Financial Resolutions, 1978: Financial Statement, Budget, 1978. - Incomes
As I have said, 1978 could be a very good year, with fast growth, increased employment and much lower inflation. But this depends on us as a community; we could equally turn it into a year of lost opportunity. Moderation in income increases is of crucial importance to the Government's programme for economic and social improvement. If developments in 1978 were on the wrong lines we would compound our unemployment and inflation problems and the targets of the White Paper could not be met. Given the scale of our unemployment problem and the prospective growth of our labour force, 1978 must be a year of determined and fast progress.
It is essential therefore that the increase in incomes this year be a moderate one. The primary reason is, of course, that the growth in our output and employment depends mainly on our ability to sell what we produce. If incomes grow too fast, so do costs, and we could price ourselves out of our markets, both home and export. Excessive increase in costs also hit employment by making this country less attractive as a manufacturing location at a time when the competition for investment is exceptionally keen. The logic of the argument is inescapable : if we are permanently to reduce unemployment and to create viable employment, we must restrain our costs and, therefore, growth in our incomes.
This argument holds with particular force at the present time. We could hardly pick a worse year than this to quicken the pace of increase of incomes and prices. Firstly, international competition will be tougher than in recent years. Secondly, the fall in the exchange rate has been reversed, so that the effects of any lessening in our competitiveness will hit us all the more quickly. Only the economically suicidal would decide that 1978 was the year to dispense with moderation in incomes.
All sections of the community have learned the danger of inflation. We came to the brink of hyper-inflation some years back, and we had the sense to step back. We have made some progress since then but the Government do not feel that it is fast enough. The manifesto package aims at reducing inflation to 7 per cent in 1978. The latest indications, which are supported by forecasts from independent sources, are that the target of 7 per cent is well within reach if the Government's pay target is accepted. The reduction in inflation is all-important to bring us in line with our EEC partners with whom we trade, but we cannot hope to achieve this target if incomes rise excessively.
As Minister for Finance, I am acutely conscious of the purchasing power of money. The Government's obligations as an employer and commitments in regard to the weaker sections of the community are directly reflected in rising public expenditure. Every 1 per cent increase in pay rates adds some £8 million to the Exchequer's annual pay bill. This money would have to be diverted from other pressing needs; if it were used for job creation, it could finance almost 2,000 jobs.
I cannot stress too strongly that we are not against real increases in incomes and living standards. We believe that people should live better. We also see the need for increases in real incomes to expand consumer demand so as to increase the domestic market for our producers. What is of importance is how these advances are achieved.
Excessive increases in money incomes would only lead to a transitory rise in real incomes. Higher prices would quickly erode any real gain enjoyed for a time by those fortunate enough to retain their jobs. Increased costs would mean a loss of existing jobs for others, leading to additional social welfare expenditure and, consequently, increased taxation. The result would be to depress the economy further.
The Government believe that improvements in real incomes are best secured in present circumstances through moderate increases in nominal incomes associated with personal tax concessions. For the year 1978 our target is for pay increases of about 5 per cent. To make this acceptable, we have already reduced or abolished rates, motor taxation and social insurance contributions and are proposing concessions in personal taxation—concessions which will result in substantial gains in after-tax pay for wage and salary earners. Adjusting for the expected rise in consumer prices this year, there will be a considerable improvement in real take-home pay, and this will be a lasting improvement, not an illusory one.
I should like to clarify aspects of the pay target proposed by the Government. The target was formulated only after careful and detailed examinations of the requirements of the economy in both the short and medium-term. Demands for flexibility and for adjustments in line with inflation have to accommodate themselves to the need for pay moderation. The Government's commitment is unequivocal and, if agreement to such moderation cannot be achieved, we shall have to take the necessary measures to ensure that excessive increases, if any, are recovered from those who secure them. The Government would be failing the community if they did not take such steps.
Of course, corrective measures could not completely eliminate the damage to the economy from excessive income increases. No feasible Government action could prevent some rise in costs and, as a consequence, loss of markets and rising unemployment.
I am naturally hopeful, however, that this situation will not arise, but if it does and as soon as it does I shall come back to the Dáil with proposals to deal with it.
The Government appreciate the difficulties which face the represeneatives of both employers and trade unions who are at present seeking to negotiate a new national agreement. Such negotiations are never an easy matter. This year they are made more difficult by the tensions which inevitably build up during a period of economic recession and its attendant constraints on incomes, employment and opportunity. Nonetheless I am quite sure that the social partners appreciate that their restraint was not in vain. The proof of this is to be seen in the fall in prices over the last six months and in the opportunities for an attack on unemployment which are now presented to us if a moderate agreement for 1978 is achieved.