I propose this year to make only a brief comment on recent economic developments. The Central Statistics Office booklet "Economic Statistics" and the report on Ireland by the Organisation for Economic Co-operation and Development, both published this month, provide a comprehensive review of the economy over the past few years.
The volume of national production in 1963 is provisionally estimated to have risen by 4 per cent, as compared with 2½ per cent in 1962. Over the five years, 1959 to 1963, inclusive, the average annual increase was 4½ per cent. As the OECD report points out, these five years "witnessed Ireland's period of fastest economic growth in the century."
In manufacturing industries the increase in output last year was 6½ per cent, one of the highest in Europe. Because of a reduction in the acreage under crops, which offset an increase in cattle production, net agricultural output showed a slight fall. The further increase in cattle herds, however, is now contributing to higher sales. Employment in transportable goods industries rose, a gain of 7,800 being registered between the December quarters of 1962 and 1963. Unemployment and emigration continue to be much lower than a few years ago. Since the 1961 Census it is estimated that the population has grown by 25,000.
Exports, both agricultural and industrial, rose substantially during 1963. There was a more than off-setting increase in imports, though this was largely of capital goods and raw materials to support the industrial expansion.
It is estimated that a balance of payments deficit of £22 million was incurred in 1963, as compared with a deficit of £13½ million in 1962. As the net external assets of the banking system and departmental funds rose by £3 million during the year, the deficit appears to have been more than covered by an inflow of capital. I agree with the statement in the OECD report that foreign capital should not be a substitute for measures to stimulate domestic savings nor for proper action to deal with a balance of payments deficit resulting from domestic inflation. The 1963 capital inflow was accompanied by a rise in domestic savings and helped to raise the proportion of the gross national product devoted to capital formation.
Turning now to the year ahead, I should like to give some indications of how the economy is expected to shape; these are based on the usual pre-budget assessment, made in consultation with professional economists, the purpose of which is to help in framing the budget in such a way that economic growth will be sustained at a high rate without too great a deficit being incurred in our external payments.
There are grounds for hoping that an even higher growth rate than the 4 per cent of 1963 may be achieved this year. The buoyancy of the economies of Britain, America and Western Europe should help us to expand our exports and thus to maintain the momentum gained in the second half of 1963, when industrial output and exports rose faster than in the first half of the year. The improvement in export market conditions for cattle in recent months is also helpful.
On the other hand, the effects of the large rise in incomes as a result of the "ninth round" will be significant in 1964. There has been general satisfaction that a national agreement was reached at the beginning of the year, avoiding a "free-for-all" and promising stability for a period of two-and-a-half years. At the same time, it cannot be overlooked that, as the increased incomes are being paid in advance of the expected increase in output, there are risks involved for the economy. A steep rise in productivity is needed to offset the higher wages and salaries and keep costs in industry and services from rising significantly. If industrial costs are pushed up so as to render our goods or services less competitive with those of other countries, this will hamper the expansion of our sales abroad and our tourist industry. Since the growth of the economy depends mainly on increased exports, the continued expansion of production and employment could in consequence be endangered.
Another risk lies in the use that may be made of the large increase in incomes. If it is spent mainly on personal consumption goods, involving heavier imports, the effect, combined with a weakening in our capacity to expand exports, could be to lead us into balance of payments difficulties. Spending on consumption goods would also absorb resources which could otherwise be used in productive investment.
It is, therefore, essential that every effort be made to minimise the possible adverse effects of the "ninth round", so that advantage may be taken of the otherwise favourable prospects for the economy. Managements should strive to bring up the productivity of workers so that they will not only be paid more but that their work will be worth more. Some of the initial strain on costs should be taken on profits, in consideration of the future easement when productivity has advanced. And workers should be encouraged to increase their individual savings.
If these steps are taken, the outlook for 1964 is good and the balance of payments deficit, though it will be higher than in 1963, will contain a temporary "hump" which we can surmount. If they are not, difficulties may develop requiring corrective action. It is a year in which we must be on our guard and, therefore, one in which the budget, while being framed so as to maintain development, should not itself give a fillip to consumption. A balance on current account must, therefore, be our objective.
In concluding this brief survey, may I say that I feel certain it would be better for the national economy—for workers as well as for employers and every other section—that the periodic increases in money incomes should correspond as closely as possible with the growth in national production and thus assure the price stability, the advantageous competitive position and the parity between money and real income increases which were good features of the years 1958 to 1960. I hope there will be growing appreciation on the part of all concerned with wage and salary negotiations, including those charged with the duties of conciliation and arbitration, of the wider national economic interests involved, and especially at this critical period in our development, of the need for maintaining and, indeed, improving our competitiveness in export markets.
2. CAPITAL BUDGET
This year a separate paper dealing with the capital budget has again been published so that information about the components of the State capital programme may be readily available for examination and discussion.
Actual capital expenditure in 1963/64 was £78.5 million as compared with the estimate of almost £80 million.
The sources from which last year's expenditure was financed are set out in Table 2 in the paper. The main contribution came from the National Loan of £25 million. The £20 million which was sought from the public was fully subscribed and additional applications amounting to £1.3 million were met by reduction of allotments to Departmental Funds. This was a satisfactory result, especially as the Electricity Supply Board had already floated a loan which was fully subscribed and several successful private issues had also been made. Small savings during the year, however, were somewhat less in total than had been hoped. Net investment in Savings Certificates and Prize Bonds increased by £¾ million and £½ million, respectively, but, although deposits in the Post Office and Savings Banks were nearly £1 million greater than in the previous year, withdrawals were also larger and the net increase in deposits, excluding interest, was only £2½ million instead of the £4½ million expected.
Table 4 shows the proposed method of financing capital expenditure in 1964/65. The amount to be provided by the Exchequer in the current year is almost £71 million and over £25 million is to be obtained otherwise. The expenditure contemplated on schemes of national development is thus, in money terms, 22 per cent greater than last year but should nevertheless be within the competence of the economy having regard to the considerations set out in the Second Programme for Economic Expansion. The bigger the contribution made by current savings, however, the more satisfactory will it be from the economic standpoint. Building and construction (which includes houses, schools and hospitals), air and other forms of transport, industrial grants and credit, and telephone development are the principal categories for which extra capital is needed.
As I have said already, every effort must be made to ensure that the £40 million or more of spending power due to the "ninth round" will not excessively raise demand for consumer goods and services at the expense of capital needs. I would, therefore, ask everyone to put aside some proportion of increased earnings into savings. The higher the proportion the better.
I am having an examination made of the present arrangements for National Savings to see whether there is any way in which they need to be improved or brought up to date. As the current issue of Savings Certificates has been on sale for eight years, I am increasing the maximum permitted holding from £1,250 to £2,500. I have recently, as is known, made the next Prize Bonds draw more attractive by adding two bonus prizes of £10,000 each. As a result, there were nearly twice as many applications for Bonds during the recent issue period as there were a year ago and over £1 million extra was subscribed.
The Post Office Savings Bank and the Trustee Savings Banks cater for small savers, affording a guarantee of immediate repayment, whenever required, with interest and without loss of capital. The Post Office Savings Bank is looking into the possibility of giving an improved service to its customers. The Trustee Savings Banks have represented that their progress is handicapped by certain statutory limitations and I hope to introduce legislation shortly to remove these.
I should like again to refer to the excellent work being done by the Savings Committee, whose members voluntarily devote much of their time to the promotion of savings. The Committee has just completed a campaign for the encouragement of saving by children in primary schools — a campaign which met with considerable success as a result of the full co-operation and assistance of the clergy and of teachers. The habits of thrift acquired by the children should be of value to the economy in future years.
Another very important feature of the Committee's work—and one which will yield more immediate results—is the organisation of savings groups in places of employment. These groups operate a type of savings scheme based on the deduction of savings from pay; it might be referred to as "Saving as You Earn". Saving is thus made easy, regular and virtually automatic. At the present time, more than 20,000 people save about £1 million a year where they work, through the 250 groups already in existence—100 in private firms, 50 in semi-State organisations and 100 in Civil Service and local authority offices. These range from groups of about ten people to a group of over 4,000 members.
There is obviously still much scope for this activity and when I met the members of the Savings Committee recently I was pleased to hear that all existing groups are being asked to make a special effort to increase their membership and savings. In additions, the Committee is about to undertake an intensive drive for new savings groups in firms and factories throughout the country. The campaign will begin immediately in the Dublin area and I understand that it has the full backing of the Irish Congress of Trade Unions. I feel sure that, as hitherto, employers will also readily co-operate.
3. CURRENT BUDGET, 1963/64— OUTTURN
Recent wage and salary increases have not only contributed to this year's budgetary problem but could be regarded as themselves accounting for last year's deficit of £2.2 million. The specific wage increases for the Garda Síochána and for national teachers and the general increases arising from the "ninth round" cost 2½ million in 1963/64. Additional expenditure was, of course, also incurred on items other than pay. State outlay on pensions, children's allowances and agriculture was specifically increased in the budget and there was need, as well, to provide for various unforeseen items such as shipbuilding subsidy and additional expenditure on health grants. It is indicative of the buoyant state of the revenue that, although the total supplementary provision needed for current services exceeded the budget estimate by £5.3 million, the overall deficit was limited to £2.2 million.
The most important feature on the revenue side of the budget last year was the introduction of the turnover tax in November. It is now working smoothly and the assumptions made in last year's budget about the advantages of this particular type of sales tax have been borne out. The yield from the tax, £3.7 million, proved to be closely in line with the budget estimate of £3½ million. The tax did not, as the cost-of-living figures for mid-November and mid-February confirm, result in a disproportionate increase in prices. Competition, consumer awareness and good sense on the part of traders combined to ensure that the effect of the tax was to raise prices by little more than the tax rate itself. The tax provides a reliable and indispensable new source of revenue to finance our economic and social development.
4. CURRENT BUDGET, 1964/65— INTRODUCTION
The turnover tax came into force only last November. So did the increase in children's allowances and in other social welfare benefits which have offset for a large proportion of the population the effects of the tax. We have had in recent months the "ninth round" of wages and salaries. Of its economic implications I have already spoken. From the revenue point of view it will swell receipts but it also entails a large rise in expenditure.
The basic figures for this year's budget are shown in the White Paper "Estimates of Receipts and Expenditure" published a few days ago. Though revenue, at £208.35 million, is up by £23.9 million, current expenditure is shown at £209.96 million and an initial deficit appears of £1.61 million.
On the revenue side, full allowance is made for the buoyancy of the economy. Special consideration was given to the prospective yield from the duty on tobacco. This is one of the most important items of revenue and the intake in February and March had been adversely affected by the coincidence of the United States Surgeon-General's report and Lenten self-denial. The setback now appears to have been transitory and, if the tax rate were unchanged, the realistic estimate is that tobacco consumption this year would show no fall on last year.
The expenditure total includes £6.85 million for "ninth round" pay increases and £2 million for CIE subsidy. Neither of these items was settled in time for inclusion in the Volume of Estimates and special attention is, therefore, drawn to them in the White Paper. The payment of subsidy to CIE depends, of course, on the enactment of amending legislation.
The salient features of expenditure this year are apparent from Table III of the Current Budget tables. Social expenditure in the broad sense shows the largest increase at £8.7 million. This was to be expected in view of the full year's cost of the increase granted to social welfare recipients in last year's budget, the growth of the health services and the increasing outlay on education. The further improvements in teachers' salaries which have recently been granted will widen the difference between this year and last year; so will any express provision made for additional expenditure in this budget.
Current expenditure represented 22.7 per cent of gross national product last year. It is expected that this year's ratio will show some small increase but will still be moderate by international standards.
The Government have given very careful consideration to the problem which a deficit poses. Producers are being urged to avoid as far as possible an increase in prices. The Government do not themselves want to cause any rise in prices that can possibly be avoided. At the same time, it is essential to persue a sound financial policy. To leave a deficit uncovered would, in present circumstances, be bad finance; it would add to inflationary pressure and widen the balance of payments gap. An optimistic assessment of revenue is justifiable, and has in fact been made, but it is important not to incur any serious risk of a current deficit this year when there will be a much larger capital budget. Further taxation is, therefore, unavoidable.
Moreover, there are certain items of expenditure not provided for in the White Paper of which account must be taken.
There are, first of all, what I might term foreseeable supplementary needs. Certain claims for pay adjustments distinct from the "ninth round", such as those of teachers and Post Office clerks, have been the subject of conciliation or arbitration settlements. Other claims and various minor items have also to be dealt with. I do not know what the extra liability will amount to but I have thought it prudent to make an indirect provision for it by not making any deduction this year for errors of estimation. In the past these deductions have been of the order of £2-£3 million.
Secondly, and as an entirely separate matter, consideration must be given to the question of arranging, by taxation, a transfer of incomes to certain sections of the community in view of the extent to which wages and salaries have recently been increased.
5. CURRENT BUDGET, 1964/65— DETAIL
By utilising the production aids and the advisory and educational services now available, and through increased co-operation, farmers can take direct action to increase their production and their incomes, as indeed many of them, even on holdings of moderate size, are already doing, to their great credit.
As in most other countries, agricultural incomes in Ireland are, in general, lower than those earned in other occupations, though the difference is not as great in Ireland as it is in some other countries. Without the high scale of State expenditure in relation to agriculture, the disparity between agricultural and other incomes in Ireland would be much greater. There is no justification for the gloomy picture painted in some quarters of the farmer's position. Agriculture in Ireland, as elsewhere, faces certain difficulties, particularly in international trade, which are beyond the power of any individual Government to overcome completely.
We have to export a much higher proportion of our agricultural output than any other country which is reasonably developed economically, with the single exception of New Zealand. For many products, because of the tendency of world agricultural production to outrun commercial demand, the prices obtainable in export markets fall short of meeting the cost of production. While our marketing methods must be improved as far as possible, it would be a mistake to think that this in itself will solve then basic difficulty which is that export markets are over-supplied and price conditions in these markets are distorted as a result of the domestic support policies followed by the Governments of importing countries. Great industrial economies such as Britain and Germany, in which agriculture represents only a small percentage of the national product and makes only a minor contribution to exports, can afford to assist their agriculture to an extent that we cannot emulate.
Until the domestic agricultural policies of exporting and importing countries are effectively co-ordinated and harmonised so that efficient farmers in different countries can obtain reasonably uniform returns for the products they sell, the present export marketing difficulties are likely to continue.
The higher prices available for cattle this year will, if they continue, raise farmers' receipts by several million pounds. The price improvements already announced for barley and sugar beet should add close on £1 million. It is the Government's policy that a reasonable relationship should be maintained between the incomes of farmers and those in other occupations. In consideration of the general rise in non-agricultural incomes, they have decided that a further substantial increase in farmers' incomes should be assured by State action. It is, therefore, proposed that the amount of aid to agriculture should be increased, at the cost of the taxpayer, by close on £5 million in a full year, amounting to £4½ million in the current financial year. The increase will comprise:
(1) an addition of 2d. per gallon to the price of creamery milk. It is to be expected that there will be the same increase in the price paid for liquid milk in the Cork and Dublin Milk Board Areas but this will concern the consumer rather than the taxpayer:
(2) additional relief of rates on agricultural land to the extent of £1.4 million, which, allowing for the higher rates being struck this year, will enable the net charge for rates on agricultural land to be kept at or below the 1956-57 level; and
(3) the raising of the minimum prices for pigs by 8/- a cwt. for grade A and 5/- a cwt. for grade A special.
The increase in the milk price will come into effect at the beginning of May and the higher pig prices will operate from 1st June. In deciding to raise pig prices by the amounts indicated, the Government took fully into account the effect on pig production costs of the increase in the minimum price for feeding barley of the 1964 crop, as well as other factors.
The total cost to the State of supporting milk prices is already £6 million a year. The further aid now afforded will raise the cost to £9 million in a full year. The cost of the rates relief on agricultural land will be raised to nearly £11 million. Support of pig prices is now expected to cost the State about £2 million a year.
Various capital grants, for farm buildings, water supply and other purposes related to the objectives of theSecond Programme for Economic Expansion, have already been increased and their cost is expected to double by 1970. Total State expenditure in relation to agriculture, including the measures I have just outlined, will now amount to over £43 million a year.
The large increase increase in State expenditure on agriculture should be of considerable assistance to farmers in expanding their production to meet the targets of the Second Programme. In particular, the increase in the price of milk, together with the calved heifer subsidy scheme, should be a powerful impetus towards attainment of the goal we have set for increased cattle production.
When consideration is being given to incomes generally, it would be regrettable to overlook the social assistance beneficiaries. The Government have decided that provision should be made for a further increase of 2/6d. a week for the non-contributory classes of old age and blind pensioners, widows and unemployed persons and their adult dependants. This will come into effect from the beginning of August next and will cost £730,000 in the present year.
Public Service Pensions
Despite various increases already granted, the purchasing power of pensions payable to former public servants has not kept up with the value of money when these pensions were awarded. Deputies are familiar with the problem, which was discussed in the House last week on the Second Reading of the Pensions (Increase) Bill. Increases in pensions must be considered both from the budgetary standpoint and also in view of the repercussions on pension schemes outside the public service. The substantial increases granted in 1962 and 1963 are costing the Exchequer about £1,100,000 this year. Having regard to this and other pressing commitments, the most that I can afford to give to the public service pensioners on this occasion is 5 per cent, which goes part of the way towards compensating for the rise in the cost of living since 1959. The increase will be granted to the same groups of pensioners for whom I provided an increase last year, with the addition of those who retired between December, 1959, and November, 1961. Military Service pensioners and holders of special allowances will also benefit. The increase will take effect from 1st October next and the extra cost to the Exchequer this year will be £140,000.
Post Office Charges
These income transfers to farmers, social assistance recipients and public service pensioners will cost in all £5.37 million this year and have the effect of widening the deficit to £6.98 million. From this I am deducting £2 million in anticipation of the higher charges which, as the Minister for Posts and Telegraphs has already announced, will be necessary to meet the additional cost of Post Office services owing to "nine round" and other pay increases. It has always been the policy that the Post Office should pay its way, one year with another, as a commercial service. The new charges may not balance the extra cost immediately because there is an element of pay arrears to be covered but this may be made up temporarily from existing balances. Appropriate orders will be made at an early date and the details of the increased charges will then be given by the Minister for Posts and Telegraphs.
To cover the remaining £4.98 million—an amount that can be more appropriately met by adjustments in particular taxes than by a change in the rate of turnover tax—I propose to increase the duties on petrol, cigarettes, beer and imported spirits. It will be noted that, for the customary retail units, the increases in duties are slightly less than a round number of pence. These margins have been left to allow for the turnover tax mark-up on the increase in duty.
Petrol and Diesel Road Fuel
The effective rates of duty on petrol and diesel road fuel have not been altered for the last seven years and, during this period, consumption of both these fuels has been rising steadily. I can reasonably look to this source for additional revenue. I propose to increase the duties on petrol and diesel road fuel by 2 11/12d. a gallon. I expect this to yield an additional £1,250,000 this year from petrol and £250,000 from diesel road fuel.
I am increasing from 6d. a gallon to 9d. a gallon the rate of repayment of duty on diesel fuel used in road passenger vehicles. There will, therefore, be no effective increase in taxation of diesel fuel used in buses. Since practically all buses use this type of fuel, bus passenger fares should not be affected.
Hydrocarbon oils, other than petrol, will continue to be relieved completely from duty when used otherwise than as road fuel.
I propose to increase the main rate of customs duty on leaf tobacco by 5s. 1½d. a lb. which is slightly less than 3d. on a packet of 20 standard size cigarettes. Special consideration must, however, be given to the position of pipe tobacco. The statistical evidence which suggests that cigarette smoking is injurious to health does not apply to pipe smoking. Whilst neither I nor my predecessors can be accused of encouraging smoking in any form——