has been brought about mainly by this budget.

Aspects of the tax package were unfair and worry me. It is now costing half as much again as it was originally estimated. The £9.60 which was a tax credit and which has now been modified to some extent was sold very unfairly at the time of the election. In many ways this was the winner for Fine Gael in particular. The canvassers for Fine Gael sold it as if everybody would benefit — the farmer's wife, the self-employed person's wife, the social welfare recipient's wife. This was very unfair. This was a tax credit from husband to wife and it should have been sold as it actually was at that time, and from people who work in the income tax business we know that those who would qualify for the £9.60 were few and far between indeed and that many would get as little as £2, £3 and £5. As I said, that has since been modified but it was sold in an unfair way.

Precluding the single person from getting a loan is, again, unfair and, surely, discriminatory. The young person who hopes to get married and is looking for the loan and is trying to get his house built, which is a fair and prudent thing to do, cannot get this because he must produce all kinds of evidence that he is getting married. It has got to the stage now where the Minister must nearly attend the wedding before the person will qualify for a loan under the SDA system. That has a very serious effect on the building industry. Many people who are building schemes of houses now find they are slowly grinding to a halt. The single person not getting his SDA loan has contributed to this slowing down process in the building industry.

I feel strongly on one aspect which has not been mentioned in this budget or in past budgets, and that is that very little incentive is given in budgets for young people to save. For example, a person who is going to qualify for a building society loan will save with the building society and the building society will pay the interest to the Revenue Commissioners on his behalf in the form of an overall package. But the young person who wants to save with a bank finds himself in serious trouble when he reaches a figure of about £700. Once he reaches interest at the rate of £70 per annum it is disclosed to the Revenue Commissioners and they immediately ask him for a contribution in his interest. This is not fair. It is doing very little for the young couple who want to be prudent and who want to save. It is doing nothing at all for the incentive to save. I would hope that some time the Minister would look into this area and, if possible, increase this crazy, low figure of £70 to the much more realistic figure that it should be.

I do not think that we are in a gloom and doom situation. We have a very excellent population, our best asset. Our youth are talented and excellent in every way. We have our land, seas, lakes, rivers, all of these things which can be utilised. I for one would not dream of saying that we are in a gloom and doom situation as has been portrayed time and time again. This is unfair to our young population and misleading to world financiers. I feel strongly on this particular point. I would agree with the previous speaker when he said that whatever cash can be found, and all our efforts, should be devoted to protecting and to creating employment and not to engaging in policies that will make the economy even less competitive than it is already.

Dr. Whitaker

I, too, am pleased to see Deputy Desmond in this House as a Minister with very exacting responsibilities.

This is the second Finance Bill to come before the House this year. When we were discussing the first Bill on 20 May last I referred to the deteriorating condition of our public finances and to the repeated promises of reform made by successive Ministers and never kept. I said that the words of the then Minister for Finance in his budget speech of January last, claiming progress towards bringing our finances into balance, had a hollow ring. Indeed, I asked him for evidence of the progress achieved towards his declared purpose that "the deficit be progressively reduced or eliminated".

To my amazement, considering how obvious was the trend towards a much bigger current deficit than had been projected in January, the then Minister asserted that "We are moving in the right direction". He gave a similar assurance about the balance of payments and, for good measure, endorsed the proposals for reform which I had outlined in my contribution, proposals based on pay restraint, curbing of current expenditure, some addition to taxation and measures to make investment outlay more productive. I am afraid that the Minister's reply to that debate showed scant respect for his audience and justified the worry and doubt I had expressed as to whether the then Government recognised in a practical way that a grave problem existed which urgently needed to be remedied. If one can judge from the report in The Irish Times of the 4 November of a speech made by Deputy Gene Fitzgerald on the 3 November the tendency since seems to be to try to make a virtue out of what was previously acknowledged to be a vice, even to the point of whitewashing borrowing to meet current expenses. “Current expenditure is not all wrong”, the Deputy is reported as maintaining. The critics, he suggested, assumed that “everything that we spend beyond our incomes is frittered away”. The real point which all the critics have been validly making is that we are spending greatly beyond our means and borrowing not solely for productive purposes, as was at times suggested, but on a vast indefensible and insupportable scale merely to cover everyday expenses.

Borrowing from abroad, at a sustainable rate, would be justifiable if it added to the nation's assets and these gave us a return at least sufficient to repay the loans with interest. Unfortunately, our present borrowings are only partly of this kind, and more and more of the interest and ultimately the repayment of principal will have to come from the taxpayer's pocket. In recent times virtually half of Government borrowing has been going to finance current services — to meet the pay of its employees, social welfare benefits and so on. Since there is no increase in national production from this kind of expenditure the debt interest and repayment is an unrelieved drain on the community which sooner or later must take the form of higher taxation.

It would, as I mentioned in Drogheda a month ago, be irresponsible for a Government to continue along this course even if lenders were thrusting the money into its hands. The hard faces of the lenders would be seen before very long. I would also like to make the point that it is absurd to make light of foreign borrowing, as some prominent politicians have done, by saying that the debt interest represents only a small percentage of our export earnings. Our exporters are not being asked, and in any case could not afford, to pay this interest. It can come only out of taxation and therefore entail a reduction in spending power as long as the borrowing is not being used to finance productive projects. This year, interest and repayment obligations require the transfer abroad of a total of some £540 million, roughly half the yield of PAYE.

The budget introduced in July last by the new Coalition did no more than tug us back a little from the cliff edge. The Exchequer will still be borrowing £800 million this year to meet everyday expenses. Even with the increased taxes to be authorised by this Finance Bill, taxation and other revenue will meet only 83 per cent of the State's current expenditure. All the pressures are pushing us back towards the brink. The Minister, indeed, indicated today that an opening current deficit of £1,100 million faces us for 1982. It seems that people want all the services and benefits—indeed, make a big fuss if there is any question of dropping or curtailing them—but simply do not want to pay for them. The policy lesson is that it is expenditure that must be curbed rather than taxation increased. This fundamental lesson is, I fear, not yet learned.

If the rate of increase in expenditure is to be curbed, three principles stand out clearly: first, the need to set one's face firmly against allowing loss-making undertakings to continue unchecked and á fortiori against starting new ones; second, the need to reduce the rate of increase in the pay bill, which, including pensions, accounts for over 40 per cent of current public expenditure — every 1 per cent increase now costs £20 million — third, the need to curb debt service charges which have risen to almost £1,000 million on the Exchequer alone, over a quarter of it for foreign debt. This can be done only if the volume of Government borrowing is reduced. The Minister drew attention in his opening statement to the appalling rate of increase in debt charges generally — they will be £400 million more next year than they are this year.

As regards loss-making undertakings, of which there is at present an appallingly long list, including NET, Irish Steel, Aer Lingus, the Sugar Company, the B and I, not to mention the uncovered losses of CIE — I will only say that the public have reason to be worried at the tens and tens of millions of losses, not counted at all as part of the current budget deficit, which so many State bodies have recently been piling up with no hope of discharging them except ultimately at the expense of the taxpayer. It would be a rash and foolish man who would accept that all these losses are balanced by a corresponding social benefit.

On pay I would like to summarise points I have been making outside the House recently. When a community is living beyond its means, earning £6 and spending £7, it is not acceptable for any major section of earners to say "You can solve this problem without our help; we will make no sacrifice; we insist on keeping intact our real income after tax so that we can buy as much as before". I am afraid that workers in employment must make some contribution. As earners and spenders, they are too big an element in the community to opt out of correcting the present imbalance which, if it persists, will threaten loss of jobs for many of themselves and frustrated idleness for their children. Unit wage costs here have been rising much faster than in the main industrial countries and there is no doubt that loss of competitiveness in home and export markets has led, and will continue to lead, to a loss of employment.

Even in present conditions of national overspending and falling competitiveness, however, any suggestion that wages and salaries should not rise as fast as prices — in other words, any suggestion that there must be some drop in living standards — tends to provoke an outcry. Trade unions, indeed, consider it moderation merely to seek to maintain the real incomes of their members. This would be a quite reasonable attitude if we were not living beyond our means at present, and if we did not need to reduce our relatively high rate of inflation in order to safeguard competitiveness and jobs. But it is at present unreasonable for most of us to expect to be able to maintain our real incomes, and if some use their industrial muscle to insist on this, it must push others out of jobs and close factory and office doors in the face of school leavers.

We are not alone in our present predicament. Another country which has been over-spending and borrowing too much abroad, Denmark, has had to bear a general reduction in real incomes over the past two years.

Another argument one hears advanced, with a show of reasonableness, is the fact — and I admit it is a fact— that industrial wage rates are low in Ireland as compared with the highly industralised members of the EEC. But should we not ask why this is so? Income per head in Ireland is well below the EEC average because Ireland is still comparatively under-developed and productivity is low because of inadequate and ineffective investment, poor management, unsatisfactory organisation of work and other shortcomings. It is not true that Irish industry is exploiting its employees and earning profits above the EEC norm. Far from it. The deficiencies which I have mentioned, and which were mentioned earlier by Senator Carroll, though probably less marked in the newer plants, urgently need to be remedied throughout Irish industry and services. Necessarily, this will take time. Meanwhile, insisting on wages and salaries beyond what efficient export industries can afford will only make matters worse.

I am not suggesting that we have to deal with our 10 per cent overspending by cutting our incomes by 10 per cent. On the contrary, most of the gap between earning and spending should be filled by improving our earning capacity. This requires more effective investment, better organisation and management, leading to higher productivity. It is a long haul, made more difficult by the current sluggishness of world trade. Meanwhile, in my view, a temporary reduction in real incomes is a necessary and desirable stage in the process of reform — necessary because we dare not continue to waste our borrowing potential in non-productive uses and desirable because acceptance of some drop in living standards would help to get things right more quickly. If acceptance took the form of not seeking what I regard as unjustified "compensation" for tax increases and of agreeing to income increases below the rate of inflation, the competitiveness of Irish goods and services would be restored and broadened and a welcome stimulus given to exports, output and employment.

We hear the argument, too, that if wages and salaries do not match inflation and are subjected to some lag or pause, there will be a deflationary contraction of home demand for goods and services and a rise in unemployment. If this were true, how could we ever slow down the upward wages/prices spiral, with its disastrous consequences for competitiveness and employment? A slowing down of inflation will, as I have said, enhance real incomes and benefit the economy by enabling us to sell more of our goods and services, both in export markets and against external competition on the home market. It is all too easy to forget that we are an open, not a closed, economy and that most of our sales and most of our jobs depend on being able to sell at home and abroad, against foreign competition. If our concern is about jobs and incomes, then to gear ourselves to external demand is a much sounder proposition than to keep on inflating domestic demand in a desperate attempt to offset rising costs and shrinking sales.

The impossibility of exempting employed workers from any fall in real income is reinforced by the consideration that two other categories have a cogent case for exemption. Everyone of us wants to protect old age pensioners, the unemployed and other social welfare recipients from any cut in their meagre standards. Again, almost everyone will recognise that at present the vast majority of farmers must, in equity, be exempted. They have already suffered a very severe drop in real incomes. They are affected by the indirect tax increases and, if external markets improve, agricultural recovery will help directly to swell the community's earnings as well. The community obviously has not the means to compensate farmers for their loss of income, but it can at least refrain from making it worse.

So, my survey comes to those who remain — the minority of rich farmers and of rich citizens generally. Even if all of these were skinned by high taxation, there are too few of them and they do not command enough surplus wealth to solve the national over-spending problem on their own. This is not to say that they ought not to make a substantial contribution. I have already several times condemned the bestowal of rates and tax reliefs on the better-off at a time of high and rising current deficits. I have pointed out, as others have done today, that capital taxes now yield only a fraction of what the old death duties would be yielding if they were still in force. I have stated my view that while the making of money by legitimate means ought not to be discouraged, too much accumulated wealth is allowed to be passed on to children who, in the main, should have to earn it for themselves. At the same time, we must not mislead ourselves into thinking that there is a huge pot of gold awaiting discovery and distribution. I had to remind the Poverty Conference in Kilkenny recently that, even if the income tax charged on incomes over £15,000 a year were increased by 50 per cent, the extra revenue produced would cover only about one-fifth of the current budget deficit of £800 million. As regards wealth, the value assessable according to the previous legislation would probably now be about £750 million and even ten times the old 1 per cent rate would produce only £75 million. I am not going to tell Senator Brendan Ryan that what was assessed before to wealth tax represents the total wealth of the country.

While high incomes and profits and accumulated wealth must make an adequate contribution to the State's finances, I must make a strong plea for taxation to be decided on objective criteria, including a fair and just assessment of income, profit and wealth. To tax on the basis of prejudice or discrimination would be inequitable and indefensible. I do, however, see a strong tendency in this direction in relation to the profits of the banks, which are seen only as absolute figures without regard to the enormous scale of the banks' liabilities, or to the judgment of the Central Bank as to the level of profits, capital and reserves needed to maintain the banks' services to the community. Senator O'Mahony, a few moments ago, was misleading himself in thinking that the banks pay little or no tax. The half-year accounts of the two major Irish banks published about a week ago showed a taxation charge of almost £20 million.

Equiry is important in taxation as in other areas, but I believe that it is the level of taxation, far more that its incidence, which is the real bone of contention. The clamour against PAYE is matched now by criticism of the way indirect taxation reduces real income. It seems that neither direct nor indirect taxation is acceptable if it cuts down spending power. But that is the whole purpose of taxation — to transfer some of your spending power and mine to the State to finance public services or, via the State, to help old age pensioners and other needy persons. If we look for "compensation" in the form of future pay increases, we are, as individuals and groups, setting ourselves against the fiscal decisions reached by Government and Parliament in our name. This undemocratic and illogical reaction solves nothing. On the contrary, such pay increases generate more inflation and, through their effects on costs and spending power, restrict exports, boost imports and plunge the country deeper into debt. I see this disquieting tendency to flout democracy manifesting itself at present in many forms, including threats by representative groups to oppose decisions democratically arrived at and the organising of breach of contract, non-payment of debts, non-co-operation in parts of the public service and so on. I regret all these signs.

We are perhaps going through an uneasy and awkward transition from a period of unusually rapid growth in the sixties, followed by the upsets and recessions of the seventies, to an era of slow growth, not just in Ireland but in the world at large. For us, as for Western society generally, the sixties are a paradise lost, but we are not yet fully conscious of our condition of banishment. Our expectations remain buoyant and cause us to urge claims and demands for income and public services which are far beyond our present capacity to satisfy. If we took time to consider how much of our rather slow future growth will be needed to make good our present inflated standards, to compensate for the rising burden of interest on foreign borrowing, and to match the rising population, we might begin to realise how fortunate we will be if, at any particular point from now on, we can expect to be as well off in a year's time. I have drawn the conclusion that not only must exaggerated expectations be discarded but new values and new non-material satisfactions will have to be developed and old moulds broken in relation to the organisation of our economic affairs generally. The proposed Youth Employment Agency is welcome in this context. There is not time to develop this broader theme now: I gave an outline of what I had in mind at the Kilkenny Conference.

Finally, what I have been saying regarding financial policy is that, without a lowering of pay expectations and improved productivity, there is no hope of putting our house in order. The restoration of financial stability and of economic growth depends directly on these two factors. The question is, will the national interest prevail over sectional self-seeking and over short-term political considerations? I would strongly urge that, in reviewing its commitments — some of which I fear are contradictory and incompatible with present realities—the Government will give priority to the basic needs of the economy. It is vital that we give first place in our policies to reducing costs and improving competitiveness, thus safeguarding employment and the exchange value of our currency. These basic needs will, no doubt, be addressed in the plan for the next few years which the Minister is preparing and Government is due to publish shortly.

In the financial field, I have no doubt that curbing of current expenditure ought to be preferred to increasing taxation in any form. Equally, reduction of borrowing for current purposes ought to take precedence over any taxation reforms which would cause significant loss of revenue, or require and unduly abrupt and massive shift from direct to indirect taxation, with the adverse reactions that this could be expected to have on prices, pay expectations, production costs and the whole inflationary process which already so seriously threatens the future of agriculture and industry.

Mr. Lanigan

First of all, in my brief contribution, I would like to compliment the Minister on one aspect of this budget statement, the commendable imposition of slightly higher taxes on tobacco products. In certain areas, the manufacture of tobacco products creates a large amount of jobs. Nevertheless, it is essential that we have a lessening of the sale of this lethal drug. I am glad that one of the major companies involved in the manufacture of tobacco products has seen fit to get away from the sole production of tobacco products and gone into a major industrial effort with an Irish bank and with foreign capital to manufacture towelling in Kilkenny. Anybody will agree that the manufacture of towelling is better than the manufacture of cigarettes.

The main thing I want to say about the Finance Bill is that the 50 per cent increase in VAT has had a tremendously detrimental effect on Irish business, in productivity and employment. No aspect of Irish life has not been hindered by what I would call this savage increase of 50 per cent. From the day a child is born the VAT on everything which he or she needs to survive has been increased from 10 to 15 per cent. We have heard much over the past number of months and, indeed, years about the farmers' prob- lems. One of the bigger problems of farmers over the past number of years is that the costs of their inputs are increasing at an enormous rate. They are stuck with Community cost increases and their inputs are rising much higher than the cost increases which are being granted to them. Now, they find that they must pay a 50 per cent increase in their inputs in a lot of areas.

I have seen the effect, in the motor trade particularly, of this Finance Bill. The cost of the ordinary things needed for repair of a motor car has increased by 50 per cent. The people with a lot of money to spend on decorating their cars have not been hit at all, because the items which they use are in the luxury category on which there is an unchanged 25 per cent VAT rate. One of the aspects of this Finance Bill which worries many people is that the wealthier sections of the community who want to buy luxury goods were not hit at all. It is the ordinary person in the street who wants to buy an essential item who bears the brunt of this VAT increase.

In this country at present, except for Dublin city and possibly Cork city and Limerick city, we have no public transport system, so the generality of the public need their motor vehicles to travel to and from work. The motor car is no longer a luxury in country areas. We have had a savage increase, in this Finance Bill, of up to 50 per cent on the rate of vehicle excise duties, a savage increase on the rate of duty on hydrocarbons, a savage increase in VAT. This has meant that the motor industry is letting off people hand over fist. The people who have to run motor cars can no longer run them, and what is happening? We have a situation in many parts of the country where people who cannot afford to pay for repairs are running cars which are totally unsafe. This is not because the motor trade is overcharging but because the taxation of the essentials for repair is so high. It is all right to say "Why do these people not take their cars off the road?" They would take their cars off the road if they could get to work. The farmer needs his car to get to the creamery, or to the mart. It is no longer a luxury.

Senator Whitaker mentioned that we have so many loss-making companies in the semi-State sector. I would ask him what is the answer? Do we close them all down, with the subsequent loss of an enormous number of jobs and in many instances the loss of social benefit. There are too many people who make statements about the problems of the country but do not give the answers. They do not tell us how these jobs, which will be lost in these industries, can be made up. The number of unemployed is increasing. The Government, in this instance, helped to increase that unemployment rate by indirect taxation.

Irish industry needs to be very mobile. It has to shift its goods. We are too small a country to be able to sustain a large manufacturing entity. We must export to live. If we export, the cost of transport has to be taken into account. Again in this Bill, because of the increased cost of diesel oil and the increased VAT on spare parts for heavy motor vehicles, the cost to industry of transporting goods has increased to an enormous degree. We have, at the end of the month — and it is a good thing in a lot of ways — legislation coming in on the tachograph. The average price of a tachograph is between £250 and £350, on which there has been a 50 per cent increase on the VAT charge since this budget came in. It puts Irish industry, in the transportation of its goods, at an enormous disadvantage compared with any other section of the European Community.

The effect of this Finance Bill on social welfare groups has been enormous because, on the items that they need for daily living, they have had a 50 per cent increase in VAT. We have a young and growing population. It is grand to say that we are spending too much on current expenditure, but our population is younger than that of any other country in Europe. It is growing at a faster rate and we will have problems in this area for a number of years to come. All these problems cannot be solved within this country. We will have to look to the European Community to help us. I do not mean that we go down on our hands and knees to the EEC and look for help. Many of these countries, in the future, will not have the capacity because of lack of population, to support themselves. Then they will be looking towards Ireland hopefully, to a nation which will be well educated and have the expertise to give to these people.

The situation in the building industry since July has deteriorated rapidly. The Government, because of the dropping of the SDA loans to single people, have contributed much to this. We hear a lot about the Government of today being a caring Government. The first thing they do when they come into office is abolish loans to single people, playing into the hands of the landlords. Thankfully over the last number of years younger single people were able to buy their own homes and if at any date in the future they considered getting married, they had the family home readily available. Now what happens? They cannot buy a house with an SDA loan and must go to a financial institution which will charge them more, or else wait a long time to save the money. Therefore we are back in the situation where the landlords of the country are going to benefit. In country areas you can see it already developing. People are building flats and houses on a speculative basis which they will let at high rents to the people who are seeking SDA loans.

The VAT imposition is a serious one when one considers the cost of educational books. Many books used in Ireland have to be imported from England so they suffer a currency surcharge as well as a VAT charge. This means that a book which is bought in Dublin is nearly twice as dear as a book bought in Britain.

The price of drink has reached the stage now when there will have to be a diminishing rate of return. Anybody who goes through the country at present will see that public houses are virtually empty until the last half-hour. Nobody wants the pubs of the country full, but they do in many cases serve as a social outlet for people. In country areas the pub is the social centre because the community has not been able to provide an alternative.

Regarding the hardy annuals of petrol, spirits and beer, the stage has come when there will be diminishing returns. I have not got the up-to-date figures on petrol sales in the country at present, but I know that in England they are down by 30 per cent this year. I would presume that they are down more in Ireland. People cannot afford any more the luxury of filling their cars. The price of a gallon of high grade petrol in England is £1.68, while in Ireland it is 70 per cent dearer. As an indication of the difference in the price of beer and spirits I notice that a pint of ale and a gin and tonic in England cost £1.31, while in Dublin the cost is £2.31.

In April a tax credit of £9.60 is to be deducted from a husband and passed on through a civil servant to the wife, with no increased benefit to the family. This will be given only to people who are in the PAYE tax bracket. There has been an estimation by the Government that this will cost £24 million in the first year. There will be no benefit to anybody as a result of that change, no increase in family income. The tax inspectors have said that the estimated cost of £24 million might be very wide of the target.

This Finance Bill has done nothing to help the underprivileged in our society or the people on middle incomes. In country areas it has been harsher than in city areas, because in the city areas at least people have the benefit of public transport. Because of a change in taxation from 35 per cent to 25 per cent on the basic rate there will be indirect taxation increases with subsequent increases in costs. The cost to the motoring public and to the industrialist who has to shift goods will be enormous.

According to the 17th Report of the European Commission, up to mid-July the rate of inflation in Ireland was expected to be in the region of 17½ per cent, which was unacceptable to the present Government when they were in Opposition. This has now jumped to an inflation rate of between 21 and 22½ per cent, and a lot of that is because of the indirect taxation changes in this Finance Bill. What we say in the House will not make any difference, because the Bill will go through, but it should be said that people on the lower scale on income will suffer most because of this Finance Bill.

There is a sense of malaise in the House, and I am wondering if it is because we have done away with our energy saving within the House. The heat here would put anybody asleep, not alone listening to somebody like me. If the Cathaoirleach could do something to reduce the heat it would be very helpful.

Mr. R. Bruton

I am delighted to support the motion before the House today. We have to cast our mind back a bit to the totally misfounded strategy of the last Government. In 1977 when they went into office they intended to launch the economy on a path of substantial growth involving a 2¼ per cent growth in employment. During that time they expected that buoyancy in income would restore the current deficit to balance and bring down borrowing as a proportion of GNP to 8 per cent. We all know that the reality was very different. The 3½ per cent deficit in 1977 rose to an 1981 deficit of 9½ per cent. Total borrowing grew from 10½ per cent to 19½.

It is not just that this was a reckless gambler's strategy on attaining growth that failed to come to fruition; it was much more misguided in that money was put into the economy at a time when recovery was on the way. It resulted in purely inflationary pay increases in some cases, in overspill into the balance of payments in other cases. What we are faced with in 1981 is the fact that the public debt has mounted from 79 per cent in 1977 to the witching figure of 100 per cent of GNP. Every £ of income that a person earns in this country is now matched by debt in the Government Exchequer.

The most frightening point of all is that a third of this debt now is what used to be called "dead weight" debt when the Banking Commission wrote in the thirties. That may be an old chestnut, but some old chestnuts need re-roasting at this stage. Dead weight debt they then regarded debt totally unbacked by any asset, and this is what a mounting current deficit has done for us.

Another little-considered aspect of the Exchequer's borrowing is the fact that there is an enormous liability overhanging the public sector through the public service parity pensions. The present value of that liability is worth at least a half of our current debt. If this was being properly funded, as would be the practice in the private sector, we would now have accumulated a fund of around £5,000 million. That has not been accumulated under the practice in the public sector, and it is something that is equally worrying with our tendency to allow debt to grow.

In January 1981, the former Minister for Finance, Deputy Gene Fitzgerald, recognised the problems that the public finances were running into. He attempted to trim the current deficit from 6½ per cent to 5¼ per cent in 1981. The problem with that budget was that it did not tackle the problem at root. He doctored the deficit by unrealistic provisions. There is just one illustration that shows this more vividly than anything else, and that was in his provision for non-pay elements in the public sector. The essence of any service provided by the State is that it requires non-pay elements to back it up. He made a provision of £35 million for that, and by June it was apparent that the actual provision needed would be £262 million. That is eight times greater than provided for. I do not think anyone could imagine that this was realistic budgeting. If that was done by anyone in the private sector he would not survive very long. Of course, the Minister did not survive very long.

The current deficit confronts us with a very serious problem, more than just a financial one. Since 1977 very many worthwhile public services have been expanded and 30,000 extra people were employed in the public sector to administer them. The big problem was that although services such as more guards on duty and more civil servants to administer various schemes all seemed desirable nothing was done to raise the revenue needed to pay for them. Every year the problem was that interest was mounting on the accumulated debt and the longer the Government put off that other less savoury side of their policy, the more interest accumulated. This problem is something we have to face throughout the public sector. In the past there has been a tendency always to consider spending and taxation separately.

Senator Lanigan illustrated vividly that every tax that you can conceive of is a severe heinous crime — it is raising costs, it is unfair to people, or is damaging the incentive to go out and do extra work. Every single tax has bad aspects and every cause that you choose to spend on, be it hospitals, the Garda force, schools, more teachers, is always desirable.

The most welcome aspect of the July budget lies in the new financial procedures the Minister spoke of. This, for the first time, will bring some more reality into the way we consider spending and taxation. The first one he mentioned was bringing in Estimates before the end of the previous year so that they can be considered before any of the spending has started. That is basic to any attempt by the Houses of the Oireachtas to control spending. If the spending is already well under way before they even debate or consider them, there is no way that we can really have a proper discussion of what is involved.

The Minister also indicated that the Government will be bringing in multi-annual Estimates. One of the serious weaknessess in Estimates that we have considered to date is that they deal with spending just one year ahead. We get no idea of what the programme will involve for many years ahead and we do not get enough information about what is to be achieved by the different programmes. This is another very valuable step forward in opening the public finances to scrutiny by Members of the Oireachtas. He has indicated that a debate on the public capital programme will be initiated. Schemes in the public capital programme are now of such enormous size and have run into such enormous difficulties in recent years that this is something that should be welcomed by all Members of this House.

The other two points mentioned were closer scrutiny of the State spending bodies, the semi-States, and a proposed link between Estimates and revenue. It has become abundantly clear in the last year or two that these are serious things we must examine. The semi-States have been running into serious financial problems and they have come to the Government looking for more equity participation. That really means they are looking for money on which they do not have to pay any service. That sort of situation needs closer scrutiny, and it is welcome that the Minister is intending to do that.

In my own experience, I have discovered that the public sector does not present its programmes in such a way that public representatives can see what is going on. In the local government area with which I am most familiar, I have repeatedly found an absence of even the minimum information for rational decision-making. In relation to proposed spending on water schemes, councillors are never presented with items such as cost and the number of people being serviced under a list of different schemes so that they would have some idea of which ones are most deserving and which should be chosen. That is not being done. Similarly we have development plans considered by local authorities which are not backed in any way by costings. Proposals are just put out there in front of the public and the public representatives and there is no way they can assess them properly until they see what will be involved financially.

Moving away from the local authority finance, we have the same problem in national finance. In the area of housing we continue to live with topsy-turvy assistance to housing from the public purse. For example, there is scant assistance for the homeless and there is no assistance at all for low income earners who are in rented accommodation. Council home loans, under all Governments, have been ridiculously small to enable a low income family to purchase a house. It means in effect that a man will be pulling the devil by the tail for the rest of his working life almost. At the very same time as we handicap those sections which to my mind are among the most needy, we allow a lot of benefit from the public purse to go to people who are up-trading their homes in the housing market and we also give enormous subsidies to the people who are lucky enough to be allocated a council house. There is no justice in a lot of those provisions in the housing area, and the reason they have been allowed to persist is that public representatives have not been enabled to see what is actually going on with the money thay are voting from year to year.

In education we have a very similar situation. The pupil who drops out of school at 15 gets an education that costs the State about £6,000, but the pupil who goes on to university gets an education that costs the State about £17,000. The early leavers are almost entirely from low income families and the university people are almost entirely from high income families. In effect this State is paying out far more to the high income families through the education system than it is to the low income families. The real tragedy is that as many as one-fifth of those who leave school at 15 do so without adequate reading capacity. That is the sort of thing that has been allowed to continue because public representatives have not had the opportunity to examine the education Vote in a proper long-term fashion. With clearer presentation of the public accounts, it will be possible for public representatives to have a real debate on such things as what choices can be made and what services should be paid for, as in the case of education where higher education is of immense benefit to people who are lucky enough to get it. It gives them great employment opportunities, they have very low unemployment rates and there is no reason in my mind why they should not be asked to pay for a substantial part, if not the majority, of it.

Another area at which we must look seriously — and this budget has made a first move towards it — is the experience with our semi-State bodies. The financial procedures for large capital projects are totally inadequate. I do not think approval should ever be given on the basis of rough designs and costings that are likely to be overrun. There should be very detailed scrutiny at the design and costing stage. At that point the management of these semi-State bodies should be held responsible for anything that goes wrong. That has not been the practice in the past, and I would welcome a change in that direction. Both the Minister and the Minister of State seem to indicate that this is the direction of their thinking. These big schemes seem to dwarf almost everything else in public spending when one considers that many of them would involve the tax take of 100,000 workers for a year. They are enormous sums, and it is frightening to think that they have been scrutinised in a very shoddy way.

I turn now briefly to another aspect which Senator Whitaker touched on, that is, the problem of Irish wage costs. There is no doubt that in the past three years we have run into very serious problems. The Committee on Costs and Competitiveness revealed that Irish hourly wages trailed European wages in the years 1970-78 by three points per annum, but since then we have forged ahead by nine points per annum. There is no doubt that this has seriously damaged the competitiveness of our industry. At the same time, it should be pointed out that they showed that absolute wages are still much lower here than in Europe and we are still an attractive base for foreign industry.

Another danger that must be watched is that we are not lower than the UK, except very marginally. The new EEC members, Greece, Portugal and Spain will also provide attractive bases for foreign industry to export into EEC and they have lower wage costs than we have. So there is a big danger even at the absolute level of wage costs. Another point they highlighted is that our per unit output labour costs exceed those in the US and within two years, if we continue on present trends, we will exceed those in Europe. These problems are at the root of many job losses in Irish industry of late. I do not intend to lecture trade unionists, because they know far better than I the reality of unemployment and job losses.

We have to consider what we face in the future. Economists seem to be agreed that in the coming years we face the continuation of the terms of trade loss of 1 per cent every year which we had during the seventies. That is effectively a 1 per cent cut in real incomes due to the faster growth in the costs of our imports than of our exports. We are also faced with a 1 per cent real cut in living standards if we are to close the current deficit. These are facts that must be faced in any attempt by the Government to organise pay bargaining on a realistic basis. If, for example, pay claims seek compensation for both the real cut in living standards due to import costs and the attempt to close the deficit, the real cuts in living standards will still come but they will come in the shape of unemployment rather than in cuts of living standards of those in employment, or at least lower growth in living standards of those in employment.

On the other hand, economists seem to be agreed that pay restraint has very significant effects on employment. Figures were quoted by both the Committee on Costs and Competitiveness and the ESRI that pay restraint of the order of 2 per cent would mean 3,000 jobs in the first year, rising to 17,000 in later years. A lot of trade unionists are right in saying that those who call loudest for pay restraints are those who least intend to practise it. It is up to the Government to make sure that the sacrifices involved in real cuts in our living standards that look to be in prospect in the coming years are spread evenly. I am glad to see that the Government are taking very definite steps in the direction of spreading the tax burden.

The taxation of bank profits is very welcome. The Government have also committed themselves to tackling the problem of the grotesque development profits that have been made. They are also committed to tackling the loopholes in capital gains tax. The income tax proposals are another element in spreading the tax burden much more fairly. The crucial element of the income tax proposals we are making does not centre on the £9.60; it is the fact that we are replacing the old allowances system by tax credits. Allowances basically benefit most the person on the high marginal tax rate, whereas the tax credit is a far fairer system and shifts some of the burden away from the lower paid worker. In the past many of those who have fared worst have been the middle income earners with young families. I am glad to see that these proposals will assist those groups. It is only as one moves back into the high incomes that the returns from the tax proposals will involve clawing back income from the top.

The other element in the equity area is the welcome fact that in this budget the Combat Poverty team have been allocated money and there has been an undertaking that their report will be acted upon by the Department.

There are a lot of inequities in our present public finances. I am glad to say that this budget will at least throw these open to us so that we can examine them more closely. We will have the opportunity to shift the burden of taxation to where it can be more ably borne. For the first time it has also brought a bit more reality back into our public finances. As Senator Lanigan pointed out, all of these taxes have hurt someone, but unfortunately the practice of the last four years of expanding the public services without raising the revenue to finance them has made this inevitable. I fully support this motion.

Mr. Leonard

I congratulate the Minister of State on his appointment. No measure introduced over the years has caused more confusion than this budget. It has confused the two Coalition partners who introduced it and it has confused a lot of people. I doubt if anyone could now explain what is entailed in the tax transfer introduced four months ago or what it will cost. We have varying figures for it — we have varying interpretations of how it would be imposed and how it would apply to the benefits. It is an area into which a Government should not have ventured. Time will tell how this massive increase in VAT will affect the economy. We must be very cautious before we introduce measures like that and begin to cut back in areas where we should be developing and trying to increase our work force. I will give an instance involving the Department of Fisheries and Forestry in which the Government's cut in expenditure had an adverse effect. Recently a constituent told me that he had been offered £25,000 for a large area of land near a State forest. He was looking for more. He believed that the market price was more. He asked me to contact the Department to see if they would increase their offer, and if not he would have to take it. I got in touch with the Department and they informed me that they would not increase the original offer, that they were not in the market for purchasing land.

I think this is very serious in an area which is calling out for development, particularly in the timber industry. If Forestry do not continue to purchase land the cycle will be affected, especially at a time when we have so many forests coming to maturity. The only market for forest thinnings at present is in Fermanagh across the Border, or in England. That is one of the areas where instead of cutbacks there should be development.

The July budget will add 5 per cent to the cost of living. That will have a damaging effect on our young population looking for jobs. In my constituency we have frightening figures of a dependency rate, from 15 years down and from 65 years up. Forty per cent are in that category.

Senators have referred to the road tax. When you add the road tax, VAT on cars and car parts and VAT on petrol, you will be putting many motorists off the road. That may be all right in cities or in large built-up areas where workers are fairly close to their places of employment, but where you have workers in remote areas, many of them travelling 20 to 25 miles to and from their work, you come up with a hardship problem.

Fianna Fáil had a reason for the withdrawal of road tax. They felt it was a severe imposition on workers and that another form of taxation might be more appropriate. They withdrew the road tax, and I believe they should have thought a lot about it before they decided to do so. I think they should have allowed the county councils, who are the taxation authorities collecting the money, some additional money for the upkeep and restructuring of the roads. The abolition of the tax then would have been justified in some way. Now it is all being collected and going directly into the Exchequer.

The 5 per cent inflation rate hit hard at the agricultural sector. Farmers are demanding an increase in prices, and with a reduced Government input and rising costs, aggravated by the budget increase in VAT which affects farmers' day-to-day overheads because of the consequent effect on oil and road tax charges, their demands are justified morally. Because of the serious economic position in farming we have a reduction in the national herd and a reduction in fertiliser use.

A number of Senators from this side have spoken about the SDA loan subsidy introduced last April by Fianna Fáil. The Government should take a hard look at the regulations they imposed regarding those loans. In justifying the withdrawal of loan subsidies to single people, the Minister referred to the number of single people who had applied for SDA loans. In his statement today he gave the impression that they would be single throughout their lives. If he had examined the situation he would have found that a large percentage are people making provision for marriage later and who are trying to ensure they will have houses when they marry.

I will give an instance from my constituency. Four people occupied a house. One of them was disabled. He was a single man and therefore did not qualify for an SDA loan, even though there were four people in that house. There have been suggestions about how to overcome the qualification for loans in cases of multi-occupancy and of double income occupiers. Most local authorities are demanding that loan applications be made in both the single people's names and that payments will be made on foot only of a marriage certificate. This makes a sort of registry office out of county council offices because we are going so much into the private affairs of people. It has been stated here and in the Dáil that if one person applies who is not in a permanent job, his salary would not be taken into account, but here again you are putting local authorities in an impossible situation. They have not the staff to carry out investigations as to whether a person is in permanent employment or not.

In the past few years during the Fianna Fáil administration the Department of the Environment recommended to local authorities that they buy land and provide serviced sites. This programme was going very nicely. Many single people who intended to marry in the near future were availing of it. I would ask the Department to have a good hard look at that scheme.

Senators have commented on social welfare. The social welfare increases provided for in the July budget have caused a lot of confusion to pensioners. I have written to the Department on behalf of a number of people who had received an additional 10p. They had been expecting a substantial increase. In October they received a bare 10p. If you compare that with the 25 per cent social welfare increases that have been made available to those pensioners in the last number of years it is very hard to reconcile the two. Side by side with these miserable increases the ESB got practically all they asked for when they sought an increase in charges. They are a company who, after the increase, reported a profit of £6 million. The Minister has justified it by saying that it would damage the board permanently if that massive increase had not been allowed.

In the public service in the last ten years there has been a one-third increase in the number employed and only a 4 per cent increase in the private sector. These are some of the statistics which the Government and the Departments should be examining. Health boards are being curtailed and have not been allowed to make appointments since last July, even in instances where the health boards had not the positions filled at that time. We in the North-Eastern Health Board find it difficult to get people interested in coming into the region to fill vacant posts. In respect of many of the posts advertised we have found it impossible to recruit dentists, and we have more than 6,000 patients per dentist in the health board area. The national average is 3,000. I believe that many of the July budget impositions were not well thought out and that they will have a serious effect on the economy in the months ahead.

Mr. Howard

I will begin by joining with my colleagues in the welcome they extended to the Minister on his first visit to the Seanad. I wish him well in his difficult and responsible job.

The Minister has told us that the purpose of this Bill is to give statutory effect to the taxation changes and other provisions in the July budget. I have listened most of the afternoon to the wide ranging contributions that have been made. Many speakers dealt with the implications of the Bill and then drifted into various other areas, but I am sure they were relevant in their own way. Many of the contributions were well worth listening to and the Senators who made them deserve to be complimented on their depth of thought and their concern at the way the nation is going.

An Cathaoirleach

The Chair would like to point out that the scope of this debate is on the lines of budget debates in the Dáil. It is confined to taxation, general expenditure, financial policy and other matters in so far as they are connected with financial policy. The Chair did not hear any Senators speaking outside the scope of debate. If they had they would have been brought within the rules of the debate.

Mr. Howard

I assure the Chair I regret very much if the Chair felt that in some way I was suggesting that speakers during the course of the debate were not entirely relevant. I do not think it is necessary to repeat what I said, but I doubt if that meaning could be taken from it. I assure the Chair that it was not intended.

There were many criticisms of the Bill and its effects, criticisms of the increase in taxation that have arisen from it, but the Senators who criticised it showed a marked reluctance to examine why the Bill was necessary in the first place. Therefore, I intend to devote some minutes to an examination of that aspect of it and to convey to the House the reasons why I feel that the Bill was necessary. I would also say that during the course of the discussion quite a number of political points were made and perhaps in the course of what I have to say there may well be a few political points as well.

The Minister told us that the Bill was the minimum necessary to protect the public finances, to ensure that the finance required by the different Departments to maintain services would be available to them during the financial year. The Minister also said, and I feel it is necessary and useful to refer back to it, that our international borrowing was drifting in such a manner that international institutions such as the EEC and the OECD felt it necessary to draw the attention of the Government to the measure of concern these institutions felt about the manner in which our finances were progressing.

Senator Brendan Ryan earlier today criticised the budget for showing a lack of imagination. Perhaps he had a point, but I would counter his argument on that score by saying that the situation the Government found themselves in on assuming office did not allow time to bring in some of the imaginative proposals or ideas that he and many members of the Government had in mind. From the public statements that we have had from the Government and the Minister for Finance, and indeed from many independent commentators, people who are generally accepted as experts in the economic field, we can agree that the situation the Government were confronted with on assuming office on 30 June last was so urgent that it was necessary to bring in the budget as quickly as possible to ensure that the resources required for the State would be available to it.

The reasons that gave rise to this budget did not occur overnight, and they certainly did not occur since 30 June. If we examine these conditions and these causes objectively, we have to travel back perhaps a period of four years to the change of Government in 1977. I believe I would be in the company of many objective commentators if I were to say that it was the Fianna Fáil spending spree initiated when they assumed office in 1977 that mainly is responsible for the serious financial conditions the Coalition Government found themselves facing on assuming office on 30 June last.

I will make a few comparisons from certain indicators through which we can judge the health, or otherwise, of the economy: for example, the levels of unemployment and inflation and the size of the budget deficit. The previous Coalition from 1973 to 1977, having weathered a serious international oil crisis which gave rise to very serious international recession, brought the economy reasonably successfully through it. In 1977, they handed over an economy that was expanding by 6 to 7 per cent, an inflation rate of somewhat similar figures and a budget deficit that was just in the region of about £200 million. Four years after the change of Government in 1977 the budget deficit was racing towards a figure of almost £1,000 million. It was estimated that without the steps that were taken in the budget of July last, the deficit by the end of 1981 would be something like £945 million. In other words, the financial situation worsened four-and-a-half times during those four years.

The annual inflation rate was roughly about 6½ per cent when Fianna Fáil took office in 1977. When they handed over last June, that inflation figure was three times greater. Unemployment in 1977 was just more than 100,000. When the change of Government took place last June that figure was approaching 126,000. The deterioration in the books, if I may put it that way, that the new Government found was quite serious, caused mainly by Government mismanagement between 1977 and 1981.

This is the second Finance Bill we have had this year. Earlier this year we discussed a Finance Bill that arose from the budget last January, prepared by the Minister for Finance of the previous Government. It set the overall Exchequer borrowing requirement for the year of £1,296 million, or roughly 13 per cent of GNP. Of that, £515 million was stated to be the requirement for current expenditure, but six months later that £515 million was found to be totally inadequate to operate the Departments and the finances of the State, providing only half of the amount required. Therefore, the new Government were faced with the problem of how to raise finance to correct what was threatening to be an extremely serious situation. The amount provided for capital expenditure was inadequate, and unless steps were taken to deal with it Exchequer borrowing for 1981 would have increased from 13 per cent of GNP to 20 per cent.

I suggest that these are the reasons, miscalculations or otherwise, why it was necessary for the Government to introduce the Bill that we are now discussing, and it is stretching a person's understanding a bit far to believe that the major difference between what was projected in January and what in June was found to be necessary could be caused solely by miscalculation.

Maybe it is rather brutal to suggest that it was not a miscalculation but that it was well known at that time that the figures would be seriously out of line and that it was also recognised that the measures needed to rectify this situation could prove so unpopular that it was better to hide them from the public until after the general election. I invite anyone who feels I am wrong in that assumption to contradict me in the course of the evening. I believe it was obvious and I also believe that the outgoing Government knew that whoever formed the Government after the June election, the new Government would be faced with the responsibility, the obligation and the duty to do what is being done in this Bill.

Even in January last it was apparent that there would be a serious shortfall in the figures. Even then the problem was recognised. The remedy was recognised but the courage to initiate the measures to deal with that situation was lacking and it was decided to let it rest until after the general election. I share the belief of Senators on the Opposition benches that there is nothing popular about a budget of this kind. Indeed there is not. It does not give me or anybody on this side of the House any great pleasure to support a measure that will extract greater taxation from the pockets of the people. But it is necessary, and it took courage on the part of the Minister and the Government to come out openly with the problems they found themselves faced with, and request the support of the public for the policies they feel are necessary to bring this country back on the economic rails.

I listened to speakers on the Opposition side demanding that the Government should increase public expenditure. The Senator opposite who spoke immediately before me requested that more money should be made available for roads in the north-west. It is rather tiresome to have to listen to demands of that kind when, in all honesty, it should be recognised that the situation in which we now find ourselves is due in large part to the mismanagement by that Senator's party when in Government of our economic affairs. Earlier Senator Lanigan went to great lengths to criticise what he felt were the disadvantages of this budget for certain sections of the economy. He dealt in particular with house building, SDA loans, and so on. One of the benefits that has emerged from this budget and, indeed, from the decision of the new Government when they took office, is the making available of an additional £30 million for house construction. That is one of the positive results of the measures we are talking about here today.

The Government inherited a very serious situation. It required strong and perhaps unpopular measures to rectify it. I am glad the Government had the courage to take the decisions to bring in these measures and to ensure that the various Departments of State could operate for the benefit of the general public. They had to ensure that some measure of balance would be restored to our national finances and they had to try to get the economy back on the rails.

A number of speakers here this evening referred to unemployment and the need to create jobs for our young people. One Senator said that with the high proportion of young people in our population we are unique in Europe. With that I entirely agree. There is also another factor which makes the burden that bit heavier. While in comparison with any of the countries in western Europe we have the highest proportion of young people in our population, we also have the highest proportion of people over 65 years. Consequently people between 25 and 65 years who are working or engaged in production of one kind or another have a disproportionate burden to carry in helping to finance the needs of that heavy proportion of people at both ends of the scale. If we are to make progress, it is absolutely imperative that we should recognise the need to provide the greatest possible number of jobs for our young people.

In recent years we have allowed a disturbing trend to develop amoung our people in the sense that people who have jobs and are in receipt of an acceptable income, somehow or other are beginning to show a declining degree of responsibility towards those who are not so lucky in our society. That attitude must change. It will take leadership from our Government to ensure that that desirable change occurs.

While it does not give me or anyone any great pleasure to vote for increased taxation measures, nonetheless the reality of the situation is that this is the minimum needed to restore order to our public finances. For that reason I fully support the measure now before us. I hope it is an indication from the Minister and from the Government that they will never fail to provide the leadership and the courage necessary to restore confidence in our finances, to restore confidence in the economy, and through that confidence to bring about the progress and development necessary to create the employment and prosperity we need.

Mícheál Cranitch

'Sé an chéad dualgas atá orm ná fáilte a chur roimh an Aire. Cuireann gach duine fáilte roimhe anois agus tá súil againn agus agam fhéin go háirithe go mbeidh tréimhse taithneamhach aige anseo a fhad is a bhíonn sé ina Aire.

I shall be brief. Many of the points I had intended to raise have been dealt with already and there is no point in going over them again. I thought Senator Ryan, who was first to speak from this side, put the budgetary and taxation style of the Government in a nutshell. He said it appeared that the present administration were in total ignorance of the financial position of the State until they took office. Nobody would accept that. During the term of office of any Administration the Opposition are almost as knowledgeable as the administration itself about financial affairs. I am sure the Government knew jolly well. One of the main points made by the Fine Gael Party during the election campaign—and it appeared in their manifesto and was dealt with at practically every meeting at which prominent speakers spoke—was on inflation. This was their main concern and, after that, unemployment. Whatever went wrong, the inflation position has actually deteriorated considerably since they got into office. Inflation is running now at 20 per cent at least. If one were uncharitable one could say that rampant inflation seems to be one of the things one associates with Coalition Governments down through the years.

Unemployment has also increased. The position is much worse now than it was last June, May, April, and there seems to be no sign of an easing as far as unemployment is concerned. It is a source of great worry to everybody—to those on the Government side and those of us in Opposition. In all my years in public life I never remember so many representations being made to me by students, young men and women and their parents and friends, seeking employment and who would accept practically anything they could get, but it is not there for them. I have never seen so many worried people. I never remembered so many representations being made to me and I am sure the same applies to every other Member of this House.

If the Government's policy is continued—and I am referring now to indirect taxation—the inflation situation will become even worse. Increased indirect taxation should be avoided in present circumstances. The Government's income tax package will do great harm also. I want to pinpoint those two matters as areas that could cause further trouble for the economy of this State. The Government should examine them with a view to correcting them. Indirect taxation almost by definition, will increase inflation, and so will their new income tax package.

Last Sunday at Mass I was struck by the beauty and veracity of the praises of the wise woman during the reading of the lesson. I will not read the whole lesson, which was taken from the Book of Proverbs. I will just read two sentences and Senators will see what I am getting at.

Who shall find a valiant woman? Far and from the utmost coasts is the price of her.

Down through the centuries it was always accepted that the value of the good Bean an Tí was simply immeasurable. That is, of course, until the Fine Gael manifesto came into existence. Then a price was fixed. Her worth was £9.60 last May. With inflation at 20 per cent, if my calculation is correct, the same Bean an Tí would now be worth £8.64. If this Administration continues in existence for a few more years, the value of the good Bean an Tí will go down to zero practically. What disillusionment for those women who were mislead by this promise and cast their votes in accordance with what they saw was to their advantage. They were very happy to do so indeed. With apologies to the writer of that famous song, they were probably singing to themselves.

Ó'Bhean an Tí cén bhuairt sin ort?

Beidh talamh gan chíos ón bhliain seo 'mach. Agus Ó, Bhean an Tí nach suairc é sin!

But it was anything but suairc. It was an extraordinary thing to do. It was done to coax the housewives to cast their votes in a certain way. The joke of it all, of course, was that only a certain number of them were eligible for it and even then money was to be provided by taking it out of their husbands' pockets.

This operation has another dimension and, in that context, I will read for Senators what The Cork Examiner had to say about it, how they described it. I could not describe it better. In their leading article on Tuesday, November 17 they regarded it as:

...an insolent intrusion by the Government into the private matter of the allocation of family resources. This product of secular morality is an insult to the many thousands of Irish homes which still revere the qualities of love, sacrifice and fair play. For those homes which, unfortunately, have lost sight of such virtues, the mine-and-thine philosophy, which the Government is now offering, can only add to the existing disharmony.

I fully agree with these sentiments. It was a most disastrous thing to do. In fact, it could possibly be regarded as offensive to the Constitution—an intrusion into family affairs. The sanctity of the family and the unity of the family must be maintained and I can see a danger of disunity in families following this provision.

That is all I propose to say. I am sure other speakers are anxious to get in. The Government should ask themselves a straight question. Have they got an answer to any of the problems facing us at the moment? I am afraid the answer must be in the negative.

Minister of State at the Department of Finance (Mr. B. Desmond)

I should like to thank Members of the House for the welcome given to me here this afternoon. I am very pleased to have the opportunity to contribute to these deliberations. I should like to reply in some detail to the points raised. I have some difficulty in responding to Senator Ryan's comments because, knowing his outstanding business and economic background and having had the distinction of serving under him as an outstanding Chairman of the Joint Committee on State-Sponsored Bodies I know he is one of the most deceptive of parliamentarians. He tends to hide an exceptionally good grasp of basic economic management issues behind a very quiet exterior. To that extent I feel he spoke today with his tongue in his cheek about the criticisms which I had advanced on the policy of the previous administration. Had the previous Minister for Finance followed the sound advice which I know he got from Senator Ryan, and the general strategy which he was advised to follow by those in his party who were preoccupied about economic policy, we would not have inherited the mess we did. Senator Ryan would not have had to defend, with his tongue in his cheek, some of the points made here today.

In my opening statement I underlined the necessity for the supplementary budget. Senator Ryan suggested that the state of the public finances was well known before the new Government took up office. I agree it was known in some dimensions. Senator Whitaker quite rightly pointed out that last May he had alluded in no uncertain terms to the degree of these dimensions. Did anybody think it was as bad as it turned out to be? That is the question we have to ask ourselves. Not even the most pessimistic of economic commentators projected a deficit of about £950 million by the end of 1981. I recall being accused on radio and television of exaggerating outrageously by my parliamentary colleague, Deputy Lenihan. Even Deputy O'Donoghue found my comment quite incredible when I suggested that the deficit could be about £800 million at the end of 1981.

In fact when we took office we found ourselves confronted with the prospect of a deficit of £950 million. Therefore, the introduction of the budget was not a propaganda exercise. It is unusual to seek to make propaganda by imposing additional taxation within three weeks of taking up office. No Government welcome the prospect of introducing taxation. Senator Ryan is well aware of this fact. The painful reality was a deficit in our public finances which had gone wildly out of control. I want to stress that point.

Senator Ryan tried to justify the budget deficits in recent years by stating that the Coalition Government started a practice of allowing current budget deficits. Fianna Fáil did that in 1972 and 1973 and, admittedly, in the oil crisis years of 1973, 1974 and 1975 we continued the practice. We made a major effort in 1976 and 1977 to reduce the level of the current deficit. As a result of the budget of 1976 we were kicked out of office. That is the reality. The then Minister for Finance, Deputy Ryan, for whom I have great respect—he is a totally honest man in terms of the mathematics of a situation; he does not try to cloak the situation — introduced a very severe budget in 1976. One could argue that it was too severe. Then the Cabinet compounded it by calling a general election in 1977 although they should have waited until 1978 when the situation would have been totally different. That is history. In fairness, major efforts were made in 1976 and 1977.

Unfortunately this policy was completely reversed in 1978. The relatively favourable conditions which were inherited by Fianna Fáil at that time were just frittered away. The subsequent annual budgets of 1979, 1980 and 1981 all provided for reductions in the current budget deficits. The reality turned out to be different because they were deliberately under-estimated. During the year massive expenditure was indulged in particularly in the second half of 1980 and right through the first half of 1981.

When I heard the former Taoiseach on radio and television in January 1980, from his strictures and the stern tone he used I wrote off the election and said: "He is an accountant. He will do it. We cannot complain. This is what we have been arguing about in 1978 and 1979." I was quite convinced that the then Taoiseach would do it. But, he did not. He did a complete U-turn in the middle of 1980 and frittered away any prospect he had. He must regret that.

The diagnosis we had today from Senator Whitaker was correct. In 1981 the deficit was £547 million, or 6½ per cent of our GNP. The budget of January 1981 set a target of £550 million, or 5¼ per cent of GNP for that year. The Minister for Finance in his budget statement underlined the importance of bringing down the deficit with all practicable speed. He told the House what he was doing. By the time we came into office, mid-way through the year, it was evident that current spending for 1981 would be £500 million more than the budget estimate of January 1981. We were faced with a budget deficit running up to £950 million for the year unless corrective action was taken.

It is important to put the actual figures on record. In terms of the current supply services the January budget made a provision — and this is the basic data — of £3,370 million. The emerging position at the end of June was £3,852 million or an under-estimation by mid-year of £482 million. It is no secret in the Department of Finance that during the preparation of the Estimates the former Taoiseach called everybody in and said: "Knock another 5 per cent off". I do not want to sound in any way vicious about Ministers but there is a joke — not necessarily in the Department of Finance — that when the former Taoiseach contacted the former Minister for Finance and said "Jump" the only response the Minister had was, "How high?" That is tragic. For political purposes, because an election was due to take place, in April the whole budget estimates position was cooked. I have to use that word. The January budget was originally set at £3,370 million. The emerging position at the end of June was £3,852 million, or plus £482 million. The July budget estimate finally tried to bring some sanity into it. We reduced it to £3,739 million, just a minor damping down, trying to contain the position which still leaves us with a massive deficit at the end of the year, and an incoming budget deficit of approximately £1,100 million.

Regarding the tax credit system and the payment to the spouse working at home, the only defence I have is that I did not in any way advocate this innovation. There are three points to be made about it. In the long-term it may well be, contrary to what some Senators have said, a very useful mechanism of social income redistribution and of major benefit. Second, the scheme has been modified somewhat from what was originally proposed in the party manifesto and in the joint programme in that we have now decided to provide additional marginal relief for those with joint incomes of £2-£4,000. The estimated cost of that is £24 million in a full year. The administrative costs of the scheme are heavy. The staffing arrangements will be quite in order and there will be no difficulty there. But the system has been made somewhat more progressive. Admittedly it is a straight tax credit system from the husband to the wife in the case of that situation existing in terms of taxable income and there is the inclusion of marginal relief for those earning from £2-£4,000. It would taper off around £4,500. There would be no net benefit except that the spouse would get the income. That is desirable. I do not regard it as an undue intrusion into married life, with due respect to The Cork Examiner.

While I am not personally mad about the scheme I would argue that it is quite possible that many women working at home are unaware of the gross earnings of their husband. Some husbands would not even be aware of their gross earnings because we are all pre-occupied about take home pay, with roughly between 70 and 80 per cent of the gross earnings finishing up in the pay packet, depending on the income reached. It is also arguable that this proposal will ensure that spouses will have a greater interest and a greater preoccupation with the precise earning levels of their husbands. This is another marginal social benefit. I do not want to argue the case excessively, but these are points I would make. The first point I made in that regard, namely, that in the long term it has a social redistributive benefit in terms of a budget mechanism, is a valid one. This is something which can be of value, and it will work out in time.

Mrs. Honan

It got the votes.

Acting Chairman (Mr. J. Harte)

The Minister, without interruption.

Mr. B. Desmond

I agree that indirect taxation has regressive elements in it. One would be quite idiotic if one did not accept that. I would point out, however, that in the Irish context not all indirect taxation is totally regressive. For example, our VAT system has a large zero rated element directed towards goods which form a high proportion of expenditure by lower income groups. Food here is not subject to indirect taxation; clothing is exempt; footwear is exempt — and these are very important elements in the household budget expenditure. Any of our colleagues here who have analysed the national household budget expenditure patterns and tables can tell one that. Therefore it is not an entirely regressive element. That, again, is rather defensive on my part. I would add one other thing. When one bears in mind that there are some wealthy individuals in rural Ireland — there are, after all, 159,000 full-time farmers in the country who, between them, paid £14.6 million in tax this year which is a substantial drop from about £20 million in 1980 — who apparently are not going to be caught by income tax now because the taxation system is not going to be dramatically changed, it is arguable that we can get them on indirect taxation. Though I hold the view that this is one way of doing it, that may not be politically a very popular thing to say. But it is something which has to be borne in mind, considering that one element in the community do not believe in paying any tax at all. I refer to the very large farmers who, with a very substantial taxable income, just do not pay any tax at all. So we might as well catch their sons and their daughters either through drink or motorcars or petrol and so on, so as to spread the load. It is an arguable proposition and it is worth while in that regard.

Senator O'Leary correctly drew attention to the NESC Report No. 62. It is probably the finest report we have had in recent years. It is an extremely good, comprehensive report and it should be compulsory reading for all of us. The Senator's reliance on the data contained in that report is indeed to be supported. He made reference to the balance of payments. In our preoccupation with the current budget deficit, we tend to ignore the far greater relevance and importance of the balance of payments deficit. I think Senator O'Mahony would thoroughly agree with me on that point as well. That is where I am really worried. We can certainly manage the budget deficit and get it under control, not necessarily in four years, but it can be done in a slightly longer period. The deficit is, at this stage, alarming. It has become a major constraint in our job growth prospects and has increased alarmingly, particularly in the past two years. In 1978, after we left office the last time, it stood at a fairly manageable £200 million. In 1979 it jumped to £727 million, a ferocious increase by any level of economic analysis. Having stayed at that level in 1980, it practically doubled to £1,400 million in 1981. Just look at the figures. The balance of payments deficit of 1978 was £200 million; in 1979 it was £727 million; in 1980 it was around £750 million, and then it soared to £1,400 million in 1981. It would be even higher if we had not taken that particular corrective action.

There is the question of financing the deficit. Here Senator Whitaker correctly drew attention to the problem of why the balance of payments deficit has deteriorated to such an extent. The very simple answer is — and we all know it — that our oil import bill has almost trebled since 1978 to about £900 million this year despite an actual fall in oil imports, an ironic situation. There has been a drop in oil imports but our oil bill has trebled since 1978. As a people living in rural and urban Ireland, we have not at all taken cognizance of it. Drive around Dublin tonight, today. We all yell blue murder about the cost of petrol, but how many of us reduce our consumption in practice, in reality? This is the reality of Irish life, and as a result our balance of payments deficit has deteriorated quite alarmingly.

Another major factor was the sharp fall-off in our agricultural exports following the heavy destocking in 1980. This was another deterioration in our balance of payments. The point made, correctly, by Senator Whitaker was that the problem which we now face is that, on all the borrowing we have done to finance our current budget deficit we now have a rapidly increasing interest payment on foreign debt, and that has literally doubled in the past 12 months. Forget about the capital. The interest payment on foreign debt has gone from an estimated £250 million in 1981 to £500 million next year. Before we even scratch ourselves in terms of next year's budget we have got to find £500 million in interest repayment. This is a significant element and it will become an even greater drain on our external balances in the years ahead. These are the problems. I indicated that the recession has levelled out to an extent. Our industrial exports are holding very firm, which is one very bright picture on the horizon. The growth in the volume of industrial exports, which was 7 per cent last year, was the important indicator. We have had a somewhat higher rate so far for the first nine months of the year. It has been holding up remarkably well. These are creditible achievements for the country as a whole. I am not at all pessimistic. If we get our budget situation right, if we get our taxation system right, I am quite convinced we can dramatically influence our employment situation and then our balance of payments will improve.

Senator John Carroll quite rightly raised the question of the public sector. I accept that the public sector should not become the scapegoat. I would refer him to a comment made by my colleague the Minister, Deputy Liam Kavanagh, a few days ago on a radio programme that everybody has to pay the same price for a loaf or a pound of butter. I am well aware that people in the civil service do an excellent job and they are not going to be the scapegoats for some Government economic policy. That is an important benchmark in the situation. There are, admittedly, embargos in force at the moment. Nevertheless I detect a very considerable anxiety in the public service, the civil service, the local authorities, the health boards and the Post Office that there should be a national understanding. It does not have to be massively excessive. There would be no question of what happened, tragically in my opinion, in the last national understanding when, as one trade union leader said to me, negotiations consisted of the former Taoiseach bringing employers out to his house and twisting their arms in an excessive manner and that it was literally like taking a lollipop from your grandmother. I do not believe that that kind of exercise should be repeated. Bearing in mind that I do not think inflation will necessarily reach 20 per cent next year but will level out around 17 per cent or 18 per cent provided we do not go mad on the indirect taxation side, we can have an incomes policy continued on a moderate and reasonable basis throughout 1981. I do accept the point made by Senator John Carroll in this regard.

Senator Brendan Ryan was being unduly modest. He certainly professed a scepticism about the objectivity of economists, but nevertheless, the points he made about agriculture and industry are entirely pertinent. I share his view that agricultural production here is scandalously low. I share the view that, for whatever reason, we just have not managed as a nation to reach European levels of production, despite the fact that in the post-entry period to the Common Market we did manage to have substantial benefit from price increases. But it was not matched with massive improvement from a low level up to a high level of basic efficiency and basic productive capacity. It does appear that, for one reason or another, there are endemic problems. For example, we see taxpayers' money wasted enormously to eradicate diseases which may not even be eradicated because some people have a vested interest and their jobs would simultaneously be eradicated, with great respect to some of my Senator colleagues. That kind of situation which is built into Irish agriculture should not be tolerated and cannot be tolerated in future. If we are going to have what we have demanded here, namely, the sharing of the burden of the cost of putting our taxation system into some sane framework, then the cost must be shared by everybody whether it is a vet, a civil servant, a politician or anybody else. The critical comments made by Senator Brendan Ryan about the structure of Irish industry were quite right, particularly with reference to marketing where we are notoriously weak. His grasp on these two issues was quite perceptive.

On the State-sponsored bodies side, there has been legitimate criticism. There are perhaps three reasons. First of all, in the sixties in particular, there seems to have been a sluggish, deliberate starving of the State-sponsored bodies of basic equity capital. Perhaps the State boards were not being aggressive enough in demanding their share of the public capital programme for coherent projects. Certainly a situation emerged through the late sixties and seventies when the basic equity capital structures of the State-sponsored bodies did not seem to move at all. The work of the Joint Committee on State-Sponsored Bodies shows that the equity situation went very much out of control in the late sixties and throughout the seventies. This was coupled with some quite disastrous investment decisions in those areas and a degree of political interference in the work of State-sponsored bodies in that period. There were four aspects, the starving of equity, some very major and disastrous investment decisions, political interference in the day-to-day running of these State-sponsored bodies and some bodies having very poor management. These are quite apart from industrial relations problems, which were not that severe in many of the bodies. As a result of that kind of situation one emerges today with the situation affecting, for example, NET and Irish Steel. Perhaps one or two more could be mentioned. But these are very serious situations because we need in a mixed economy a strong, productive, profitable, highly viable and dynamic public sector growth area. It can be done, but it does not necessarily have to be done on the back of the taxpayer and on the back of investment decisions which are disastrous. The ESB is a good example of how it can be done without necessarily screaming to the State for an enormous amount of equity capital every time they take a particular decision. Bord na Móna are another example. There are other examples but I have just singled out two. NET has been a quite disastrous one. This is so large that that and Irish Steel together, have turned the whole thing on its head. For example, about £150 million was spent in the Marino Point plant. At the end of 1980 NET had accumulated losses of about £80 million and losses of over £30 million are expected in the current year. Add it all up, £260 million, divide it by the total number of workers employed, and it will be found that on average it is about a quarter of a million pounds per employee. One could buy them a farm each and set them up for life. That is a quarter of a million pounds lost per employee on just one State enterprise. Irish Steel has spent about £60 million on a new plant in Cork. It was a political decision that that should be done. I do not necessarily lay the blame on the former Government because there were two Governments directly involved. There were two Governments directly involved in NET as well as the present Government, and there were different complexions. But Irish Steel have spent about £60 million on a new plant in Cork and at the end of June, 1981 had accumulated losses of £26 million, and the outlook for the current year is rather gloomy. Again, there are just 700 workers and £8 million divided out works out at about £120,000 each. Compare that with the fact that the IDA can produce a new job in this country for £7,000 capital investment where a grant is made and one can see the divergence and the major political problem.

It would not be so bad if all that was history, but it is not. It is living with us now. For example, both of these bodies — and I am just taking two of them — are seeking substantial additional equity. NET have already got £77.5 million and they are looking for another £40 million at the moment. Irish Steel have got £25 million and they are looking for another £60 million at the moment. In any country, in any sectoral development, that is, by any stretch of the imagination, quite massive. Then there are other areas which again arise in terms of management, such as total absence of a transport policy. CIE is a classic example with an £85 million subsidy this year of which the Dáil has already voted £74 million and we have to find another £11 million now. There has been, for all practical purposes, no transport policy in the country in the seventies in terms of the urban areas. There are massive transport problems in Dublin. Cork, Limerick and Waterford which have not been solved because we have an incapacity to organise small urban areas. Relative to Europe they are quite small, but we lack the political clout and the managerial expertise to resolve those problems and to build our bridges, to insist on traffic management arrangements. As a result, CIE get this year, and every year to come as long as this kind of situation continues, £85 million in subsidy.

I want to comment on some of those aspects. I accept the points made by my colleague, Senator Flor O'Mahony, about the need for a change in the overall taxation system. Having read the IMF report, the report of the EEC, the report from the OECD, and having spoken to the Budget Commissioner in Brussels and in Dublin about the way we have framed our budget, not just this year but over the past two or three years, I am not at all certain that we should have massive changes from direct to indirect taxation. It could be phased. We have to adopt a changing attitude in that regard. To quote the words of Senator Whitaker here, "Old moulds have to be broken". The most important mould to be broken is that outlined by Senator O'Mahony in this debate. He correctly pointed out that we abolished domestic rates; every year we have foregone some £85 million or more since we abolished rates. If rates were now in, even with a massive system of rates waiver, we would still be collecting about £160 million a year. Every one of the 20 per cent of householders in the country who would come under a rates waiver system would deserve it, would have it and would know it. But we abolished rates. We transferred all our health charges from being local health charges to the Exchequer. The millions of pounds involved there is not even estimable at this stage because it happened so long ago, but not that long ago — it was in the seventies. We abolished car tax. We restored it to 1977 levels but if we had a decent system of car tax in operation it would be worth £50 million. In regard to capital taxation, despite what Senator Whitaker correctly said, with an effective system of capital acquisitions tax, capital gains tax, wealth tax and profits on development land and so on, I am convinced we could bring in anything up to £100 million a year. For example, the closing off of one loophole by the former Minister for Finance, Deputy Gene Fitzgerald, brought in a substantial number of millions of pounds. I refer to the transference in relation to property ownership of development companies. It was a surprise to the Minister of the day and to the Revenue Commissioners what immediately came in as a result of that change. I have no doubt that money would come in.

With regard to the change from direct to indirect taxation, I cannot put a figure on it or say whether it would run to £200 million or £260 million or more. As of now it is a matter for the Government to decide the precise ramifications of the changeover. I do not know whether it will be phased or not. I have expressed my views.

We have, for all practical purposes, dismantled farm taxation. It is hardly worth collecting it because it is so costly to collect it and there are so many appeals. Of course, about half of the assessments of the self-employed are under perpetual appeal anyway.

We have boiled our taxation base down to drink, VAT and a few other incidentals, plus changing the income tax situation. The tax base has become so narrow that we cannot fund basic economic and social progress. If we had not done those things and if the manifestos of 1977 and 1981 had not been in the framework they are in, our country today, in terms of our Exchequer resources, would have an additional amount of between £500 million to £700 million. That £500 million is the minimum at 1977 prices. I estimate it to be about £720 million at 1981 prices. With that money one could eliminate poverty. For example in 1980 the payment to a person on long-term unemployment assistance was only £26 a week. That is, as we know, below the poverty line. With that money we could have increased enormously the basic rates, particularly for those on long-term unemployment, the basic 20 per cent of our people who are on and below the poverty line. That is why I deliberately used the phrase and I deliberately amended my text in my speech where I said "most of us have enjoyed rising living standards." I am talking there about the 80 per cent. But the 20 per cent who, by and large, do not have the voting strength and do not have the political clout and are not in representative organisations, are the people who have suffered by virtue of that kind of change. The £700 million could have been used for anything up to 70,000 jobs at a high rate — £10,000 per job is very high. In the west of Ireland it is about £7,500; in the rest of the country it is about £6,000 for a new IDA job. We could have solved many other problems. For example, the 27,000 people on our housing lists of local authorities with no hope of getting a house could have been housed.

Finally, I should like to commend in particular the comments made by Senator Richard Bruton. His comments on education were quite radical, quite correct and very progressive. His comments in terms of housing expenditure were equally thoughtful and quite correct and will read as a distinctive contribution towards the work to be done.

In conclusion, I want to hold to the view that there will be borrowing in future. There has to be some borrowing for the public capital programme next year. But that borrowing must be directed to investment aimed at boosting employment rather than the financing of current Government expenditures. Between 15,000 and 20,000 young people, whom Senator Cranitch rightly talked about, will be joining our labour force for the first time, leaving aside the 130,000 who are out of work. They will be seeking employment and therefore moneys to be borrowed, saved and cut back will have to go into the employment sector. Senator O'Mahony said that we should avoid cutting off options from the next generation. We will be opening up an option for the next generation. In the process, I suppose, we will probably be thrown out of office because those who adopt such an attitude invariably finish up on the political scrap heap. They may resurrect themselves and come back into office. The cycle tends to be very painful but if one succeeds in terms of change, it is worthwhile being in political life even for that short period before the electorate faces the unpalatable facts and then decides that they do not like what they are being told anyway.

Question put and declared carried.

Acting Chairman

When is it proposed to take Committee Stage:

Mrs. G. Hussey

Tomorrow.

Committee Stage ordered for Thursday, 19 November 1981.

The Seanad adjourned at 8.30 p.m. until 10.30 a.m. on Thursday, 19 November 1981.