When this Government came to office we were borrowing large quantities of money for new services and projects. In the past four years spending has been brought under control to the extent that virtually all our new borrowing is now confined to what is needed to service existing debt. In 1981 Government borrowing for new spending — i.e. non-interest purposes — was at 8½ per cent of GNP. It is now down to 2 per cent and, in accordance with the Government's 1987 budgetary decisions announced last week, will be virtually eliminated next year.
Preparations for the 1987 budget are well under way and the Government have already decided on the Exchequer borrowing requirement and current budget deficit within which the budget is being determined. The deficit for the year will not exceed 7.4 per cent of GNP and the overall borrowing figure will not be more than 11.8 per cent. The overall borrowing figure conforms to the guideline for the 1987 budget which is being recommended by the EC Commission in their recent annual report. The Commission also underlined the importance of taking account of the medium term dimension in framing budget policy for 1987 and this will be done.
The budget strategy for 1987 will require a significant curtailment of public expenditure and tough decisions will have to be made to operate within the parameters the Cabinet has set. Priorities between different areas of expenditure will have to be set within a predefined overall budget. The Government have reiterated their view that higher taxation is not an acceptable alternative because of the consequent damage to the economy. I want to issue a challenge to the Opposition parties, Fianna Fáil, the Progressive Democrats and The Workers' Party.
The Government have made a decision as to the current budget deficit and Exchequer borrowing requirement for 1987. I want Opposition parties now to say what their proposals would be for the current budget deficit in 1987, and for the Exchequer borrowing requirement. That is a simple question. I am not asking them to go into detail about specific expenditure and taxation measures. I am simply asking them to say "how much extra should we borrow as a nation next year?". Any party seriously seeking public support in this country should have no difficulty in answering that simple question. I hope we will hear an answer to the question from Opposition spokesmen in the Seanad today and tomorrow.
As I have said, the Government are on course virtually to eliminate borrowing other than for interest payments. It is worth comparing this with the approach of the main Opposition party who have initiated this debate in the Seanad today. Unlike Senators Smith and Killilea I do not have to, nor do I wish to, go back to 1972 when we had our first current deficit, nor to 1977. All I want to do is go back four or five months to April of this year. In that month Fianna Fáil at their Ard Fheis promised cumulative spending and tax reduction programmes amounting to £450 million. As no expenditure cuts were specified, one can only presume that this — on top of the borrowing that is already being criticised in this debate by the self same Opposition — extra £450 million would be financed by more borrowing. More recently we have had repetitions of these promises by the Leader of Fianna Fáil, Deputy Haughey. I have said before, and I repeat it now, these borrowing promises will push interest rates up even further. More Government borrowing means higher interest rates.
Fianna Fáil, as a political party, have tended in the past at least to have two great strengths. One of these strengths is their perceived appeal to nationalism in Ireland. People see Fianna Fáil as a party that stand strongly for national interest as against the interests of the wider world of Britain or any other country. The other strength of Fianna Fáil is their perception of being a party of the working people. This is something that dates back to the thirties. The party were then seen as defending the interests of manual workers against those with money.
I contend that the present policies of Fianna Fáil in regard to Government borrowing are directly contrary to these two basic strengths that underlie their own political philosophy. Present Fianna Fáil policy is against the interests and philosophies of their own supporters.
Let me explain why I make this statement. The more this country borrows the more it loses its economic independence. A country that has borrowed heavily must depend on the perception of it by its foreign creditors. It cannot afford to say or do things that will frighten foreign bankers. Thus its economic and its political independence is in a significant sense diminished by foreign borrowing.
An indebted country must also pay large amounts of money in interest. If international interest rates rise or fall, an indebted country's fortunes fall or rise in a reverse direction to the movement of interest rates. Thus a country, by becoming heavily indebted, becomes less economically independent and more subject to international financial trends.
A heavily indebted country has to send large amounts of its hard earned money straight out of the country to service debt. Ireland at the moment is sending out well over £700 million each year in interest on foreign debt. This is money that we should be using for job creation here in Ireland but we have to send it straight out of the country as dead money because of past borrowing and yet the Opposition party wants £450 million more borrowing on top of the borrowing already implemented. This is another way in which high Government borrowing is bad for national independence.
Some Senators, Opposition spokesmen and particularly the Leader of the Opposition, talk about the fact that there should not be an obsession with book-keeping, that there should be a developmental approach and there should be more imagination, all code words for saying, borrow a bit more, do not make the financial restrictions this year, put it off. Whenever people hear the Leader of the Opposition or other spokesmen for that party making that case about the need for creativity, developmentalism and avoiding an obsession with book-keeping, they should remember that lack of book-keeping compromised the national independence of this country, which is the very issue on which the Fianna Fáil Party, because of their interpretation of how that should be expressed, base their foundation as a separate political unit in this country. That is the true context within which this argument should be placed, a political one.
In these three ways our present level of indebtedness is strangling our national economic independence. Yet Fianna Fáil seem quite happy to contemplate further increases in the level of debt if this will gain political support for them in the short term. This is contrary to the political philosophy and nationalism of their own supporters. It in something that Mr. de Valera, Mr. Lemass and Mr. MacEntee would never have supported.
The high borrowing policies of Fianna Fáil are also directly contrary to the interests of working people who have been amongst their traditional supporters. High Government borrowing drives up interest rates. Who gains in this situation? Those who gain are those who already have money and can now invest it with high rates of return in risk-free Government bonds and accounts.
Those who lose in a situation of high interest rates induced by high Government borrowing are working people — PAYE payers trying to pay a mortgage which has increased because of the pressure created by high Government borrowing, people trying to establish a business which is strangled at birth because of high interest rates created by high Government borrowing. High Government borrowing makes the creation of jobs more expensive and makes money lying dormant in State secured bonds more remunerative.
The big losers when an actual debt crisis occurs — that has not occurred in this country at this time — are always the poor, not the well-off whose cash is mobile. This is evident in the world today. We have seen instances of this in other countries — for example, Mexico — which are in dire financial difficulties. The rich have been able to move their money out while the poor have had to suffer the consequences of a declining economy. So let nobody defend high Government borrowing on the basis that it helps the poor. The ultimate sufferers from the continuation of the present high levels of Government borrowing will be none other than the poor and the least well-off people of this community. They are vulnerable; they depend on the solvency of the State. It is in no way capable of being claimed that anyone serves the interests of the less well-off community in this country by maintaining benefits that we cannot afford to pay at the cost of increasing the level of national borrowing. Ultimately those who suffer most from an unsustainable level of borrowing are the very people one is intending to help.
No party which espouses the interests of less well off people could possibly therefore justify support for continued high Government borrowing. By their reckless and unfinanced promises, Fianna Fáil are turning their backs on the interests of some of their own traditional supporters, those who are least well-off in this community.
The Progressive Democrats, in their recently published taxation and economic document, are proposing some cuts in spending but these are not to be used to curtail borrowing. They are to be used for reductions in personal taxation. While this is certainly attractive electorally, the country simply cannot afford it at the present time. These cuts in taxation will tend to be spent on imports. Thus any stimulative effect from them will quickly leak out to help the economies of our trading partners, rather than ourselves. On the other hand the Progressive Democrats' economic policies will add further to our national debt and increase the interest burden that will have to be paid by Irish people in 1988, 1989 and subsequent years.
Let me illustrate why this is so. The Progressive Democrats are proposing tax cuts in 1987 amounting to about £200 million. They are proposing expenditure cuts in the same year amounting to about £250 million. Thus, virtually no contribution will be made to the reduction in the deficit. Their policy will, therefore, do virtually nothing to reduce the current budget deficit in 1987.
We simply cannot sustain this approach. It is not good enough for any Opposition party to ignore the 1987 budgetary situation. If the urgent obligation to improve the public finances is ignored, then we face borrowing hundreds of millions more than the Government's recent budgetary decisions of an EBR of 11.8 per cent and CBD of 7.4 per cent would involve. The annual cost of servicing this extra borrowing which is implicit in a policy statement published by the Progressive Democrats would be several million pounds. This would have to be met for each subsequent year and would represent a significant ongoing drag on the economy right into the next century.
The level of interest payments involved in pursuing the high borrowing policies of the Progressive Democrats will very quickly undermine the very tax reductions their policy is designed to achieve. At the moment we are in a situation where the entire PAYE income tax yield is used up in debt service and that is without any addition to our present borrowing level.
Under the high borrowing policies of both Opposition parties these debt service payments would increase even further. The result of this would be that, sooner rather than later, taxes would have to be increased again in order to pay the interest. The Opposition parties must realise that this country is on a treadmill because of its existing level of debt without adding a single penny to it. This now amounts to more than 140 per cent of GNP and is among the highest to be found anywhere in the world. Moreover at present, levels of annual borrowing are continuing to increase.
This situation cannot be allowed to continue. The upward trend in our level of debt accumulation must be halted and reversed. There is only one way in which this can be done and that is to cut the annual borrowing requirement as we have done since 1981 by some three percentage points of GNP, as the Government amendment points out.
In addressing the performance of the Government, it is well to consider in the first instance the situation which they inherited on coming into office four years ago. There had been years of over-spending and over-borrowing. The Exchequer borrowing requirement had reached an all-time high of virtually 16 per cent of GNP in 1981 and there was just a marginal decrease on this in 1982. We were in the grip of a severe international recession, a recession that has persisted much longer than we could have reasonably anticipated at the time. Our options were, therefore, on coming to office severely limited. While priority had to be given to lowering the borrowing requirement, it was necessary at the same time to minimise the consequent short term risks to employment.
The Government have been accused of failing to alleviate the problem of unemployment. This is just not so. When we came into office unemployment was increasing at the rate of 40,000 a year. In the past 12 months it has only shown an increase of 3,000 a year, less than 10 per cent of the rate of increase in unemployment when we came into office. However, the fact that there is any increase in unemployment is nonetheless at this time a great disappointment. It is due to a number of factors, including the continuing international recession and the impact of new technology on traditional jobs and the increasing number of new entrants to the labour market. But for the special measures taken by the Government by way of increased incentives and special schemes, the unemployment situation would be considerably worse.
It is fair to note that during the same period unemployment has been rising in other countries also, even in countries which have not had to cope with an expanding labour force as we have. The creation of more jobs must remain our central economic priority. This is a difficult task in a highly competitive environment, but there are solid indications that the situation is improving.
It is worth remembering that there can only be a solution to the job problem in Ireland if there is also a solution to the debt problem. Ireland's high level of borrowing has a negative effect on jobs. High Government borrowing has a negative effect on jobs because it means that virtually all income tax revenue is absorbed in debt service and thus it results in tax levels which actively discourage job creation.
High Government borrowing has a negative effect on jobs because it absorbs large amounts of domestic money in Government stocks and thus diverts funds from productive investment and the uses which would provide jobs — lending to the Government does not provide jobs.
High Government borrowing has a negative effect because it tends to push up interest rates, which makes investment in job creation less profitable and business prospects of survival considerably less rosy. High Government borrowing has a negative effect because interest on foreign debt takes revenues out of the economy, causing depressed living standards, depressed markets for goods and a consequential low profit profile of job creation projects designed to serve those markets. For these four reasons, there is no choice to be made between tackling unemployment and tackling the deficit. Both must be done together if either one is to be achieved.
The recent upward movement in interest rates has come as a disappointment and is a setback to our efforts to promote greater economic activity. The high level of general interest rates in Ireland is due, in considerable measure, to the level of Government debt and the consequent appetite of the State for funds but the rises in interest rates have also been due to factors outside the control of Government and have much to do with international developments. The volatility of sterling has created particular difficulties for us, difficulties which are entirely outside of our control.
Exchange rate stability is critically important for an economy such as ours which is so open as regards trade and other flows. It is difficult to achieve this stability when major currencies like sterling and the US dollar are very volatile. I have urged repeatedly that Britain should participate in the EMS exchange rate mechanism, but that is ultimately a decision for the UK Government. Our best approach is to maintain a stable position within the European Monetary System. We have now reached a stage where one-third of our trade is with countries participating in the EMS exchange rate mechanism and this proportion is growing.
The Government have made it clear recently that there will be no downward adjustment of the Irish pound within the EMS. The August adjustment was a once-off change which has improved the overall competitive position of Irish industry, particularly in relation to continental European countries. The Government are determined to maintain the current EMS parities of the Irish pound.
There have been outflows of funds from the economy, as reflected in the high level of the unexplained balance of payments residual. These outflows took place particularly in the first quarter of 1986 at a time when there was both speculation about an EMS realignment and a depreciation of sterling and the US dollar.
While, of their nature, it is not possible to identify the unexplained outflows, it seems that the bulk of them can be put down to leads and lags in trade payments arising from the exchange rate uncertainty. Given the continued uncertainty generated by the further fall in sterling and the dollar, these leads and lags have not yet been reversed and, if anything, have been intensified somewhat.
The assurance which the Government have given on the exchange rate should make it clear to speculators that they cannot hope to make gains by transferring or keeping funds abroad in anticipation of an adjustment in the Irish currency. Indeed it is worth noting that anybody who has tried to do this at any point since we joined the EMS got their fingers burned and they will get their fingers burned this time also. The relatively high domestic interest rates make such speculation more expensive at this stage. I expect that the combination of these factors will lead to an early inflow of funds from abroad.
High interest rates are not merely a problem for the business world. They are a problem for the average householder who has to meet higher payments and they add to the already crippling burden of interest payments on the national debt. We must continue to do all that is possible, within the limited scope available to us, to move back to lower interest rates with a minimum of delay. We have now moved into an era when real interest rates are positive; in other words, greater than the rate of inflation, this is a real turnaround from the situation of some years ago. Positive real interest rates mean simply that the amount repaid by a borrower is greater than the amount borrowed in the first place. Negative interest rates enjoyed in the 1970s meant the amount repaid by a borrower was less in real terms than what he or she had borrowed in the first place. This has changed. I think it has changed semi-permanently and it means that just as any householder has difficulties if he is a heavy borrower because of high real interest rates, so also has any country.
Probably the best way to understand what has happened to this country since 1980 in terms of the results of the increase in interest rates is its effect on what has happened to any borrower. The effect on their cashflow position as a result of interest rates being in excess of the rate of inflation, where they were below the rate of inflation in the 1970s, is exactly the same as the effect on the Government finances. People must understand that it is not the result of bad Government or good Government, imaginative or unimaginative Government. It is a result of a reality that is occurring out there in the marketplace which no Government can overcome on their own. We are not in the position of King Canute of being able to hold back the tide. The tide in this case is flowing against borrowers, whether they be Government borrowers or individual borrowers. The sooner one gets out of that situation the better, just as people realise that postponing doing something about a problem if one is a high borrower at a time of high interest rates makes the situation worse. Exactly the same logic applies to a Government of a sovereign country.
Let me conclude by referring again to the problem of employment. I invite Senators to look at what the Government have achieved in this area. When we came to office, unemployment was increasing at 40,000 a year. The increase is now down to 3,000 a year. Jobs are created by selling goods abroad. When we came to office the country had a trade deficit: in other words, we were selling less abroad than we were buying from abroad. Now it has a trade surplus. By selling more than we are buying we have established the right conditions for job creation. We can only create more jobs by selling more; we are now selling more than we are buying, exactly the reverse of the situation inherited by the Government in 1982. We have achieved this because we have cut inflation and thus improved our competitive position.
The Government have introduced successful and innovative schemes to help unemployed people back to work, for example, the enterprise allowance scheme, the social employment scheme and the teamwork scheme. They have given hope and challenge to thousands of people who would otherwise be unemployed. It is worth recalling that the OECD have asked this country to chair a special inter-ministerial study on special interventions in the job market because it has recognised that this country under this Government has done more in terms of special interventions to give unemployed people the chance of working themselves back into a full-time job than any other country in Europe or in the rest of the OECD. That is why we have been chosen to chair this committee that is being established to look at new ways of improving the labour market all over the world.
The Government have also overhauled industrial and tourism policies, publishing the first-ever Government White Paper on either of those major industries. We have shifted the emphasis in industrial policy to marketing of new technology and away from capital intensive projects which had been the practice before. We have dramatically cut VAT rates on tourism, thereby creating competitive conditions for job creation in that most sector, a sector that will be probably the most important sector in the economy of much of the world in the next century.
The Government have also greatly increased the incentive to work by introducing a family income supplement for low income families at work and adjusting pay-related benefits for those out of work. This has tilted the balance in favour of active pursuit of all available employment opportunities.
Much remains to be done. The biggest immediate challenge is the implementation of the budgetary decisions which will remove the greatest single threat to job creation in Ireland — unsustainable Government borrowing which causes high interest rates, an anti-employment bias in investment, a fear of future taxation and a general environment of uncertainty.
This is why I have asked Opposition parties to say where they stand on the 1987 Budget parameters. If there is a national consensus on this issue — on what should be the overall CBD for 1987 as a percentage of GNP and the overall EBR as a percentage of GNP — that, in itself, will give a major boost to confidence and investment in the country.
In 1982, in Denmark, that is what happened. Once it was made clear by the minority Government then come to office in Denmark — who incidentally are still in office there — that they intended to take the budgetary situation resolutely in hand, and it was equally clear that the Opposition were not going to attempt to defeat them for doing so, and that both Opposition and Government were taking their responsibilities to the nation seriously, and once it became clear that the problem that was creating uncertainty and overhanging the market with the fear of increased taxation and a fear ultimately of destitution for those who were relying on the State, as a result of the State being unable to meet its obligations — once that uncertainty was cleared away by the creation of a national consensus on the need to take action on the Government borrowing situation in Denmark in 1982, there was an immediate surge in investment and job creation which was quite out of proportion to the actual measures taken by the Government.
Denmark brought about a situation in which they simultaneously had the biggest reduction in the Government budget deficit and at the same time the biggest increase in employment in the entire Continent of Europe. There are many people in this country who say nothing can be done about the Government deficit because of the huge employment problem; if something is done about the deficit it will have a negative effect on jobs. The Danish case shows that is not true, that by tackling the Government deficit, the uncertainty about possible future taxation, a possible further increase in interest rates, possible better rates of return for money invested in gilts rather than into a productive project is removed, and people are given the sense of certainty and a sense of knowing where they are going, they are able to invest money to create jobs rather than creating money for doing nothing.
Essentially, if the Opposition parties in this debate can respond to the challenge I am putting to them by saying — having criticised the Government which they are perfectly entitled to do — what their budget deficit would be in 1987 and what their Exchequer borrowing requirement would be in 1987, if they are prepared to agree with the Government's targets or, better still, if they are prepared to say they would actually have a lower Exchequer borrowing requirement than we propose for next year, that will create in itself a sense of certainty in the community that this problem is going to be tackled over the next five years, no matter what Government are in office. If they continue to criticise the Government saying, as Senator Smith said, that they are in favour of virtue and against sin — that is about all he said — saying that they are in favour of more promises involving an additional borrowing of £450 million but at the same time condemning the Government's existing borrowing, refusing to say what their policy is on any subject because it might create public relations difficulties which would have to be explained by briefing afterwards, we will never get a sense of certainty in this country. We will continue with the destructive tit-for-tat approach to politics which has created an atmosphere of total unreality, and we cannot afford to go on with that.
I hope this debate will be one in which people on both sides of the House will face up to the fact that, no matter who is in office, we have a problem with borrowing and we as a country must solve that problem. Within this House or the other House we can have an argument, once we agree on a 7.4 per cent deficit, about where the reductions should be. One party might say there should be more reductions in education and another party might say there should be more in the health area. We can have lots of arguments like that; there is no difficulty with such arguments; that is what politics are all about. But all the parties in this House should at least agree on the overall parameters within which we are prepared to work. As long as the main Opposition party continue to deliberately dodge that fundamental question, we will never get stability in this country. We will not have an honest election whenever it occurs within the next 12 or 18 months because the Opposition party will not come out of their bunker as far as telling the truth to the people is concerned.
We have had the spectacle of the Opposition party trying simultaneously to say things that are directly opposite to one another. We read on the front page of The Irish Times on a date early in September — I will not go back to 1972 as Senator Smith did —“Mr. Haughey promises £200 million to the construction industry”. The following day on page three of the Irish Independent there was a briefing from the Fianna Fáil Front Bench that promises were out, that they were not making promises anymore. You even had the same thing in the one speech. In Cork, Deputy Haughey first of all promised to make an extension to the runway and promised to abolish the DIRT but in the same speech he said: “I never made an irresponsible promise in my life”. The man never made a promise in his life and yet he was actually making one at the same time. That suggests a degree of schizophrenia in the Opposition that is certainly not good for their health, and it is not good for the health of the country either. While my primary concern is for the health of the country it must be said that everybody who is responsible should have a concern, that all the parties who have and command considerable support in the country should try at least to face up to the fact that we are living in a real world at present.
We are not living in some sort of kindergarten where one can dream about what one would like to be the case without regard to what would have to be paid for. That is a stage in psychological development that most people pass at about the age of ten. That seems to be the situation in which the present Opposition are labouring. They are saying they would like to cut borrowing but they would also like to be in Government. Therefore, they are prepared to promise more borrowing even though they would like to reduce it. That approach will not get them anywhere and it will not get the country anywhere. It will not give confidence to the financial markets either. We had the spectacle of one of the spokesmen for the Opposition party trying to say on radio on the Friday following the Government's announcement on Thursday, that these measures would not work and that the markets were responding badly to them. In other words, that spokesman for the Opposition was deliberately trying to sabotage what the Government were trying to do to bring about a reduction in interest rates. For pure party political purposes he was trying to say that these measures were not going to work. He was trying to create a self-fulfilling prophecy to the detriment of the Irish people and — he hoped — to the advantage of his own party. That is the height of irresponsibility and it is an irresponsibility that derives from the schizophrenia that is at the heart of Fianna Fáil's attitude to our economic problems.
It is essential that they respond to the challenge I put to them in this debate and say what their deficit would be and what their Exchequer borrowing requirement would be next year. There is no problem about the books being unavailable to them. If they wish to see the books, they can see them any day of the week. There is no mystery about the books in this country. The information is either already published or available for publication at any time, and anyone who wants to see the books can see them if they feel they need to see them in order to say honestly what they believe should be done as far as the deficit in the Exchequer borrowing requirement is concerned. But, please, let us cut out the hypocrisy and, as an adult nation, face up to the problems we actually have in regard to our indebtedness as a people. There is no other way of doing it. There is nowhere as a nation that we can hide at this point and it would be a tragedy for the nation if the next election — whether in 12 months time or less or more — was fought again, as so many of them in the past have been, on the basis of slogans, simplification and the avoidance of reality. It may make life comfortable for politicians but it surely is extremely bad for the country. I hope that one result of this debate, which is a very timely one indeed, will be to put an end once and for all to that sense of self-delusion that has been the mark of much economic and political debate in this country since I became a Member of the other House in 1969.
