I would like to thank Senators for their courtesy in affording me the opportunity of participating in this debate. As this is my first visit to the Seanad I would like to avail of it to congratulate you, a Chathaoirligh, on your election as the first woman ever to occupy that Chair. I know women throughout the land see your election as of particular significance for them. While understanding and sharing that sentiment, I have no doubt that your colleagues in the Seanad did not elect you to this important constitutional office as a woman but in your own right as an experienced, dedicated, wise and compassionate politician. I wish you every success in the Chair of Seanad Éireann. There is now widespread understanding among the general public of the fact that the difficulties we are encountering in this country are also being experienced to a greater or lesser extent by practically every country in the western world. Perhaps the greatest shock for the western world was administered by the Japanese Prime Minister when he declared a financial emergency in what is regarded as one of the most successful modern economies.
Nor can those on the other side of the ideological divide find any solace in the present situation for the socialist bloc of countries appear to be meeting exactly the same type of recession as is prevalent throughout the west. The world economy has been in deep recession for over three years now; unemployment in most countries has risen steadily to unacceptable levels. With a decline in economic activity and rising unemployment the budget deficits of governments have risen sharply and as a result the borrowing and debt of governments have mounted. Inflation and higher international interest rates, themselves engendered by inflation and uncertainty, have aggravated these problems.
This long lasting world recession is not due solely to the two massive oil price increases of the seventies. Additional factors are structural changes in industry, the slowing down of industrial investment, technological developments leading to redundancies, and the growing competition from newly-industrialising countries seeking their fair share of international trade. The growth of the labour force in many countries of the western world had also contributed to the numbers unemployed in these countries.
We are not, therefore, unique in having to contend with a sharp rise in unemployment. At present some 30 million people are out of work in the OECD area. In the United States, the most powerful economy in the world, the unemployment rate is almost 10 per cent, a level not seen since the Great Depression of the nineteen thirties. Even Germany, which for so long had over-full employment, is now suffering unemployment at levels unequalled since the war. I could go on to the details of similar situations in every other country but that is hardly necessary since in most of them the situation mirrors that in the US and Germany.
To put matters into better perspective I would point out that since the outset of the recession the increase in unemployment in Ireland has been more or less the same as the average of other EEC member States, even though in that period our labour force was growing at a much more rapid rate than in the Community. Everyone should understand that our exceptionally fast increase in the labour force makes it necessary for us to make greater efforts and bear greater burdens than other countries in order to ensure jobs for our young people.
The adverse international developments responsible for the high levels of unemployment have had a more serious impact on us than on the more advanced economies for a number of reasons. First, our heavy reliance on imports, including energy, put us in a very exposed position. Second, the rise in import prices and the exchange rate movements severely affected the domestic economy, especially in the years 1980 and 1981. As a consequence the upsurge in domestic inflation was greater than that experienced by our main trading partners. Third, the rise in imported prices aggravated the cyclical agricultural downturn, which unfortunately coincided with these adverse international developments. Fourth, the relatively lower per capita income levels in this country compared with the average for the Community as a whole made it more difficult for us to absorb the impact of the oil price changes. The fall-off in the growth in world trade also hampered our export performance, though it nevertheless remained highly credible. Finally, the steep rise in international interest rates added greatly to the cost of servicing of the Government foreign debt.
The serious problem we have this year and in recent years in trying to balance the annual budget is largely a consequence of these developments. This imbalance in our annual budget must be reduced because it constitutes a major obstacle to recovery. It has brought about a situation when the payment of interest on foreign borrowing places far too heavy a burden on our economy. Unless it is reduced from its existing level we shall have to raise taxation to levels which would discourage personal endeavour, make the private sector uncompetitive, discourage private investment and, of course, increase unemployment.
The slow growth of output, continued high interest rates and the need to avoid more taxation and to keep costs to a minimum so as to encourage job creation in the private sector mean that inevitably the main burden of adjustment must be made on the side of Government expenditure.
This need to take action to reduce budget deficits is accepted by many of our partners. In Belgium stringent adjustment policies, including severe cuts in public expenditure and restraint on incomes, are already taking place and the new Governments in the Netherlands and Denmark have clearly signalled their intentions of following this path. In France, where the Socialist Government had hoped to bring about economic recovery and combat unemployment through increased deficit spending, the Government there have also now decided to retrench. Firm adjustment measures, including an incomes and prices freeze and a strict limit on the budget deficit, have already been implemented. In Italy the 1982 budget provided for substantial cuts in public spending, mainly in health and social security. It is particularly significant to note that the corrective programmes of all those Governments include very tough social policy decisions. Those Governments are acting decisively in the knowledge that their budget deficits and lack of competitiveness are threatening their economic survival by depressing activity, particularly investment activity, which is the engine of economic growth.
The same considerations apply to the Irish economy even more cogently because of its openness and our sharper public finance and balance of payments difficulties. We have no alternative but to pursue, as our European partners are doing, rigorous policies of economic adjustment and correction. Against that background they do the Irish people no service who pretend that there is some different, easier or more acceptable way of dealing with our situation.
Our balance of payments problem is formidable. Last year the external payments deficit amounted to £1,370 million or 13.5 per cent of national output. This is simply not sustainable — no country could possibly continue to run a deficit of that order of magnitude. The size of the deficit is closely related, of course, to Government borrowing, especially borrowing abroad, the interest payments on which last year were about one-fifth of the total external deficit. This year the proportion could be higher still. The rate at which foreign debt has been accumulating must be reduced, and reduced quickly, and that requires immediate and decisive action to improve the state of the public finances.
In his budget statement last March, the Minister for Finance emphasised that the Government are firmly committed to bringing the current deficit under control and gradually eliminating it. To that end we set a tough target for the budget deficit with the objective of achieving it through rigid control of public expenditure and increased taxation. Senators will recall that, even though the budget sought to do no more than was reasonable and prudent in the situation, we nevertheless had to fight off a major political onslaught to get through the Dáil the necessary Finance Bill to give effect to it. Because of a deepening of the world recession, leading to a decline in economic activity and other adverse international developments, the Exchequer returns for end-September — due to be published this afternoon — will show a deficit on current account substantially above the target of £679 million for the year as a whole which was set in the budget of last March. Indications are that it will exceed £950 million. The end-September figure, of course, will not properly reflect the trend for the year as a whole because there will be a surplus of revenue in the final quarter of this year and this will bring the deficit down very considerably.
Nevertheless, the outlook is that the current budget deficit for the full year will be well in excess of the budget target and may be of the order of £900 million. This is a serious disappointment, especially in view of the determined action taken to correct the situation. In recent years budget deficits have gone above the limits set because of a failure to control expenditure. But that is not the case this year and I would like the Seanad to fully understand this because there is a great deal of misconception abroad about it. This Government have strictly controlled expenditure this year by exercising constant supervision. We were obliged to take steps in July in order to ensure that there would be no overspending. As a consequence the expenditure figures for this year are reasonably well on target.
Unlike previous years, the wide gap between the budget forecast and the outturn on this occasion results from the returns of tax revenues being substantially below expectations. There has been a significant drop in consumer spending due to the continuing severe recession and this is reflected in the tax returns for VAT and excise duties in particular. So the picture is emerging quite clearly that the budget deficit will possibly go to about £900 million, but that increase in that budget deficit is not due to overspending but rather to a fall in revenue. The Government and the public Departments have been successful in restraining public expenditure to the levels indicated in the budget.
The increase in the current budget deficit is a warning of the critical need to exercise extremely tight controls on expenditure. Those who are advocating more State spending, either as a means of coping with our economic difficulties, or even for understandable social purposes, must tell us how this spending can be financed. It is misleading to suggest that there are large, untapped sources of taxation, especially at a time when tax yields are falling below expectations. The only rational approach is to impose a greater discipline on spending. That is why the Government had to take action in July and this is why we are planning a major reduction in Government expenditure in 1983 as the only way out of our present critical situation.
That the measures taken in July to reduce public expenditure were absolutely necessary has since become clear to all. Those measures were spread right across the public Departments, though it is the proposals in regard to public service pay that have attracted most attention. I digress here to say that I cannot understand the statement by Senator Barnes that I listened to some moments ago about these public expenditure cuts, because they were spelt out in detail by the Government in its statement of 30 July. In the developing economic situation, and given the deterioration in the public finances, the Government felt that the overwhelming majority of public servants would respond to their appeal for pay restraint in the national interest.
It is clearly reasonable, given the state of the public finances, to ask for a postponement until 1 January 1983 of the 5 per cent third phase of the pay agreement for the public sector due generally on 1 October 1982. The considerable saving to the Exchequer in this year that that postponement involved was absolutely necessary in view of the increasing deficit which was already emerging in July. It was also an important signal of the intentions of the Government to set about taking the corrective action the situation urgently demanded.
The Government's parallel proposal that there should be no further special pay increases in 1982 and 1983 reflects the simple fact that the Exchequer can no longer sustain special pay increases of the order which we were facing.
The Exchequer bill increased this year by £323 million, in 1981 by £375 million and in 1980 by £392 million. The Exchequer bill for public service pay now amounts to the staggering figure of £2.2 billion per year.
The prospects facing us in 1983 are already unprecedentedly intimidating. In any event, there will be in 1983 an addition to the bill of an extra £160 million because of the carry-over of increases and increments from 1982 and the payment of the 5 per cent phase from 1 January 1983. So we already start 1983 with an additional £160 million for public service pay.
To add another £250 to £300 million for special claims on to that would be out of the question. But that was the prospect which faced us in July when we indicated that the Exchequer could not meet such a bill and the situation, of course, has become even more critical since then.
The Minister for the Public Service and the Public Services Committee of the Irish Congress of Trade Unions are even now discussing these problems in a mutually constructive and understanding way with a view to reaching an agreement which takes full account of the Exchequer position and the interests of the union members.
I should like to emphasise that we are now moving into a period of falling inflation, which gives us a new justification for moderating our income expectations considerably below what they have been in recent years when inflation was at its peak.
The social services now account for a major sector of Government spending. There has been a growing volume of public criticism of the widespread abuse of the social welfare system. However, and contrary to what the motion would imply, the Government are determined that necessary economies in expenditure will not be to the detriment of that section of our community who must rely on our welfare services for their standards of comfort and security.
As regards social welfare, it was clear from the Government statement of 30 July last and subsequent statements that our intention was to cut back on the abuse of our social welfare services rather than on the services offered to those people genuinely requiring and entitled to them. Expenditure on social welfare in 1982 will, in fact, be about £190 million more than it was in 1981, an increase of some 27 per cent.
The statement of 30 July indicated that new anti-abuse measures were being taken in the social welfare area — specifically in relation to disability and unemployment benefits — which would reduce abuse by about £5 million this year. The Minister for Health and Social Welfare subsequently elaborated on these new measures in a statement which he issued on 3 August last. The tightening-up on blatant social welfare abuse is in the best interest of all, but particularly those who genuinely and legitimately have recourse to the system for their needs. Action by the Government was urgently necessary unless the whole system was to be swamped by abuse and rendered incapable of serving its basic and fundamentally important humanitarian purposes.
In the health area the Government have been concerned to ensure that the economies to be made should not be at the expense of essential health care needs. In the hospitals and health board sectors economies are essential, but our approach has been to allow those directly concerned in providing these services to determine their own medical priorities — it is they who are in the best position to assess where economies can best be made without taking from essential health standards.
In all areas, right across the board, Government expenditure must be reduced. The reductions are not all palatable in their effects, but they are inescapable. Carping and destructive criticism of them ignores the realities of our present economic circumstances.
The Government, I want to assure the House, are well advanced in their preparations of fiscal policy for 1983. The work of preparing the departmental Estimates is away ahead of previous years. Expenditures in every area are the subject of detailed, careful and anxious examination. It is intended that the Estimates will be settled well in advance so that everyone concerned in the public sector can co-operate in the action that must be undertaken.
The seriousness of our difficulties and the severity of the measures needed to tackle them will imply burdens for all sections of the community. These are sacrifices which must be equitably shared and widely supported. At a time such as this, when far-reaching and difficult decisions have to be taken, it is particularly important that the correct framework for taking these decisions be established and that it have the broadest possible endorsement across the community. The Government's forthcoming plan will provide this framework.
It is being prepared with the aid of a wide spectrum of economic expertise including consultation with representatives of employers, trade unions, farmers and youth interests. It is an attempt to set down, as guidelines for the national economic recovery, a full appraisal of our problems and a candid analysis of what we now must do to overcome them and resume our economic and social progress. It will be subjected to full debate in both Houses of the Oireachtas and the Government will consider all constructive suggestions for its improvement. The time has come for all concerned and responsible persons in public and in private life to accept that we have serious problems to overcome and that there are basic solutions to them which cannot be postponed or shirked.
The ultimate objective of the plan is the provision of employment for our rising population. The plan will outline the conditions necessary for us to achieve the rate of growth in national output and investment needed to provide the jobs required to reduce existing unemployment and provide for new entrants into the labour force. Central to the plan will be measures to restore order to the public finances and improve the competitive position of the economy. This, in essence, is the only strategy open to us for creating sustainable jobs in the longer-term and reducing the balance of payments deficit to a tolerable level.
The approach to public expenditure over the period of the plan will be selective. There will be no scope for across the board expansion of State services. Existing services will be scrutinised closely to ensure that they are cost-effective and meet current needs. Within this overall framework the Government are anxious to provide the expenditure needed to promote the expansion of the productive sectors of the economy provided that it can be shown clearly that the commitment of resources is likely to yield real returns to the economy.
There will also be strict control of Public Capital Programme expenditure in order to ensure that it is worthwhile and to curb the overall public sector borrowing requirement and the cost of servicing public sector debt. Priority will be accorded to projects which improve the productive capacity of the economy and yield a reasonable rate of return.
Of equal importance with the restoration of financial stability is the promotion of economic growth. The realisation of the Government's economic, and especially employment, objectives will depend to a great extent on the ability of the private sector to respond to the more favourable climate for enterprise created by the plan strategy. The plan will put particular emphasis on the importance of competitiveness, especially since rapid growth in employment will depend on Irish products increasing their share of world markets as well as maintaining their share of the domestic market.
The necessity to be competitive does not relate solely to the exposed sectors of the economy. It is essential that those employed in other sectors, particularly in the public sector, have full regard to the effects of their actions on the economy as a whole.
Income moderation is also vital in the private sector. This year, largely as a result of wage settlements under the current pay round, Irish products will lose competitiveness vis-a-vis our major trading partners. This trend must be reversed in 1983 and in later years if we are to curtail the growth in unemployment and bring order to the public and external finances.
I must emphasise that while the Government can devise a strategy in the form of a plan, its successful implementation is dependent on the co-operation of all sections of the community. By taking specific measures to restore balance to the public finances, directing public expenditure towards areas which make a positive contribution to economic development, the Government will create the competitive conditions conducive to growth in investment and employment in the economy. These conditions will provide the framework for the community to respond positively. The extent to which our development goals are realised will depend ultimately on the effort and enterprise of individuals and on co-operation between all sections in the interests of the community as a whole.
I am confident that with the full and active support of all sections of the community, the clear and courageous policies to be set out in our National Economic Plan will provide not only the solutions to the difficult problems we face but also the means to achieve the economic and social progress to sustain our growing population. Our economy is basically strong and has the necessary underlying capacity and resilience to respond to the positive policies we will put forward.
I should like, in stressing the underlying strength of our economy, to point to the fact that we have, since we entered the EMS in 1979, succeeded in maintaining the stability of our currency within that system and I want to stress that we are fully confident of our ability to continue to do so. This stability of our currency within the EMS, when added to our high international credit rating, which continues to ensure us excellent credit terms, is a measure of international confidence in our ability to take, for ourselves, and I emphasise that in view of some of the things that have been said in the course of this debate, whatever measures may be necessary to correct deficiencies in our economic and financial structure.
The basic strength of our economy is perhaps most clearly illustrated in its continuingly impressive export performance. Last year, industrial exports rose by no less than 8 per cent in the face of very depressed international markets. Moreover, so far this year they are on target for a growth rate into double figures despite continued weakness in markets abroad. This is truly a remarkable achievement which serves to underline what more of our exporters could achieve if they had that extra edge in competitiveness.
Reflecting this performance, manufacturing output rose by 3 per cent last year with the rate of growth accelerating to 7 per cent in the second half of the year. Admittedly, this momentum has not been sustained in 1982, possibly because of a further downturn in domestic demand and intensified competition on the home market which again underlines the need to improve competitiveness. Nevertheless, the fact that our manufacturing output expanded in the first half of the year when it was more or less flat elsewhere is a very creditable attainment.
Developments in agriculture also give grounds for confidence. Last year, net output fell by 7 per cent with exports dipping by 9 per cent in volume. This year, net output should rise strongly and exports recover. With this revival in output there should be a good increase in farmers' real incomes this year. The Minister for Agriculture is preparing at the moment — it is at a very advanced stage of preparation — in full consultation with all the interests involved and in parallel with the National Economic Plan a development plan for agriculture which will provide for farmers a framework in which they can plan the future development of their farm enterprises.
The expected recovery in agricultural exports and the strong performance of industrial exports will result in a reduction in our trade deficit this year. The trade gap for the first eight months of 1982 was down by £345 million on the corresponding period of 1981. A particularly welcome feature of external trade developments is the improvement in export prices relative to import prices. In the last few years adverse movements in the terms of trade have added considerably to the payments deficit. It is hoped that the welcome favourable movement in the terms of trade now emerging will continue to strengthen and relieve the external payments deficit.
We cannot, however, look forward to a commensurate improvement in our payments deficit this year because of the growth in the interest payments on foreign debt. Nevertheless, the deficit will show a substantial reduction relative to national output. We hope to make further rapid improvement next year with the measures to be implemented in the context of the National Plan. We are hopeful that the domestic measures set out in the plan will be supplemented by continued easing in international interest rates and that, consequently, the relative burden of interest payments abroad, the largest single drain on our external deficit, should ease considerably.
The recent easing in international interest rates is a good sign that the long-awaited downward trend in these rates is under way. The recent falls in domestic rates have been particularly welcome and the Government have moved to ensure that the cuts were quickly transmitted to all sectors of the economy.
We must recognise that domestic interest rates are still high by historical standards. We must strive to get them down further and the only way this can be done is by wholehearted support of the Government's efforts to implement realistic fiscal and incomes policies. Interest rates everywhere but particularly in Ireland are vulnerable to international trends which can at times be dominant. This, however, does not absolve us from the responsibility to assert what influence we can, Irish rates, as nearly everybody is aware, are a good deal higher than those in some of our neighbouring countries. The differential, even after the most recent fall, is still high. If we want to lower that differential, and this implies that Irish rates must fall faster than those abroad, we must first create the conditions conducive to that fall. This in turn necessitates lower inflation and prudent fiscal and borrowing policies.
One of the most important developments in the economy is the falling trend in inflation. It has been fundamental to the economic policy of the Government that our domestic economic decisions should help rather than hinder this trend in international inflation. That is why in our budget we changed the budgetary proposals of our predecessors which would have increased inflation when it was falling elsewhere.
The importance of that strategy is now evident in the fact that inflation in the quarter to mid-August was only 2.1 per cent, the lowest rate since November 1978. The fall in international inflation is considerable also. Our import prices in the first seven months of this year increased by little more than 8 per cent as compared with over 20 per cent in the corresponding period last year.
This illustrates the economic opportunities which are within our grasp if we can control domestic costs by our decisions on pay, productivity, public expenditure and taxation. Unless we moderate our domestic costs in line with the moderating cost trends internationally, we will lose further ground competitively both at home and abroad to our trading competitors. This will inevitably mean that our possibilities of halting and reversing the trends in unemployment will be removed. As far as this Government are concerned, halting and reversing the present trend in unemployment must remain the primary objective of economic and social policy. No opportunity must be neglected, no sacrifice refused, no burden shirked which could help to ensure that our young people can aspire to a future in which rewarding economic and social opportunities will be available for all.
It should not be forgotten that, despite recession, job creation has continued and has absorbed a large proportion of the increasing labour force. The labour force has been growing at a much more rapid rate than in the EEC generally — more than twice as fast in fact. Our task now is to raise the rate of job creation through higher investment and improved competitiveness so that the existing high level of unemployment can be reduced.
The world economic climate and the short-term outlook do not indicate, I regret to say, any significant world economic growth in prospect. Economic policies must be based on the reality of this uncertain outlook. However, if recovery comes sooner than expected, it will be a bonus and we are ready to exploit it. I am cautiously optimistic that there will be some move out of recession shortly and in this I am encouraged not only by the reality of falling interest rates but by the preparations currently in train to develop an investment strategy at EEC level to promote growth. We have been to the forefront in advocating such a strategy in the EEC and it is our hope that it will bear fruit in a renewal of activity in the European economy.
I have outlined the realities of an economic and financial situation which is of deep concern to us all. I have also charted the way we must go if we are to remedy that situation and resume the full economic and social progress which the recession has halted. We face grave choices and decisions. Our economic future and that of the rising generation are involved. We have the potential to achieve an expanding and socially-progressive economy. But that potential can be achieved only by a carefully-timed combination of both corrective and developmental policies. The corrective measures are already in train by this Government and we look to all who have the best interests of the nation at heart to support those measures. Without them, we put at risk our future economic welfare and security.
Combined with these corrective measures we must continue to develop the potential of our people for greater and more diversified economic activity and innovation. The resources are there in our enterprise and technological skills, our fertile soil and our natural resources, some of which have still to be explored. We must continue to invest as heavily and as productively as we can in these resources. We can only do this if in the short-term or period immediately ahead we accept the type of corrective actions in the public finances and throughout the economy generally which are essential if we are to create a modern expanding economy. Other countries are making the necessary sacrifices and accepting the necessary burdens to retrieve their economies so heavily damaged by the greatest recession since the thirties. I know that when the issue is clearly put and the reality fully understood there will be the resolve, the will and the good sense to support the remedies needed now to gain the benefits which our potential, if realised, can bring us.
This Government refuse to comtemplate any policy other than one which will unite all sections of the national community in a determination to correct the present fundamental weaknesses in our public finances and in our economy generally. By so doing we will recover our economic strength and restore our ability to earn our way in the world by our industry, energy and enterprise. We cannot contemplate any other future. The choice must be made now, the decisions taken. If there are those who would shirk it they should know that failure to take the necessary remedial measures and decisions now will mean very soon a shrinking economy and a stagnant society. This would be a sorry end to the high aspirations we have held since we started out as an independent State. The policy options are clear; the leadership will be firm. Every person in the Oireachtas and throughout the land who cherishes the future welfare and progress of the nation must lend their support. No one can or should hold back.
This debate and this special meeting of Seanad Éireann will have been worthwhile if a message goes out to the country that Senators are united on the need to face the realities and the requirements of our economic situation. Let the message go forth also from this Chamber that there is confidence that our difficulties can be overcome and that when they have been our economic resources can be mobilised to build an economy which can again expand and grow in wealth and social equity. Only by such unity, confidence and resolve can we ensure a stable society free of unwelcome pressures which will meet the ambitions and aspirations of our young people whose interests, above all, we must serve by the actions and decisions we take at this testing time in the life of our nation.
