I move:—
That a sum not exceeding £116,480 be granted to complete the sum necessary to defray the Charge which will come in course of payment during the year ending on the 31st day of March, 1957, for the salaries and expenses of the office of the Minister for Finance, including the Paymaster-General's office.
This afternoon I propose to avail of the opportunity this Estimate offers to speak on a matter of the gravest national importance. I intend in so doing to be as simple and as blunt as possible, so that everyone in the community will know and appreciate all the facts of the present economic situation. Many people still believe that the situation, although serious, will right itself of its own accord. This idea must be put aside once and for all. A vague uneasiness about the way things are going, and wishful thinking that all will soon be well, must be replaced in the public mind by a real awareness of how serious matters are and a determination on the part of each individual to do his share to remedy them. It is only by realising and by facing the difficulties squarely that we shall be able to overcome them.
In March last the Government, after careful analysis of the economic situation, imposed a special levy on a range of less essential consumer goods and also restrictions on hire purchase transactions. These measures were supplemented in the Budget by higher taxes on less essential forms of expenditure, particularly on imports, and by certain incentives to production and saving. An attractive new issue of Savings Certificates was put on sale on 1st May. Both in March and in the Budget and on various occasions since, it was made quite clear that further action would have to be taken if an adequate improvement did not take place. Stress was laid on how much that improvement depended on individual decisions to produce more and to defer unnecessary consumption now so as to increase savings. A marked increase in saving has not so far occurred, nor has there been any significant increase in output. I am sure all the Deputies in the House and thinking people throughout the country realise the seriousness of our present difficulties and look to a responsible Government to set a headline in dealing with the situation. The Government have, therefore, decided at once to reinforce and supplement the measures already taken, despite any temporary political embarrassment this may cause.
Before announcing the measures which the situation demands, I think it well to state in simple terms the dangers and weaknesses in our economy. Most of our troubles arise from the fact that our production does not support the purchasing power yielded by our money incomes. We are, moreover, spending so much of these incomes to satisfy our immediate wants and desires that all too little is being set aside for the productive investment on which our future standards depend. Because our home output of goods and services is not high enough, a large volume of goods is being imported to satisfy our inflated purchasing power and, since we are not earning enough to pay for these imports, we are eating into our capital to do so. We have even added to the excessive purchasing power of our incomes by borrowing from the banks and drawing down our past savings. The result is that these past savings are vanishing and that sufficient current savings are not being made to finance all the capital works needed to develop the economy. Although the level of capital investment is below that of more developed countries, resources which represent the forced saving of two world wars have been largely wasted instead of being used exclusively and carefully to increase our productive capacity and so provide a firm basis for higher living standards.
We must face the unpalatable truth that, without a radical change in the situation, we cannot enjoy much longer the artificial standards to which we have become accustomed, since the external reserves to which we owe these standards are steadily running out. Unless our present purchasing power is upheld by an immediate increase in production, we must accept a temporary reduction in that purchasing power now or suffer a wholesale and drastic reduction in imports in a very short time, with dire effects on industry, trade and employment.
Our pattern of trade for many years has been that we import far more goods than we export, hoping to make up the difference by what are termed invisible receipts such as the expenditure of tourists in Ireland, emigrants' remittances and similar items. Lately the excess cost of what we import over what we get for our exports has become so great that the invisible trade items cannot bridge the gap. Last year, for example, we spent £204,000,000 on imports but received only £110,000,000 for exports so that the visible trade gap was £94,000,000. Invisible receipts amounted only to £58,000,000 and we, therefore, failed to pay our way by £36,000,000. No household, or business concern, could continue for long to pay out more money than is coming in. What is true of a household or business is true also of a country. We must, therefore, see that more comes in and that less goes out— that is, we must have more production and less expenditure on imports, if we are to maintain national solvency.
The overspending on imports has continued with but little abatement in recent months and no worthwhile net improvement in the trade balance has yet been realised. While the measures taken earlier this year have had some result, the change for the better is disappointing. Taking the first six months of 1956 together, imports were £5.7 million less than last year but this was accompanied by a decline in exports of £4.5 million. The surplus of imports over exports in the period was, therefore, only £1.2 million less than in 1955. This rate of improvement is obviously much too slow seeing that last year the import of goods and services in excess of our earnings abroad resulted in the loss of no less than £36,000,000 of our external capital. I say loss because the external capital was used not for development here but purely for consumption purposes.
Moreover, the fall in imports so far this year has arisen mainly from the running down of stocks of certain staple commodities such as wheat and maize, imports of which were exceptionally high last year because of the bad harvest weather in 1954. Imports of consumer goods and of the materials for the manufacture of consumer goods have shown little reduction and, in view of the failure of exports to revive, are still being maintained at a level higher than we can afford. Imports of commodities subject to the special import levy imposed in March were £3,000,000 in the two months April and May of this year as compared with £3.7 million in the corresponding months of 1955. Apart from imports of motor cars and components which declined by £450,000, the effect of the levy in both months was slight.
The Government have been particularly concerned to note that, so far as total imports are concerned, the falling trend of recent months was reversed in June when imports were actually £450,000 higher than in June of last year. It might have been expected that the impact of the levy would have been fully effective by June. We are still importing, however, at an annual rate of up to £90,000,000 in excess of our exports.
The fall of £4.5 million in exports in the first half of 1956 as compared with the first half of 1955 was mainly in cattle and other agricultural exports, principally pigmeat, dressed beef and butter. As a result of increased domestic costs we find it impossible to sell abroad some of our agricultural products. Cattle exports have shown signs of recovery recently and accounted for most of the increase of £1.7 million in total exports in June as compared with June, 1955. Even on favourable assumptions about cattle exports in the remainder of the year, it would be clearly unwise to expect a sufficient increase in exports as a whole to reduce the trade deficit this year; the most we can hope for at the moment is that total exports will reach last year's level. Our export prospects, even in the long run, are closely related to the level of agricultural production and it is to live stock and other agricultural exports that we must look for any significant expansion over the years ahead.
Another handicap to the restoration of a balance between foreign receipts and payments is the falling trend in the prices obtained for exports as against the rising trend in the prices paid for imports. Even in a country in which merchandise imports and exports were in balance at the outset, this trend would mean that more exports would have to be sold, or less goods bought from abroad, if the balance were to be maintained. In our case, imports are so much in excess of exports that the effect of any worsening of the price relationship is virtually doubled, as is, therefore, the effort necessary to offset it.
That means that even if the volume of imports remained static, every time their cost increased by 1/- in the £, to prevent the balance from disimproving we would have to receive 2/- in the £ more for exports or increase the volume of exports by an equivalent amount. That has not happened and indeed the changed relationship between import and export prices between 1949 and 1955 added, by itself, some £25,000,000 to the trade deficit in the latter year. If we cannot offset, by increased exports, the effect on our balance of payments of an adverse turn in the terms of trade we have no option but to accept the necessary reduction in what we can afford.
The need for an early and substantial reduction in our import excess is emphasised by the possibility of a drop in our earnings this year from invisible items. Emigrants' remittances, for example, may fall below last year's level as a result of recent developments in the motor and other industries in Britain.
These are hard facts, unpalatable facts, cruel facts perhaps, but they are, nevertheless, facts from which there is no escape. The only conclusion to be drawn is that imports and other forms of external spending must be reduced immediately. To secure this result, the Government have decided on the following measures:—
First, an increase to 60 per cent. (full) and 40 per cent. (preferential) in the rates of special import levy on the items which were subject to 37½ per cent. (full) and 25 per cent. (preferential) under the March Order. The specific rates of levy on canned fruit have been increased pro rata and commercial vehicles, except buses, have been made liable to the 15 per cent. levy on motor vehicles. The March rates on motor vehicles, newsprint, newspapers and periodicals are being left unchanged.
Second, a further range of imports has been subjected to levy at the rates of the original levy, namely, 37½ per cent. (full) and 25 per cent. (preferential). Broadly speaking, the goods now being charged are in character those which can less readily be dispensed with than those selected for the first levy and it is, therefore, appropriate that they should bear the lower rates.
These intensifications and extensions of the levy have been effected by an Order under the Emergency Imposition of Duties Act which comes into force at once. Copies of the Order are being tabled and will be made available to Deputies. Of our total imports in 1955, the new list of goods affected represented about £14,000,000, while the March list represented about £22,000,000 making a total of £36,000,000. The effects anticipated from the changes now being made in the levy are a further decrease in imports of the order of £5,000,000 in a full year and an additional revenue yield, again in a full year, of some £3,000,000. I want to stress that the proceeds of these levies will, as before, be paid into the Capital Fund and, therefore, will not be used for ordinary budgetary purposes. These estimates should be reduced by one-third, i.e., to, say, £3,500,000 and £2,000,000, respectively, to allow for the fact that almost one-third of the financial year has passed.
The third measure is a reduction of 25 per cent., which will come into force at once, in the basic allowance for holiday travel abroad. It is essential not only that expenditure on imports of goods should be reduced but also that all avoidable spending abroad should be curtailed. This is the maximum reduction we can enforce under our O.E.E.C. commitments.
I mentioned that the 5 per cent. rate of levy on newsprint has been left unchanged. In 1953 imports were 450,000 cwt. valued at £1.2 million; in 1955 630,000 cwt. valued at £1.8 million. In the first five months of 1956 we spent on these imports £50,000 more than in the same period last year. This is a sphere in which we can have physical control without danger of the emergence of black-marketing activities and I am, therefore, in touch with the representative organisations of the printing and publishing interests with a view to limiting our imports to what we spent on newsprint in 1953.
Furthermore, as part of the general campaign to reduce imports, I have already asked Government Departments and State-sponsored bodies to have all purchasing programmes reviewed with the object of reducing or deferring, as far as practicable, any purchases involving imports.
I would appeal to all firms and undertakings who purchase stocks of goods from abroad to review their plans similarly and effect as big a reduction as possible.
Apart, however, from direct expenditure on imports, all public expenditure must now be reviewed. In my Budget speech I announced that the net borrowing requirement on foot of the capital programmes of the State, local authorities, the E.S.B. and C.I.E. would amount to about £37,000,000 as compared with £41,000,000 last year. I defined most carefully the conditions and assumptions on which this forecast was based. I said:—
"Provided personal savings recover to the 1954 level we can carry through a programme of national development of this magnitude without any undue strain on our resources and with great benefit to our economic and social welfare."
This proviso was and remains of fundamental importance because a failure of savings to revive could not but necessitate the suspension and curtailment of development plans. Even in March last I said I was basing my estimate of the possible level of public capital outlay this year on the assumption that the public would increase their savings to a significant degree, and then I went on:—"For if this assumption were not made very drastic reductions would have to be made in public outlay". I regret that, as I said in this House last week, there is as yet no evidence of a sufficiently marked increase in savings. On the contrary, there is evidence that the consumption is continuing at a higher rate than we can afford and that even past savings—such as those represented by bank deposits—are being drawn upon to support this excessive expenditure on consumer goods. The Government, have, therefore, no alternative but to review the programme of public expenditure settled prior to the Budget and, in the circumstances which still prevail, to reassess how far it can be financed out of available resources.
In the budgetary programme the overall capital requirements of the State and other public bodies in 1956-57 were estimated at a gross figure of £43,500,000. Towards this gross figure, there was expected to be available from capital repayments accruing to the Exchequer and the Local Loans Fund, from the proceeds of the special import levy imposed in March and from the Road Fund the sum of £6,500,000. This meant, as I have said earlier, a net borrowing requirement for the present financial year of £37,000,000.
Towards that amount there is a reasonable expectation that small savings and the investment income of the Post Office Savings Bank and other funds will contribute £7,000,000. Last year these sources yielded £5,750,000. The new issue of savings certificates has given an impetus to small savings in this form and, even though the improvement has been partly at the expense of the Post Office Savings Bank, a net total of £7,000,000 from small savings and investment income seems attainable.
The problem remains of raising £30,000,000. The position in regard to savings and the state of the gilt-edge market make it unfortunately only too clear that the borrowing of £30,000,000 in a non-inflationary way is not possible this year. Last year's experience confirms that there is no hope of success for a series of public issues for C.I.E., the E.S.B., Dublin and Cork Corporations and the State itself. I have come to the conclusion that, at most, only one major public issue, and that a direct Government loan, should be made in the present financial year. It is too early to settle the precise timing but I think it well at his stage to repeat that it will be the only major loan launched for public capital purposes in this financial year. There will, in other words, be no public issue this year for the E.S.B., C.I.E. or Dublin Corporation. The State will, so far as it is able to do so, come to the aid of these bodies, to supplement such funds as they can raise independently so as to provide the capital they necessarily require. The extent, however, to which it can assist must, of course, depend on the extent of the capital resources which the public make available to the State.
It is not usual to indicate in advance the amount or terms of national loans. I can, however, promise that the terms will be attractive to small and large investors alike. It is the Government's desire to raise as much money as possible by voluntary subscriptions from the public; the terms of issue will, therefore, be such as will offer an incentive to public subscriptions and in this way encourage the revival of savings which is so necessary for economic stability and progress.
The usual amount of a national loan is £20,000,000. A loan of this amount should be successful, seeing that it will be the only major public loan in the present financial year, that, as I have said, its terms will be attractive, and that the special import levies will operate to discourage excessive consumption. Even in the difficult conditions of last year, public subscriptions to the various loans floated by the State and public bodies exceeded this amount. It is not, therefore, I hope, unduly optimistic to expect that £20,000,000 will be subscribed. The patriotic good sense of our people, at whose desire and for whose benefit capital development is being undertaken, can, I believe, be relied upon to make the issue a success.
The normal arrangements for the flotation of a national loan mean that Government funds and the commercial banks, as underwriters, have to be prepared to supply any deficiency in public subscriptions. For Government funds—and, indeed, also for the banks in present circumstances—the fulfilment of underwriting commitments would involve further sales of sterling securities. Neither the Minister for Finance nor the banks could regard this as a welcome prospect. It would reduce the already limited reserves held by departmental funds, leaving them less able to support the State capital programme in the future, but what is even more serious, it might necessitate in the case of the banks a contraction of credit facilities in other directions in order to safeguard their liquidity. It is not, I think, appreciated that, as a direct consequence of the balance of payments deficit, the commercial banks have lost nearly £50,000,000, or two-fifths, of their net external assets since January, 1955. It is essential, therefore, that any further sales of sterling securities, whether by departmental funds or by the banking system, in order to finance public capital outlay, should be avoided or at least kept to a minimum.
May I say, in passing, that a good deal of misconception seems to exist about the country's holdings of external assets? Many people, in talking about them, do not take care to emphasise that most of these holdings belong to private individuals and institutions and are no more available for public capital purposes or for covering balance of payments deficits than houses or other private property.
Raising by loan £20,000,000 from the public would still leave us £10,000,000 short of covering the net borrowing requirement of the State and other public bodies this year. In this latter sector, some easement may be secured through external borrowing but external borrowing is expensive and entails special risks. For these and other reasons it can be undertaken only to a strictly limited degree. There is no escaping the conclusion that the net borrowing requirement for public capital purposes as fixed at Budget time must now be reduced.
The necessary extent of that reduction is being lessened by the imposition of the new and increased levies on imports. The proceeds will be used exclusively for capital purposes and it is expected that the receipt in the present financial year will be roughly £2,000,000. Allowing for some limited external borrowing and for the finance provided directly for Dublin Corporation and other bodies by Irish insurance companies, there still remains a gap of £5,000,000 which must be closed if, as a Government, we are to discharge our responsibility to maintain a sound and healthy economy.
This gap could be closed either by an immediate increase in taxation or by a reduction in expenditure or by a combination of both. To raise the amount necessary would require very heavy impositions which, coming so soon after the increases in taxation provided in the Budget, could be defended only if there was no alternative. The Government recognise that their primary obligation is to close the gap by economies in public expenditure.
It is obvious that exhortations to private individuals to forgo expenditure, however desirable, in order to save must fail to carry conviction unless supported by the clearest evidence that public expenditure is being restricted to essentials and that the Government are not using their taxing powers to maintain services which are to any degree non-essential or postponable to less difficult times. Savings cannot, of course, be made without depriving some individuals or institutions of money or services which they had hoped to get or deferring the receipt by particular individuals or classes of new services of a beneficial or desirable nature. Equally, however, these moneys and these services cannot be made available at the present time except by imposing heavier charges on the community at large and this the Government will not do. They have decided, therefore, that at least £5,000,000 will be saved in Government expenditure this year. Plans to give effect to this decision are being framed and the particular reductions will be decided upon and made effective by the Government without delay.
Certain proposals to effect this saving are, in fact, already under consideration and I should stress they cover the whole field of current as well as capital expenditure by the Government and those bodies to which I have already referred. Savings in current expenditure which must be in addition to the £3,000,000 for which I made allowance in the Budget will ease the problem of financing the capital programme because the revenue already provided for such expenditure will then be freed to meet capital needs.
By this cut in public expenditure, by the imposition of the new and increased duties on imports, by very limited external borrowing, and by a national loan it is hoped to carry forward this year, to the utmost limit of our available resources, a public capital programme of a predominantly productive character which will not merely yield employment now but will secure permanent future increases in our living standards.
I have used the phrase "available resources" quite deliberately because in these times the deliberate creation of new credit could have nothing but harmful effects. Either it would drive up internal prices or, and more probably, it would accentuate even further our balance of payments problem by creating a new demand for imports. No Government concerned to preserve a sound economy and secure lasting improvements in the community's living standards could deliberately pump new money into circulation to add to the inflationary forces which are already too active in the economy. On the contrary, the Government must make sure that such external capital resources as are still available will be used solely for the permanent strengthening of our economy and not to satisfy an excess demand for consumer imports generated by the creation of new money.
I have emphasised this point because the belief is entertained in some quarters that the solution of our present difficulties is to be found in financial expedients either by way of credit creation or in other forms, including even a change in the value of our currency. These are no real solutions. I have already explained what would be the effect on the economy of credit creation and it is clear that devaluation of the currency would inevitably lead to a progressive deterioration in our conditions relative to other countries. Leaving aside the effect on confidence in our currency, such a step would have a serious reaction on the cost of living since imports enter so largely into domestic consumption. Wheat, tea and other basic needs would be affected equally with the least essential imports. I want to state clearly and categorically that the Government not merely have no intention of devaluing our currency but are determined to take whatever measures are required, however unpleasant, to safeguard and maintain the value of the Irish pound.
The real need at the present time is for a substantial increase in the volume and efficiency of our national production. This cannot await the fulfilment of any long-term plan nor can it be realised by any magic formula; it must be achieved in the immediate future through the effort and enterprise of individuals if we are to surmount our difficulties. They can be surmounted if we all increase our output by one-tenth. What is needed, therefore, is that everyone should concentrate on achieving this immediate target. A rise of 10 per cent. in national production is well within our capacity in view of the advances recently made in other European countries. I am, of course, referring to an increase in real output, not to an increase in the monetary value of production resulting from higher prices. The benefit obtained from mere price increases by any particular section of producers can only be at the expense of other sections of the community or of the competitiveness of our exports.
While we are attempting to get over our present difficulties stability of money incomes is essential. The measures which I have announced must reduce the purchasing power of incomes by raising the cost of certain imports. They will be rendered ineffective if there is any effort to compensate for this reduction in purchasing power by pressing for higher monetary incomes. In the present serious situation we must all accept a temporary lowering of our standards as a condition of building them on a surer foundation. Another round of increases in money incomes on top of those gained last year would be certain to price many of our products completely out of foreign markets. It would be certain also to aggravate our balance of payments difficulties and to necessitate a contraction in our plans for national development.
I remarked earlier that there has been no sufficiently marked improvement in the savings trend in recent months. While there has been some increase in small savings, deposits with the commercial banks have continued to fall. Next to our lack of resilience in production, this failure of savings to revive is our greatest anxiety. The development of our economy by productive capital works cannot proceed without a large and steady volume of current savings. The savings of our own people are the only means that will enable us fully to develop our national resources and to provide with that development more opportunities at home for employment and a sure foundation for a reasonable standard of living. The Government are, therefore, consulting with the Savings Committee to see how the promotion of a national savings drive can be aided and accelerated in view of the urgent and vital importance of increased savings.
I have outlined the measures intended to remedy a serious situation. These measures will be retained only as long as the situation requires. I hope that a balance will soon be restored in our external payments and the conditions assured for steady progress in economic development. In the last resort, however, a return to balanced conditions depends on the decisions and efforts of individuals. The Government for their part will discharge their responsibility to safeguard the national economy. The situation, however, is one which may vary from week to week and from month to month. I want to make is crystal clear that should any further action be required even while the Dáil is in recess the Government will not hesitate to take it. What is at stake is our economic independence. If we should lose this, the political independence we have achieved would be a mere facade. The Government are determined that both will be preserved at all costs.