I would like to thank the House for the opportunity to examine the motion that has been put before it. The problem referred to in the motion, as Members of the House will understand, is a problem which has been occupying the Government since last July and where we can define three main areas of the problem.
The first segment of the problem is the obvious problem we have in relation to farm incomes which is a matter I will dwell on in a little more detail in a few minutes. It is one part of the problem of which we must be aware. The second part relates to the volume of farm output. It is here we have run into a certain number of difficulties over the last couple of years which are serious not only in their direct effects on the incomes of our farming population but have very serious implications also in other sectors of the economy, in the agri-business sector and on a wider basis than that and which also affect the level of our export earnings and, therefore, our balance of payments problem. The third part of the problem which I think we must address ourselves to relates to the decline we have seen in our livestock breeding herds particularly over the past two years. This is the cause of part of our problem in relation to the volume of agricultural output but it is so important it merits particular attention as a separate part of the problem.
The difficulties that we experience now are not, of course, new. The problems I have referred to have been building up over the past three years. It is very important we should realise that because it has obvious implications for the kind of measures we can take in order to deal with those problems. We have gone from a situation in which during the period 1973 to 1978 we saw rapid increases in farm incomes and indeed an increase in the total volume of farm output, to a very different situation in 1979 and 1980 in particular, where we had falling output and falling incomes both in nominal terms and in real terms.
In 1981 the volume of agricultural output continued to fall but owing to a conjunction of other circumstances we have had a stabilisation of real income levels for our farm families. During 1979 and 1980, we saw a more rapid increase in costs of farm production than in the prices being received for farm output. In 1979, output prices increased by 5.9 per cent over the year whereas input prices increased by 12½ per cent. In 1980, output prices declined by 2.7 per cent but input prices continued to grow at a rate during that year of 14½ per cent.
This sharp divergence between the trend of output prices and that of input prices created the classic cost/price squeeze which gave rise to very severe pressure on farm incomes and the kind of drop in farm incomes over those two years to which I have already referred. The size of that drop can be appreciated by looking at what happened to consumer prices in those years. In 1979, the consumer price index increased by 13 per cent and in 1980 it rose by 18 per cent.
In addition to this cost/price squeeze we have had a decline in the level of output to which I have already referred. Taking 1975 as the base year at 100, the volume of gross agricultural output in 1978 was 111.5; in 1979, 110.6; in 1980, 110.7, which was no change, and in 1981, 108.3. There lies one of the main roots of the problem which we have at the moment. In addition, during 1979 and 1980 there was a serious amount of de-stocking particularly in our cattle herds and this resulted, for example, in our cattle breeding herd falling from 2.368 million head in 1979 to 2.245 million head in 1980, a drop of 123,000 in our basic cattle breeding herd. At the same time, there was an increase in the use of certain farm materials on farms from 1978 onwards at a time when the volume of output on farms was declining.
Again I refer to the volume figures. Taking 1975 as the base year at 100, in 1978 the volume of farm materials used was 147.5; in 1979, the volume increased to 175.2; in 1980, it declined to 153.2, which was, nevertheless an increase over the 1978 level; and in 1981 there was a further increase to 159.3. This has added to the effects of the cost/price squeeze. This is a problem which merits particular attention. If we have a situation where the volume of output is declining and the volume of input is increasing, obviously we must be very concerned about it.
There are a number of reasons why this might be happening on individual farms. It is perfectly conceivable, for example, that at the beginning of a particular year a farmer might have planned to buy in a certain number of cattle and would, therefore, have planned his feed and fertiliser purchases to cater for that level of activity on his farm. He might then have found that it was not possible for one reason or another to get that level of stocking on his farm and might, therefore, have found himself during the year overstocked with feed and fertilisers. That kind of situation obtaining on any kind of a wide basis throughout the country would have created to some extent a divergence between the trend in the use of inputs and the trend in the volume of outputs. In my view that alone is not a sufficient explanation of these divergent trends.
I would like to make the point straight away that in pointing out this trend and drawing attention to something which as I have said is a very worrying factor, I am not making the point nor am I suggesting that there has been any large-scale mismanagement on farms or that there has been any large-scale wasteful use of money on farms. I can see what might be some of the explanations for this divergence between the trend in inputs and the trend in outputs but I am not sure we know all the causes. Equally, until we have examined this in greater detail than has been possible up to now, we will not be able to make as good an effort at redressing the situation as we would like to make. This is a feature which we need to examine, and which is being examined closely by my Department, and if we find explanations as to why these things have happened then we can deal with them in a reasonable way. I will be very happy to do so and the farming community would also like to know the explanation for these trends.
The problem as I have outlined it has been building up over the past three years. It is only reasonable to point out that given that kind of background to the problem it is realistic to say that we cannot solve that problem in the space of a few months. The causes of the problem are fairly deep-rooted and they require action extending over a period in order not simply to eliminate the causes but to turn around the trends in output, in inputs and in incomes to which I have referred and to get ourselves back into a situation where we can look with some confidence for an increase in the volume of output, for an increase in the margins being earned by farmers on what they produce and, therefore, for an increase in the level of farm incomes.
A number of instant solutions have been put forward in recent months and it is worth looking at some of them in order to see what kind of contribution they could make. One area of instant solution that has been put forward relates to a devaluation either of our green currency rate or a straightforward devaluation of our currency. It would be useful if I were to indicate to the House some of the considerations which have led the Government to take the view they have taken in relation to these two matters.
Taking first the question of a devaluation of our green currency rate, I would have to say that were we to propose such a thing at the moment we would be proposing to pursue a course of action diametrically opposed to that which successive governments here have followed in relation to green currencies since 1973. The House will recall that our national aim in relation to green currencies during that period has always been to reduce the gap between our green currency rate and our market currency rate. The normal situation over that period was that our green currency rate used in the conversion of EEC prices and aids of various kinds into Irish currency tended normally to be above the market rate because our currency tended to devalue over that period. Successive Irish Governments have made the point that the proper thing to do was to align the two rates by bringing the green currency rate closer to the market rate of the currency.
We have a different situation at the moment. Were we now to propose a devaluation of our green currency rate, we would be proposing to create a new gap between the market rate of our currency and the green rate. We would be proposing to bring the green rate down below the market rate and that is the opposite of the policy that we have followed in this country since 1973. Without having put the question, I am quite sure that the reaction among our partners in the European Community and, indeed, in the Commission would be one that would be completely negative in this regard and would, again, be inconsistent with a number of things which we have been doing over the past few months and which we will continue to press in the forthcoming price discussions in the Community, one of those things being that we want to reduce monetary compensatory amounts now being applied in other countries which, in our view, are a hindrance to exports from this country to our partners in the European Community. For those reasons a devaluation in our green currency rate, attractive though it may seem, appears to me not to be a real option at this point.
The other question is, of course, the more general question as to whether we should seek to bring about a devaluation of the general market exchange rate of our currency. This was a question we were faced with last October during the realignment of exchange rates within the European Monetary System. At that time given what was going on in relation to the other currencies in the system and, indeed, our own economic situation here, the Government took the view that it was not the right moment and we were not in the right circumstances to justify a devaluation of our market rate relative to all of the other currencies in the European Monetary System. There are a number of reasons for that and I will refer only to some of the agricultural arguments in that connection.
A devaluation of our currency or, indeed, of the green rate would bring apparent immediate benefits in terms of the value in this country of EEC price supports and various aids. A devaluation of our currency would bring about the same result if we were to ensure that our green rate stayed in alignment with the market rate. It would also bring about certain costs on the agricultural side to the extent that our farmers use imported materials, raw materials, machinery and so on, and they would feel the effects of a devaluation in terms of an increase in the prices they would have to pay for those imported inputs. This is something that we should bear in mind particularly since we are at a time of the year now when farmers tend more to be buying inputs than to sell outputs. The least one could say is that the risk would be that the ill-effects of a devaluation on farm incomes would be felt at this point more quickly that the benefits in terms of increases in farm prices since we are in what is more a buying period than a selling period. When we add those arguments to arguments of a more general economic nature, we come to the conclusion that a devaluation of our currency is not an option that we would follow at this time to deal with the problem we have to deal with in the agricultural sector. I would make the point that indeed I have been saying this since last September. Some of those who have been putting forward devaluation as a solution to the problem appear since last week to have taken the points I was making and now say that they would look at it only as a last resort. We are not at a point yet where we need to resort to the last resort to deal with the problems before us.
Another one of the instant solutions being put forward is that we should borrow substantial amounts of money abroad to inject into the agricultural sector of the economy. I would make the point straightaway that the Government have no objection in principle or in practice to borrowing abroad for productive purposes. However, we have to deal with a problem which exists, which is the problem of servicing an already high level of foreign indebtedness. The servicing of foreign debt is taking up a substantial proportion of our current tax revenue. That being the case, the servicing of existing foreign debt puts a number of constraints upon the Government in terms of what they are able to do with the remainder of current revenue, either for current purposes within the economy or to support measures to help the productive sectors of the economy. Given the problems we have at present this does not seem to be the moment to incur further large increases in foreign borrowing because that would further constrain our ability to do the kind of things we want to do within this country.
That is a very broad review of the problems that we face and of some of the less likely solutions that have been put forward. I would like now to illustrate what has been done to meet the problem since we took office last July.
Almost the first thing we did was to lay before the Oireachtas the first Supplementary Estimate for agriculture of £35 million, prepared by the last Governfent before they left office, which we, of course, proceeded to pass through the Oireachtas in order to ensure that we could continue with the programmes that were in operation at that stage. We then announced a series of measures in the July mini-budget which were aimed at implementing points outlined in the Government's programme and which we believe would make a contribution to solving part of the problem with which we are faced.
We first of all secured agreement and then brought into operation an EEC interest subsidy scheme which applies to borrowings contracted by development farmers for investments eligible for aid under the farm modernisation scheme. This scheme provides for a 5 per cent interest subsidy in respect of outstanding borrowings for those purposes. That scheme came into operation on 1 September and so far the response to that scheme has been satisfactory after a relatively slow start. It is clear that that scheme does not apply to all investments made by farmers. The essential point is that it applies to those investments for which farmers have already got grant aid if they are working on development plans and it will apply to new investments carried out under the terms of existing or new development plans entered into by farmers. It represents a substantial reduction in the rate of interest to be paid on the loans in question. Even though it may not cover the whole of a farmer's borrowing, and in many cases it does not, nevertheless it represents a useful contribution to those borrowings which he needs to undertake in order to carry out the development plan which he has agreed to carry out.
Another measure which we announced in July which equally came into operation on 1 September was a reduction in the rate of value added tax on contractors' charges from 10 per cent to 3 per cent. Members of the House will know that this has been a matter of controversy for some time, not only among the farming community themselves but among the agricultural contractors who felt that the level of value added tax on their services in the circumstances made it difficult for them to continue in business. We have reduced the rate of value added tax there and that came at a useful time for farmers when many of them were coming to the point where they would be buying substantial amounts of services from contractors in the harvest period.
Another measure which we took at that time was to increase the flat rate value added tax reimbursement for farmers to offset the effects of the increases in the basic value added tax rate on those farm inputs which are subject to VAT. We increased the flat rate compensation from 1 per cent to 1½ per cent. On the basis of the information we have in relation to volume and prices of farm outputs and equally of farm inputs, I am fairly confident at the moment that the new 1½ per cent rate compensates adequately for the element of value added tax included in farmers' input costs.
Finally, in July we announced an increase in the rates of grants under the sheep headage scheme. Total increase in expenditure under this head would be in the region of £2.5 million this year and all of that expenditure will go into areas in the western part of the country where there was a clear farm-income problem and farm incomes were already low before we got into the problem that has emerged over the last three years. Those were the first measures that we took in order to respond to the problems that we found on taking office.
More recently we introduced a second Supplementary Estimate for agriculture of £37 million. Some of the more notable features in this Supplementary Estimate included provision of £3 million to finance a national interest subsidy scheme which will provide for non-development farmers a level of interest subsidies equivalent to that provided under the EEC scheme for development farmers. We provided an amount of £3 million under that scheme for this year. The cost in a full year would be somewhat more than that. In addition, that second Supplementary Estimate included a provision of £8 million extra for aids to farmers in less favoured areas in order to maintain in operation the various headage schemes that are in existence and a further provision of £13.3 million to cover expenditure under the farm modernisation scheme including the western measures and the EEC interest subsidy scheme. Therefore, between the measures we took in July and the other measures taken and reflected in the second Supplementary Estimate we have already begun to implement a number of points set out in the Government's programme and which address directly the problems that I have been outlining here.
In recent weeks we have made further progress in the sense that we have got EEC approval for a series of three national aids that deal with problems with which the House will be familiar. The first is a national aid for second-time silage makers. That is for people who last year, 1980, benefited from the EEC aid for first-time silage makers. That scheme was continued this year in order to provide extra encouragement for people who made silage for the first time in 1980 to make sure that they continue making silage. We are trying to ensure that more and more farmers get into the habit of making silage because it seems on all the advice we have that it is a very good method of conserving winter feed and one which should be more widely followed throughout the country. The schemes in question have shown that it is possible and viable to make silage in areas of the country where silage-making had not been the practice up to now.
The second measure is a subsidy of £30 per ton for one ton per farm of nitrogenous fertilisers announced earlier this year. The third measure is designed to encourage further increase in our breeding herd. I refer to the scheme which provides for a £70 subsidy next year in the form of an interest subsidy in relation to extra breeding heifers kept on farms in June of next year compared with June of this year. I would like to say a few words on this because there has been considerable public discussion of the measure and what it constitutes.
The previous Government announced their intention to pay a £60 subsidy on extra heifers in the herd. Part of our Government's programme was to pay £100 subsidy, £60 of which would be paid in 1982 and the remaining £40 two years later. Our intention was to bring in a measure which would ensure that extra heifers brought into the herd in 1982 would be retained. This is a national aid measure funded from national resources which would have an effect on the level of our breeding herd and, therefore, on the volume of our production. That being the case, it is necessary for us to clear that measure with the EEC authorities and with the Commission. Immediately on taking office I took the matter up with the Commission authorities and during the discussions which I had with them I found a certain reluctance simply to allow the measure to go ahead in the form in which we had put it forward. A number of suggestions were made to me as to other ways in which we might go about achieving the result we desired but my view was that we needed a specific measure that would directly tie an increased aid to an increase in the number of breeding animals in the herd. The agreement we reached finally was that we would be able to pay £70, not £60, in 1982 and that it should take the form of an interest subsidy. My intention will be that that subsidy should be paid, if at all possible, on every extra heifer in our breeding herd in June of next year compared with June of this year. The original measure which we put forward was part of a four-year programme to bring about an increase in our breeding herd. The measure which we now have in operation is a one-year measure which will apply in 1982.
That is not by any means the end of the story. It is still my intention to carry on with a four-year programme to expand our breeding herd. We have the first part of it in operation. I will be taking up the remaining part of the first subsidy during the course of the forthcoming price discussions in the EEC and in future years I will be taking up the continuation of that measure or a measure that will have equivalent effect to ensure that we will get the kind of increase in our breeding herd that we want to bring about.
I referred to the national interest subsidy which we brought into operation. That is a 5 per cent interest subsidy scheme which is parallel to the EEC interest subsidy. As I said, those subsidies will not cover all of the problems for a number of farmers who have serious financial difficulties at the moment. My concern is to ensure that farms which are basically commercial units capable of providing a decent living for a farming family should be able to stay in production and I am looking at measures which will enable us to achieve that aim.
The House will be aware from press reports and so on that a separate discussion is going on between myself and the lending institutions in order to arrive at this result. Those discussions have not yet been concluded and I cannot say when they will be concluded. The intention of the measure being discussed is to ensure that farmers in serious financial difficulty will be enabled to overcome their immediate problem in order to stay in production and think again in realistic terms about expanding production. In this respect we must recognise that some farmers are facing serious financial difficulty, not because of mismanagement or bad lending or borrowing decisions, but for the simple reason that farm plans which can show a profit when money is available at 10 or 12 per cent may very quickly become unprofitable when interest goes to 19 per cent. That problem has afflicted farm enterprises over the last couple of years just as much as it has afflicted production enterprises in other sectors of the economy. We must recognise and deal with this problem to the best of our ability, not only for the sake of the farm families involved but also for the sake of all those people whose livelihood depends directly or indirectly on agriculture.
I have outlined some of the measures which we have taken and one which we are in the process of negotiating at the moment. I talked about the price cost squeeze. We need to do two things in order to get out of that. The first is to tackle inflation, to find a means of reducing the rate of increase in costs of inputs and the cost of living for our farm families. This Government are committed to that and further measures to deal with it will be forthcoming. We must also look at the price side of that equation. In this connection I am looking at our approach to the Brussels farm price review which will begin early in the New Year when the Commission publishes its price proposals. I will be looking for as much increase as I can possibly get from that discussion, in the grand tradition of every Minister for Agriculture we have had since 1973 when we joined the Community. In addition, I will be looking for other complementary measures, as they are called, to deal with problems which we have which do not apply either at all or to the same degree in other member states of the EEC. I have already told Commissioner Dalsager that that is my intention, and he was not surprised to learn that. We will be discussing and approaching the price proposals with that in mind.
It is difficult to say at this point how much one wants to look for. Therefore I will not go further into that. Even if I knew what the figure was I would not say it too loudly. You do not start such negotiations by showing your hand in advance.
Another reason for being cautious about saying what we are looking for, which is related to policy in the EEC, is that we are still in the middle of a discussion on the mandate of 30 May. One of the elements in that discussion is an effort on the part of some of our partners to ensure that the rate of increase in expenditure on the common agricultural policy is not greater than the rate of increase in the total budgetary availabilities of the EEC and a desire on the part of some interests in the Community to ensure that we fix the total amount of spending on the CAP at or about its present level. We must view that development with very serious disquiet.
At the European Council in November and at meetings since then, the latest on 15 December, and a forthcoming meeting around the middle of January, we have been and will be ensuring that that kind of development will not come about. We need to be sure that within the European Community the conditions exist for us to be able to continue to expand our agricultural production at whatever price levels we manage to get agreement on during the course of the annual price negotiations. I am very conscious that as an exporting country we need to be sure that whatever measures should be taken within the EEC to sustain an expansion in agricultural production in a country like ours are taken and that our hands are not tied in advance by artificial or autonomous limitations on the amount of funds being made available to support the common agricultural policy. That is one of the priority areas of activity which we are following at the moment.
I pointed out the problem and what we are doing in order to remedy it. In spite of the fact that we have come through three very difficult years in agriculture, I still take the view that we have not come to the end of the road. We still have a sound basis for further expansion in agricultural production. We have seen this year at least a halt to the decline in farm incomes. The final results for this year will probably show that in money terms total farm income will have risen by somewhere in the region of 20 per cent or, in other words, that total farm income will be in real terms at about the same level in 1981 as it was last year. That, perhaps, is not the result we would wish to see but it is an improvement over the decline we have seen in the last two years.
Something which is easily forgotten in the kind of debate that has been going on for the last few months about the difficulties we have in agriculture is that a very substantial amount of investment has been carried out on farms in this country, particularly under the farm modernisation scheme. That infrastructure is available to sustain increases in production in the years ahead. Some discussion which takes place would almost lead one to the conclusion that all of the investment up to now on farms in terms of improvement in farm buildings, construction of new farm buildings and land improvement has been lost. It has not. It is there to sustain increases in output over the coming years. With a continuation of the kind of measures that we have introduced I am confident that we will see increases in production during years to come. They will not, perhaps, be as rapid as we would wish but they will not be held back by any reluctance on the Government's part to follow the kind of measures that are needed in order to get us out of the problem we are in at the moment.